CHAPTER 7 INCREMENTAL ANALYSIS INCREMENTAL ANALYSIS Managerial Accounting, Fourth Edition.

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  • CHAPTER 7 INCREMENTAL ANALYSISManagerial Accounting, Fourth Edition

  • Incremental AnalysisOccurs when there is more than one alternative choice of action.Alternative OneAlternative Two

  • Important DefinitionsRelevant Cost. Costs and revenues that do not differ between alternatives. These can be ignored in incremental analysisOpportunity Cost. The benefit given up when one alternative is chosen over another.Opportunity costs are never found in the general ledger.Sunk Cost. A cost that has already been incurred and will not be changed or avoided by any future decision.Sunk costs are not relevant costs.

  • Types of Incremental AnalysisAccept an order at a special price

    Make or buy components or finished products

    Sell products or process further

    Retain or replace equipment

    Eliminate an unprofitable business segment

    Allocate limited resourcesLO 2: Describe the concept of incremental analysis.

  • McDermotts CriteriaWhen can you sell a product at less than full cost and still make a profit? When . . .You can segregate the marketYou can identify fixed and variable costsYou have a positive contribution marginYou have excess capacity or can charge for opportunity costThe minimum price you can charge under these conditions is:Variable costs of the new order plus opportunity cost

  • Variable Cost of the New OrderVariable costs of the new order include:Direct laborDirect materialsVariable overheadVariable marketing and administrative costsAny other costs will be incurred to fulfill the new order (freight, special handling, and so on).Any normal costs that disappear should be subtracted from variable costs in this formula.

  • Opportunity CostThe opportunity cost is the contribution margin of any sales given up.The formula is (contribution margin per unit ) (units of sales to existing customers given up)

  • Example ProblemMcDermott Manufacturing makes computer monitors.Revenue and cost data for the company are shown below:Price $60Direct labor $10Direct materials $5Variable overhead $12Fixed overhead $100,000Variable marketing $6Fixed marketing and administration $50,000

  • Example ProblemA Japanese retailer wants to purchase 5,000 monitors.Assume that the purchase needs the criteria listed earlier by Professor McDermott.

  • Additional InformationThe company has the capacity to manufacture 10,000 units per year.Currently the company is manufacturing and selling 8,000 units per year.The special order will have no marketing costsIt will cost $3 to ship the monitors to the purchasers San Francisco warehouse.What is the minimum price for which the company would be willing to sell this special order?

  • Calculation of Variable CostsRemember: we delete any savings on the special order. In this case we save marketing costs (sales commissions).

    CategoryAmountDirect labor$10Direct materials$5Variable overhead$12Variable marketing$0Additional shipping$3Total variable costs$30

  • Calculation of Variable CostsAlso remember: We add any additional costs of this special order, in this case shipping the product to San Francisco.

    CategoryAmountDirect labor$10Direct materials$5Variable overhead$12Variable marketing$0Additional shipping$3Total variable costs$30

  • Calculation of Opportunity CostThe company has an excess capacity of 2,000 units (10,000 manufacturing capacity 8,000 units presently manufactured and sold).However the customer wishes to purchase 5,000 monitors.The opportunity cost in units, therefore, is 5,000 units of demand - 2,000 units of excess capacity = 3,000 units.The opportunity cost in dollars is the contribution margin per unit times the opportunity cost in units.

  • Calculation of Opportunity CostThe contribution margin (for existing customers) is:$60 price - $10 direct labor - $5 direct materials - $12 variable overhead - $6 variable marketing = $27.The total contribution margin lost is, therefore, $27 3000 units = $81,000.The opportunity cost per unit sold to the Japanese is $81,000/5000 units = $16.20 per unit

  • Minimum Price Special Order$30 variable costs of special order + $16.20 opportunity cost = $46.20.Note: the full cost of the product including fixed costs is $48.What if the customer is willing to pay $47.50 per unit?This is less than the full (absorption) cost of the product.Should they accept the special order?

  • Minimum Price Special OrderThe contribution margin is $47 - $30 variable costs of special order = $17 contribution margin.This $17 will cover the opportunity cost of $16.20 per unit, allowing $.80 per unit to flow to the bottom line.The net impact on the bottom line will be $.80 x 5000 units = $4000Bottom line: variable revenues and costs are relevant, fixed costs are not relevant in short-term special pricing decisions.

