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1.Stone, Inc., budgets the following amounts for its Buildings & Grounds and Computer Services Departments in servicing each other and the two manufacturing divisions of Signs and Mailers:
|
Used By |
||||
|
Supplied By |
Building & Grounds |
Computer Services |
Signs |
Mailers |
|
Buildings & Grounds |
— |
0.20 |
0.60 |
0.20 |
|
Computer Services |
0.15 |
— |
0.30 |
0.55 |
If you are using the step down method to allocate support department costs which department(s) would you allocate the costs from first:
| a. |
Mailers and Signs |
|
| b. |
Building and Grounds and Computer Services |
|
| c. |
Building and Grounds |
|
| d. |
Computer Services |
2.
The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
| Total | Dirt Bikes |
Mountain Bikes | Racing Bikes |
|||||||||
| Sales | $ | 929,000 | $ | 267,000 | $ | 405,000 | $ | 257,000 | ||||
| Variable manufacturing and selling expenses | 470,000 | 110,000 | 205,000 | 155,000 | ||||||||
| Contribution margin | 459,000 | 157,000 | 200,000 | 102,000 | ||||||||
| Fixed expenses: | ||||||||||||
| Advertising, traceable | 69,400 | 8,500 | 40,400 | 20,500 | ||||||||
| Depreciation of special equipment | 43,800 | 21,000 | 7,500 | 15,300 | ||||||||
| Salaries of product-line managers | 115,600 | 40,800 | 38,300 | 36,500 | ||||||||
| Allocated common fixed expenses* | 185,800 | 53,400 | 81,000 | 51,400 | ||||||||
| Total fixed expenses | 414,600 | 123,700 | 167,200 | 123,700 | ||||||||
| Net operating income (loss) | $ | 44,400 | $ | 33,300 | $ | 32,800 | $ | (21,700) | ||||
*Allocated on the basis of sales dollars.
Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.
Required:
1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
2. Should the production and sale of racing bikes be discontinued?
3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.
Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Financial advantage per quarter
Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long- run profitability of the various product lines. Totals Dirt Bikes Mountain Bikes Racing Bikes 0 0 0 Contribution margin (loss) Traceable fixed expenses: 0 0 0 0 Total traceable fixed expenses Product line segment margin (loss) 0 $ 0 0 $ 0 Net operating income (loss) $ $ 0
3.A music promoter has had an offer to bring a famous musical group from England to Australia, as part of its world tour to promote its new album. The music promoter has done smaller tours previously, but nothing on the scale proposed by the manager of this famous group, the tour will cost several million dollars, but is likely to have revenue which will result in substantial profits for those involved. The promoter has some contacts at a national radio station which can promote the tour, and there is at least one financier who is interested in financing the tour in return of course for a share of the revenue from the tour. The promoter is calling for a meeting of the different interested parties, he is not sure what business organisation would be best to manage and conduct the proposed tour, particularly as it is going to involve various diverse entities, each with their own separate business interests.
Explain: • The options open to the different parties in what business structure they might use to promote the tour.
1.In case of step method of overhead cost allocation the service or support department which renders highest amount of service to other service department will be allocated first. The service of Buildings and grounds is used Computer services 20% and service of computer services used by building and ground is 15%. Hence Buildings and ground is giving more service to computer services. So Buildings and ground overheads cost will be allocated first in step method of overhead allocation. Mailers and signs are production departments and hence not the answer.
2.Conclusion: There is a financial disadvantage of discontinuation of racing bike segment since discontinuation of this segment will take the profit from $44400 to loss $600 this is the actually financial disadvantage $45000 (-$44400-$600)
2 Should the racing bike production and sale discontinued
It is loud and clear from the above calculation that there is a financial disadvantage of discontinuation of racing bike segment. therefore It is recommended that continue with the same segment
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