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Moore Company sells both designer and moderately priced fashion accessories. Top management is deciding which product line to emphasize. Accountants have provided the following data:

Per Item

Designer Moderately Priced

Average sales price \(185 \)87

Average variable costs 105 22

Average contribution margin 80 65

Average fixed costs (allocated) 20 10

Average operating income \(60 \)55

The Moore Company store in Grand Junction, Colorado, has 14,000 square feet of floor space. If Moore Company emphasizes moderately priced goods, it can display 840 items in the store. If Moore Company emphasizes designer wear, it can display only 560 designer items. These numbers are also the average monthly sales in units.

Prepare an analysis to show which product the company should emphasize.

Short Answer

Expert verified

The company should emphasize on moderately priced productsforprofit maximization.

Step by step solution

01

Meaning of Management

In business terms, a management refers to an authority responsible for managing and controlling theactivities of an entity and itshuman assets.A management has the authority to developpolicies and strategiesfor abusiness entity and also drafts decisions.

02

Preparation of an analysis

Particulars

Designer ($)

Moderately Priced ($)

Units displayed per square foot:

Designer

(560/14,000)=0.04

(840/14,000)=0.06

Contribution margin per unit

80

65

Contribution margin per square foot of display space

(80*0.04)=3.20

(65*0.06)=3.90

Capacity square foot of display space

14,000

14,000

Total contribution margin at capacity

(14,000*3.20)=44,800

(14,000*3.90)=54,600

The company should emphasize on moderately priced productsbecause it will provide a higher contribution margin.

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Most popular questions from this chapter

What questions should managers answer when considering dropping a product or segment?

Newtown Sunglasses sell for about \(154 per pair. Suppose that the company incurs the following average costs per pair:

Direct materials \)39

Direct labor 15

Variable manufacturing overhead 6

Variable selling expenses 3

Fixed manufacturing overhead 20*

Total cost \(83

* \)2,050,000 Total fixed manufacturing overhead / 102,500 Pairs of sunglasses

Newtown has enough idle capacity to accept a one-time-only special order from Water Shades for 17,000 pairs of sunglasses at \(80 per pair. Newtown will not incur any variable selling expenses for the order.

Requirements

1. How would accepting the order affect Newtownโ€™s operating income? In addition to the special orderโ€™s effect on profits, what other (longer-term qualitative) factors should Newtownโ€™s managers consider in deciding whether to accept the order?

2. Newtownโ€™s marketing manager, Peter Kyler, argues against accepting the special order because the offer price of \)80 is less than Newtownโ€™s $83 cost to make the sunglasses. Kyler asks you, as one of Newtownโ€™s staff accountants, to explain whether his analysis is correct. What would you say?

Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:

Per Unit

Deluxe Toothbrush Standard Toothbrush

Sales price \(86 \)56

Variable costs 20 18

Contribution margin \(66 \)38

Contribution margin ratio 76.7% 67.9%

After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.

Requirements

1. Identify the constraining factor for Brinn.

2. Prepare an analysis to show which product line to emphasize.

Edna Fashions operates three departments: Menโ€™s, Womenโ€™s, and Accessories. Departmental operating income data for the third quarter of 2018 are as follows:

EDNA FASHIONS

Income Statement

For the Quarter Ended September 30, 2018

Department

Menโ€™s Womenโ€™s Accessories Total

Net Sales Revenue \(101,000 \)59,000 \(102,000 \)262,000

Variable Costs 65,000 35,000 91,000 191,000

Contribution Margin 36,000 24,000 11,000 71,000

Fixed Costs 27,000 19,000 29,000 75,000

Operating Income \(9,000 \)5,000 \((18,000) \)(4,000)

Assume that the fixed costs assigned to each department include only direct fixed costs of the department:

โ€ข Salary of the departmentโ€™s manager

โ€ข Cost of advertising directly related to that department

If Edna Fashions drops a department, it will not incur these fixed costs. Under these circumstances, should Edna Fashions drop any of the departments? Give your reasoning.

Refer to Exercise E25-18. Cool Systems needs 79,000 optical switches. By outsourcing them, Cool Systems can use its idle facilities to manufacture another product that will contribute $225,000 to operating income.

Requirements

1. Identify the expected net costs that Cool Systems will incur to acquire 79,000 switches under three alternative plans: make the switches, buy the switches and leave facilities idle, buy the switches and use the idle facilities to make another product.

2. Which plan makes the best use of Cool Systemโ€™s facilities? Support your answer.

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