  • Another example the authorsExampleMexico Co. offers to buy a special order of 2,000 blenders at $11 per unit from Sunbelt.No effect on normal sales; sufficient plant capacity Operating at 80 percent capacity = 100,000 unitsCurrent fixed manufacturing costs = $400,000 or $4 per unitVariable manufacturing cost = $8 per unitNormal selling price = $20 per unitBased strictly on total cost of $12 per unit ($8 + $4), reject offer as cost exceeds selling price of $11

    LO 3: Identify the relevant costs in accepting an order at a special price.

  • Accept an Order at a Special PriceWithin existing capacity, no change in fixed costs - they are not relevant for this decisionTotal variable costs change they are relevant

    Revenue increases $22,000; variable costs increase $16,000Income increases by $6,000Accept the Special OrderLO 3: Identify the relevant costs in accepting an order at a special price.

  • It costs a company $14 of variable costs and $6 of fixed costs to produce product Z200 that sells for $30. A foreign buyer offers to purchase 3,000 units at $18 each. If the special offer is accepted and produced with unused capacity, net income will:a.Decrease $6,000.b. Increase $6,000. c. Increase $12,000.d. Increase $9,000.Lets ReviewLO 3: Identify the relevant costs in accepting an order at a special price.

  • Make or BuyManagement must decide whether to make or buy components.The decision to buy parts or services rather than making them is called outsourcing.Example: Costs to produce 25,000 switches

    LO 4: Identify the relevant costs in a make-or-buy decision.

  • Make or Buy Example ContinuedSwitches can be purchased for $8 per switch (25,000 x $8 = $200,000)At first look, the switches should be purchased; thus saving $1 per unitBuying the switches eliminates all variable costs, but only $10,000 of fixed costsHowever, $50,000 of fixed costs remain even if the switches are purchased

    LO 4: Identify the relevant costs in a make-or-buy decision.

  • Make or Buy Example ContinuedSwitches can be purchased for $8 per switch (25,000 x $8 = $200,000)At first look, the switches should be purchased; thus saving $1 per unitBuying the switches eliminates all variable costs, but only $10,000 of fixed costsHowever, $50,000 of fixed costs remain even if the switches are purchased!!!!!

    LO 4: Identify the relevant costs in a make-or-buy decision.

  • Make or Buy Example ContinuedThe relevant costs for incremental analysis are:

    Baron Company will incur $25,000 additional cost if switches are purchasedContinue to make switchesLO 4: Identify the relevant costs in a make-or-buy decision.

  • Make or BuyOpportunity CostsDefinition: The potential benefits that may be obtained from following an alternative course of action.New assumption:Now assume Baron Company can use the newly available productive capacity from buying the switches to generate additional income of $28,000 by making another product.If Baron makes the switches, this possible income is lost.

    LO 4: Identify the relevant costs in a make-or-buy decision.

  • Make or Buy Opportunity Cost ExampleLO 4: Identify the relevant costs in a make-or-buy decision.This opportunity cost, the lost income, is added to the Make column as an additional cost for comparative purposes

    It is now advantageous to buy the switches: Baron Company will be $3,000 better off

  • In a make-or-buy decision, relevant costs are:a.Manufacturing costs that will be saved.b. The purchase price of the units. c. Opportunity costs.d. All of the above. Lets ReviewLO 4: Identify the relevant costs in a make-or-buy decision.

  • Sell or Process FurtherMany manufacturers have the option of selling a product now or continuing to process the product hoping to sell the refined product at a higher price

    Decision Rule:Process further as long as the incremental revenue fromsuch processing exceeds theincremental processing costsLO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Sell or Process Further - ExampleSingle-Product CaseCost to manufacture one unfinished table:

    Selling price of unfinished unit is $50; unused capacity can be used to finish the tables to sell for $60Relevant unit costs of finishing tables:Direct materials increase $2; Direct labor increases $4Variable manufacturing overhead costs increase by $2.40 (60 percent of direct labor increase)Fixed manufacturing costs will not increaseLO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Sell or Process Further

    Incremental revenues ($10) exceed incremental costs ($8.40); Income increases $1.60 per unitProcess furtherLO 5: Identify the relevant costs in determining whetherto sell or process materials further .

