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Chapter 25: Q16E (page 1413)

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

Mary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associates’s payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positions—payroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system.

Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting:

  1. The current payroll software that was purchased for \(4,000 three years ago would not be needed if payroll processing were outsourced.

  2. Duck Associates’ bookkeeper would spend half her time preparing the weekly payroll input form that is given to the payroll processing service. She is paid \)450 per week.

  3. Duck Associates would no longer need payroll clerk Toby Stock, whose annual salary is \(42,000.

  4. The payroll processing service would charge \)2,000 per month.

Requirements

1. Would outsourcing the payroll function increase or decrease Duck Associates’ operating income?

2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect of having to lay off Stock, who has become a close personal friend. She does not believe there is another position available for Stock at his current salary. Can you think of other factors that might support keeping Stock, rather than outsourcing payroll processing? How should each of the factors affect Tan’s decision if she wants to do what is best for Duck Associates and act ethically?

Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Light could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows:

Per Unit

Deluxe Regular

Sales price \(1,030 \)610

Costs:

Direct materials 320 130

Direct labor 88 180

Variable manufacturing overhead 270 90

Fixed manufacturing overhead* 102 34

Variable operating expenses 121 63

Total costs 901 497

Operating income \(129 \)113

*allocated on the basis of machine hours

Requirements

1. What is the constraint?

2. Which model should Tread Light produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)

3. If Tread Light should produce both models, compute the mix that will maximize operating income.

Question: Explain the difference between price-takers and price-setters.

Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.

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.
See all solutions

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