Chapter 25: Q25-17RQ (page 1406)
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.
Answer
Dropping a segment may lead to a decrease in total operating income if such a segment has a positive contribution margin.
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Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz’s total production cost is \(0.58 per pack, as follows:
Variable costs:
Direct materials \)0.11
Direct labor 0.09
Variable overhead 0.08
Fixed overhead 0.30
Total cost \(0.58
Collector-Cardz has enough excess capacity to handle the special order.
Requirements
1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.
2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?
Grimm Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes:
Direct materials \(500
Direct labor 1,000
Variable manufacturing overhead 200
Fixed manufacturing overhead 1,200
Total manufacturing cost \)2,900
Number of cakes ÷ 100
Cost per cake \(29
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Grimm expects to retain the equipment. Grimm can buy the cakes for \)25.
Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:
Direct materials \(17,510
Direct labor 2,600
Variable overhead 2,060
Fixed overhead 7,000
Total manufacturing costs for 2,000 bindings \)29,170
Suppose Topnotch will sell bindings to Cold Sports for \(15 each. Cold Sports would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.
Requirements
1. Cold Sports’s accountants predict that purchasing the bindings from Topnotch will enable the company to avoid \)2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings.
2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sports’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.
Refer to Exercise E25-13. Assume that Video Avenue can avoid $39,000 of direct fixed costs by dropping the DVD product line. Prepare a differential analysis to show whether Video Avenue should stop selling DVDs.
Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants has \(5,100,000 in assets. Its yearly fixed costs are \)650,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total \(1.90. Snappy Plants’s volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)4.25 each. Garden centers then mark them up to sell to the public for \(9 to \)12, depending on the type of plant.
Requirements
1. Snappy Plants’s owners want to earn a 11% return on investment on the company’s assets. What is Snappy Plants’s target full product cost?
2. Given Snappy Plants’s current costs, will its owners be able to achieve their target profit?
3. Assume Snappy Plants has identified ways to cut its variable costs to \(1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?
4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend \)105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?
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