  • Sell or Process FurtherMultiple-Product Case

    In many industries, a number of end-products are produced from a single raw material and a common production process

    Multiple end-products are commonly called joint productsPetroleum gasoline, lubricating oil, keroseneMeat Packing meat, hides, bonesLO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Sell or Process FurtherMultiple-Product Case

    All costs incurred prior to the point at which the products are separately identifiable (the split-off point) are called joint costs

    Joint costs are (for purposes of determining product cost) allocated to individual products on the basis of relative sales value

    Joint costs are not relevant for any sell-or-process-further decisions

    Joint product costs are sunk costs.They have already been incurred and cannot be changedLO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Sell or Process Further - ExampleMultiple-Product Case

    Marais Creamery must decide whether to:Sell cream and skim milk noworProcess each further before sellingLO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Sell or Process Further Example ContinuedThe daily cost and revenue data for Marais Creamery are:LO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Sell or Process Further Example ContinuedSell cream or process further into cottage cheese?

    Do not process cream further:To do so will incur an incremental loss of $2,000LO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Sell or Process FurtherSell skim milk or process further into condensed milk?

    Marais should process the skim milk:To do so will increase net income by $7,000LO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • The decision rule in a sell-or-process-further decision is:process further as long as the incremental revenue from processing exceeds:a.Incremental processing costs.b. Variable processing costs. c. Fixed processing costs.d. No correct answer is given.Lets ReviewLO 5: Identify the relevant costs in determining whetherto sell or process materials further.

  • Retain or Replace EquipmentManagement must decide whether a company should continue to use an asset or replace itExample: Assessment of replacement of a factory machine:

    Variable costs: Decrease from $160,000to $125,000 annuallyLO 6: Identify the relevant costs to be considered inretaining or replacing equipment. Old Machine New Machine Book value $40,000 Cost $120,000Remaining useful life four years four yearsScrap value - 0 - - 0 -

  • Retain or Replace Equipment - Example

    Replace the equipment - Lower variable manufacturing costs more than offset cost of new equipment.The book value of the old machine does not affect the decision it is a sunk cost.However, any trade-in allowance or cash disposal value of the old asset is relevantLO 6: Identify the relevant costs to be considered inretaining or replacing equipment.

  • In a decision to retain or replace equipment, the book value of the old equipment is a(an):a.Opportunity cost.b. Sunk cost. c. Incremental cost.d. Marginal cost.Lets ReviewLO 6: Identify the relevant costs to be considered inretaining or replacing equipment.

  • Eliminate an Unprofitable SegmentShould the company eliminate an unprofitable segment? Key: Focus on relevant costsConsider effect on related product lines Fixed costs allocated to the unprofitable segment must be absorbed by the other segmentsNet income may decrease when an unprofitable segment is eliminatedDecision Rule:Retain the segment unless fixed costs eliminated exceed the contribution margin lostLO 7: Identify the relevant costs in deciding whetherto eliminate an unprofitable segment.

  • Eliminate an Unprofitable Segment - ExampleMartina Company manufactures three models of tennis racquets: Profitable lines: Pro and Master Unprofitable line: ChampCondensed Income Statement data:

    Should the Champ line be eliminated?LO 7: Identify the relevant costs in deciding whetherto eliminate an unprofitable segment.

  • Eliminate an Unprofitable Segment - ExampleIf Champ is eliminated, must allocate its $30,000 share of fixed costs: 2/3 to Pro and 1/3 to MasterRevised Income Statement data:

    Total income has decreased by $10,000 ($220,000 - $210,000)

    LO 7: Identify the relevant costs in deciding whetherto eliminate an unprofitable segment.

  • Eliminate an Unprofitable Segment - ExampleIncremental analysis of Champ provides the same results:

    Decision: Do not eliminate ChampLO 7: Identify the relevant costs in deciding whetherto eliminate an unprofitable segment.

  • If an unprofitable segment is eliminated:a.Net income will always increase.b. Variable expenses of the eliminated segment will have to be absorbed by other segments. c. Fixed expenses allocated to the eliminated segment will have to be absorbed by other segments.d. Net income will always decrease.Lets ReviewLO 7: Identify the relevant costs in deciding whetherto eliminate an unprofitable segment .

