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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

Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acresโ€™s reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.

Requirements

1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?

Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:

Direct materials \(17,590

Direct labor 3,200

Variable overhead 2,080

Fixed overhead 6,300

Total manufacturing costs for 1,900 bindings \)29,170

Suppose Livingston will sell bindings to Snow Ride for \(13 each. Snow Ride would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.

Requirements

1. Snow Rideโ€™s accountants predict that purchasing the bindings from Livingston will enable the company to avoid \)2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings.

2. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Rideโ€™s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

What are the two keys in short-term decision making?

What is differential analysis?

Nautical manufactures flotation vests in Tampa, Florida. Nauticalโ€™s contribution margin income statement for the month ended December 31, 2018, contains the following data:

NAUTICAL

Income Statement

For the Month Ended December 31, 2018

Sales in Units 29,000

Net Sales Revenue \(551,000

Variable Costs:

Manufacturing 116,000

Selling and Administrative 111,000

Total Variable Costs 227,000

Contribution Margin 324,000

Fixed Costs:

Manufacturing 123,000

Selling and Administrative 92,000

Total Fixed Expenses 215,000

Operating Income \)109,000

Suppose Water Works wishes to buy 4,800 vests from Nautical. Nautical will not incur any variable selling and administrative expenses on the special order. The Nautical plant has enough unused capacity to manufacture the additional vests. Water Works has offered \(15 per vest, which is below the normal sales price of \)19.

Requirements

1. Identify each cost in the income statement as either relevant or irrelevant to Nauticalโ€™s decision.

2. Prepare a differential analysis to determine whether Nautical should accept this special sales order.

3. Identify long-term factors Nautical should consider in deciding whether to accept the special sales order.

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