  • Other Considerations in Decision MakingMany decisions involving incremental analysis have important qualitative features that must be considered in addition to the quantitative factors.Example cost of lost morale due to outsourcing or eliminating a plant Incremental analysis is completely consistent with activity-based costing (ABC)ABC often results in better identification of relevant costs and, thus, better incremental analysis

  • All About YouWhat is a Degree Worth?Over a life time of work, college graduates earn an average of $500,000 more than associate degree holders and $900,000 more than high-school graduates.Tuition costs about $8,655 a year to attend a public four-year college and about $1,359 for a public two year institution.About 600,000 students drop out of four-year colleges each year.

  • All About YouWhat is a Degree Worth?

    You are working two jobs, your grades are suffering, you feel depressed: Should you drop out of school?

    Is it better to stay in school even if you only take one class each semester?

  • Chapter Review - Exercise 7-1 1. The first step in managements decision-making process is Determine and evaluate possible courses of action. 2.The final step in managements decision-making process is to actually make the decision. 3.Accountings contribution to managements decision-making process occurs primarily in evaluating possible courses of action and in reviewing the results.4.In making business decisions, management ordinarily considers only financial information because it is objectively determined.Identify each of the following statements as true or false.FalseFalseTrueFalse

  • Chapter Review - Exercise 7-1 Continued5. Decisions involve a choice among alternative courses of action. 6.The process used to identify the financial data that change under alternative courses of action is called incremental analysis. 7.Costs that are the same under all alternative courses of action sometimes affect the decision.8.When using incremental analysis, some costs will always change under alternative courses of action, but revenues will not.9.Variable costs will change under alternative courses of action, but fixed costs will not.Identify each of the following statements as true or false.TrueTrueFalseFalseFalse

  • Problems Come Next!

  • Brief Exercise OneThe steps in management decision-making process are listed in random order below. Indicate the order in which the step should be executed.Identify the problem and assign responsibility.Determine and evaluate possible courses of action.Make a decision.Review results of the decision.

  • Exercise OneGiven the following list of statements about decision making and incremental analysis, determine which are true and which are false.If false, correct the statement.

  • StatementsThe first step in management s decision-making process is: Determine and evaluate possible courses of action.False. The first step in management decision making process is identified the problem and assign responsibilityThe final step in managements decision-making process is to actually make the decision.False.The final step in managements decision-making process is to review the results of the decision.

  • StatementsAccountings contribution to managements decision-making process occurs primarily in evaluating possible courses of action and in reviewing the results.TrueIn making business decisions, management ordinarily considers only financial information because it is objectively determined.False. In making business decisions, management ordinarily considers both financial and nonfinancial information.

  • StatementsDecisions involve a choice among alternative courses of action.TrueThe process used to identify the financial data that changes under alternative courses of action is called incremental analysis.TrueCosts that are the same under all alternative courses of action sometimes affect the decision.False. Costs that are the same are not relevant.

  • StatementsWhen using incremental analysis, some costs will always change under alternative courses of actions, but revenues will not.False. When using incremental analysis, either costs or revenues or both will change under alternative courses of action.Variable costs will change under variable courses of action, but fixed costs will not.False. Sometimes variable costs will not change under alternative courses of action, but fixed costs will.

  • Exercise 7-2A company produces golf discs which normally sellto retailers for seven dollars each. The cost of manufacturing 20,000 golf discs is.Materials $10,000Labor $30,000Variable overhead $20,000Fixed overhead $40,000Total cost $100,000The company incurs a 5% sales commission ($0.35) on each disc sold.

  • Exercise 7-2An outside firm offers $4.75 per disc for 5,000 discs.This company would sell the discs under its own brand in foreign markets yet not served.If the manufacturer accepts the offer, its fixed overhead will increase from $40,000 to $45,000 due to the purchase of a new printing machine.No sales commissions will result from the special order.

  • Exercise 7-2Prepare an incremental analysis for the special order.Note that fixed costs sometimes are relevant. However only the portion thatvaries one alternative to the next ($5,000) is relevant. The other $47,000 is not relevant

    (a)RejectOrderAcceptOrderNet Income Effect

    RevenuesMaterials ($0.50)Labor ($1.50)Variable overhead ($1.00)Fixed overheadSales commissions

    Net income$ -0--0--0--0--0- -0-

    $ -0-$23,750 (2,500) (7,500) (5,000) (5,000) -0-

    $3,750$23,750 (2,500) (7,500) (5,000) (5,000) -0-

    $3,750

  • Exercise 7-2Should the company except the special order?Why or why not?As shown in the incremental analysis, Innova should accept the special order because incremental revenue exceeds incremental expenses by $3,750.

  • Exercise 7-2What assumptions underlie the decision made in part b?It is assumed that sales of the golf discs in other markets would not be affected by this special order. If other sales were affected. Innova would have to consider the lost sales in making the decision. Second, if Innova is operating at full capacity, it is likely that the special order would be rejected.

  • Exercise 7-5XYZ Company has been manufacturing his own shades for table lamps.The company is currently operating at 100% capacity, and variable overhead is charged production at the rate of 70% of direct labor costs.The direct materials and direct labor cost per unit to make lampshades are five and six dollars respectively.

  • Exercise 7-5Normal production is 30,000 tables per year.A supplier offers to make the lampshades at a price of $15.50 per unit.If XYZ accepts the suppliers offer, all variable costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently charge to lampshades will have to be absorbed by other products.

  • Exercise 7-5Prepare the incremental analysis for the decision to make her by the lampshades.In this case the fixed cost is not relevant sinceit is not change one alternative to the next.

    MakeBuyNet IncomeIncrease(Decrease)

    Direct materials (30,000 X $5.00)Direct labor (30,000 X $6.00)Variable manufacturing costs($180,000 X 70%)Fixed manufacturing costsPurchase price (30,000 X $15.50)Total annual cost$150,000180,000126,00045,000 0$501,000$ 0 0 045,000465,000$510,000$ 150,000180,000126,000 0( (465,000)($ (9,000)

  • Exercise 7-5Prepare the incremental analysis for the decision to make her by the lampshades.They should not purchase the lampshadesSince doing so will decrease net income by $9,000.

    MakeBuyNet IncomeIncrease(Decrease)

    Direct materials (30,000 X $5.00)Direct labor (30,000 X $6.00)Variable manufacturing costs($180,000 X 70%)Fixed manufacturing costsPurchase price (30,000 X $15.50)Total annual cost$150,000180,000126,00045,000 0$501,000$ 0 0 045,000465,000$510,000$ 150,000180,000126,000 0( (465,000)($ (9,000)

  • Exercise 7-5Prepare the incremental analysis for the decision to make her by the lampshades.Would your answer be different if the productive capacity released by not making the lampshades could be used to produce income of $35,000?

    Of course, by purchasing the lampshades they would then save $26,000.

    MakeBuyNet IncomeIncrease(Decrease)

    Direct materials (30,000 X $5.00)Direct labor (30,000 X $6.00)Variable manufacturing costs($180,000 X 70%)Fixed manufacturing costsPurchase price (30,000 X $15.50)Total annual cost$150,000180,000126,00045,000 0$501,000$ 0 0 045,000465,000$510,000$ 150,000180,000126,000 0( (465,000)($ (9,000)

  • Exercise 7-6XYZ has recently started to manufacture a product.The cost structure to manufacture 20,000 units is as follows.Direct materials ($40 per unit) $80,000Direct labor ($30) $600,000Variable labor ($6) hundred and $20,000 Allocated fixed overhead ($25) $500,000Total costs $2,020,000XYZ is approached by ABC which offers to make the product for $90 per unit or $1,800,000.

  • Exercise 7-6Using incremental analysis, determine rather XYZ should accept the offer under each of the following independent assumptions.

  • Exercise 7-6Assume that $300,000 of the fixed overhead costs can be reduced or avoided.Accept the order!

    MakeBuyNet Income Increase (Decrease)Direct materials$ 800,000$-0-$ 800,000Direct labor600,000-0-600,000Variable overhead120,000-0-120,000Fixed overhead500,000200,000300,000Purchase price 0 1,800,000 (1,800,000)Total annual cost$2,020,000$2,000,000$ 20,000

  • Exercise 7-6Assume that none of the fixed overhead can be avoided.However, if the products are purchased from ABC, XYZ can use the release productive resources to generate additional income of $300,000.Here the author shows the revenue as a negative (opportunity) cost which isthe same as a revenue.

    (2)Make BuyNet Income Increase (Decrease)Direct materials$ 800,000$0$ 800,000Direct labor600,0000600,000Variable overhead120,0000120,000Fixed overhead500,000500,0000Opportunity cost300,0000300,000Purchase price0 1,800,000 (1,800,000)Totals$2,320,000$2,300,000$ 20,000

  • Exercise 7-6Describes the qualitative factors that might affect the decision to purchase the product from an outside supplier.Qualitative factors include the possibility of laying off those employees that produced the robot and the resulting poor morale of the remaining employees, maintaining quality standards, and controlling the purchase price in the future.

  • Exercise 7-11XYZ Enterprises uses a computer to handle its sales invoices.Lately, businesses has been so good that it takes an extra three hours per night, plus every third Saturday, to keep up with the volume of sales invoices.Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

  • Exercise 7-11If sold now, the current machine would have a salvage value of $5,000. If operated for the remainder of its useful life, the current machine would have a zero salvage value. The new machine is expected to have zero salvage value after five years.

    Should the current machine be replaced?

    Current MachineNew MachineOriginal purchase cost$15,000$25,000Accumulated depreciation$6,000$0Estimated annual operating costs$24,000$18,000Useful lifeFive yearsFive years

  • Exercise 7-11(1)$24,000 X 5.(2)$18,000 X 5.There are a number of formats one could use in doing this analysis, here the author chooses to make the far right column show the impact the change would have on operating income. He arbitrarily decides to make a positive impact a positive number and a negative impact a negative number.

    RetainMachineReplaceMachineNet IncomeIncrease(Decrease)

    Operating costsNew machine costSalvage value (old)Total$120,000 0 0$120,000(1)($90,000)(25,000)( (5,000)($110,000)(2)( $ 30,000( (25,000)( 5,000)($ 10,000)

  • Exercise 7-11(1)$24,000 X 5.(2)$18,000 X 5.The current machine should be replaced. The incremental analysis shows the net income for the five-year period will be $10,000 higher by replacing the current machine.

    RetainMachineReplaceMachineNet IncomeIncrease(Decrease)

    Operating costsNew machine costSalvage value (old)Total$120,000 0 0$120,000(1)($90,000)(25,000)( (5,000)($110,000)(2)( $ 30,000( (25,000)( 5,000)($ 10,000)

  • Problem 5Lewis Manufacturing Company has four operating divisions.During the first quarter of 2008, the company reported aggregate income from operations of $176,000 and the following divisional results.

  • Problem 5Analysis reveals the following percentages of variable costs in each division.

    DivisionsOneTwoThreeFourSales$250,000$200,000$500,000$400,000COGS200,000189,000300,000250,000S & A Expense65,00060,00060,00050,000 Income (loss)-$15,000-$49,000$140,000$100,000

    DivisionsOneTwoThreeFourCOGS 70%90%80%75%S&A Exp.40%70%50%60%

  • Problem 5Discontinuance of any division would save 50% of the fixed costs and expenses for that division.Top management is very concerned about the unprofitable divisions (one and two).Consensus is that one or both of the division should be discontinued.

  • Problem 5Compute the contribution margin for divisions one and two.Contribution margin is what is available to pay fixed costs. Eliminating Division II gives us a negative contribution margin.

    However, if we can decrease fixed cost below $12,100, the elimination would still be a good idea.

    Division IDivision II

    SalesVariable costsCost of goods soldSelling and administrativeTotal variable expensesContribution margin$250,000140,00026,000166,000($84,000)$200,000170,10042,000212,100$ (12,100)

  • Problem 5Prepare an incremental analysis concerning the possible discontinuance of Division I and Division II.

    Eliminating Division One would reduce income by $34,500 not a good idea!

    (1)Division IContinueEliminateNet IncomeIncrease(Decrease)

    Contribution margin (above)Fixed costsCost of goods soldSelling and administrativeTotal fixed expensesIncome (loss) from operations$(84,000)(60,000)(39,000)(99,000)$(15,000)$( 0)(30,000)(19,500)(49,500)$(49,500) $(84,000) 30,000 19,500 49,500 $(34,500)

  • Problem 5Division II should be eliminated as income from operations would increase by $30,500 by so doing.

    Division IIContinueEliminateNet IncomeIncrease(Decrease)

    Contribution margin (above)Fixed costsCost of goods soldSelling and administrativeTotal fixed expensesIncome (loss) from operations$(12,100)(18,900( 18,000( 36,900$(49,000)$( 0)(9,450)(9,000)(18,450)$(18,450)$12,100( 9,450( 9,000 18,450$30,550

  • The End

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

    1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

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