Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 20: Q1EI (page 1140)

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.

The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel’s $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.

Requirements

1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?

3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?

4. After considering all the factors, should you inform Barnhill or simply keep quiet?

Short Answer

Expert verified
  1. The breakeven sales and operating income are fixed at a low level. If it rejects the break-even point to great extent then president may reject the sales commission proposal.
  2. The error made by the intern could be incidental but not informing about that could be unethical.
  3. If the controller already knew about the analysis, then the consequences will not be as feared by the intern. The controller should take the responsibility for the error.
  4. Information should be shared with the controllers, as it will preserve the integrity, and honesty.

Step by step solution

01

Part 1

In this case, the fixed cost was understated by overlooking the sales manager’s monthly salary amounting to $2,800, the breakeven sales are fixed at a low level. But, if the actual fixed cost was taken into the consideration, then the breakeven sales level will be much higher.

If the fixed selling cost is considered a major expense for the company, then it will affect the break-even point to a great extent, in that case, the president should think to reject the sales commission proposal

02

Part 2

The error of overlooking the salaries of the sales personnel while computing the breakeven point and the operating income of the company is made by an intern who has come for the job this summer at the company. The error is truly incidental or unintentional, hence this will not be considered unethical. But the intern could be questioned about his competency.

The action of not reporting this matter of error to the controller is not ethical, as this is a misinterpretation of the facts of the company.

03

Step 3Part 3

If the intern would have reported the error to the controller, then the consequences may not be as bad as the intern feared. He might not have initiated the action as per the analysis made by the intern.

The controller should also take some responsibility as he has not checked the analysis made by the intern before taking the action.

The controller should have informed or given the guidelines to the intern and advised about the cost data that he should take into consideration for analysis.

04

Step 4Part 4

After taking into consideration all the factors, Intern should inform about errors to the controller because of the following reasons:

  • The intern can feel guilty, in case if the error goes undetected
  • In this way, the intern can preserve his integrity
  • Intern can also prove their honesty and quality by admitting the errors

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What is operating leverage? What does it mean if a company has a degree of operating leverage of 3?

On the CVP graph, where is the breakeven point shown? Why?

The Jacksonville Shirt Company makes two types of T-shirts: basic and custom. Basic shirts are plain shirts without any screen printing on them. Custom shirts are created using the basic shirts and then adding a custom screen printing design.

The company buys cloth in various colors and then makes the basic shirts in two departments, Cutting and Sewing. The company uses a process costing system (weighted-average method) to determine the production cost of the basic shirts. In the Cutting Department, direct materials (cloth) are added at the beginning of the process and conversion costs are added evenly through the process. In the Sewing Department, no direct materials are added. The only additional material, thread, is considered an indirect material because it cannot be easily traced to the finished product. Conversion costs are added evenly throughout the process in the Sewing Department. The finished basic shirts are sold to retail stores or are sent to the Custom Design Department for custom screen printing.

The Custom Design Department creates custom shirts by adding screen printing to the basic shirt. The department creates a design based on the customer’s request and then prints the design using up to four colors. Because these shirts have the custom printing added, which is unique for each order, the additional cost incurred is determined using job order costing, with each custom order considered a separate job.

For March 2018, the Jacksonville Shirt Company compiled the following data for the Cutting and Sewing Departments:

Department Item Amount Units

Cutting Beginning balance \( 0 0 shirts

Started in March 1,200 shirts

Direct materials added in March 1,920

Conversion costs 1,320

Completed and transferred to Sewing ??? 1,200 shirts

Ending balance 0 0 shirts

Sewing Beginning balance, transferred in, \)1,350;

conversion costs, \(650 \) 2,000 500 shirts

Transferred in from Cutting ??? ???

Conversion costs added in March 1,196

Completed and transferred to Finished Goods ??? 1,000 shirts

Ending balance, 60% complete ??? ???

For the same time period, the Jacksonville Shirt Company compiled the following data for the Custom Design Department:

Job Quantity Design Fee Printing Status

367 400 Yes 3 colors Complete

368 150 No 2 colors Complete

369 100 Yes 5 colors Complete

370 500 Yes 4 colors Complete

The Jacksonville Shirt Company has previously determined that creating and programming the design cost \(80 per design. This is a one-time charge. If a customer places another order with the same design, the customer is not charged a second time. Additionally, the cost to print is \)0.20 per color per shirt.

Requirements

1. Complete a production cost report for the Cutting Department and the Sewing Department. What is the cost of one basic shirt?

2. Determine the total cost and the average cost per shirt for jobs 367, 368, 369, and 370. If the company set the sales price at 200% of the total cost, determine the total sales price of each job.

3. In addition to the custom jobs, the Jacksonville Shirt Company sold 1,000 basic shirts (assume the beginning balance in Finished Goods Inventory is sufficient to make these sales, and the unit cost of the basic shirts in Finished Goods Inventory is the same as the unit cost incurred this month). If the company set the sales price at 125% of the cost, determine the sales price per unit, total sales revenue, total cost of goods sold, and total gross profit for the basic shirts.

4. Calculate the total revenue, total cost of goods sold, and total gross profit for all sales, basic and custom.

5. Assume the company sold only basic shirts (no custom designs) and incurred fixed costs of \(700 per month.

a. Calculate the contribution margin per unit, contribution margin ratio, required sales in units to break even, and required sales in dollars to break even.

b. Determine the margin of safety in units and dollars.

c. Graph Jacksonville Shirt Company’s CVP relationships. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, and the operating income area.

d. Suppose the Jacksonville Shirt Company wants to earn an operating income of \)1,000 per month. Compute the required sales in units and dollars to achieve this profit goal.

6. The Jacksonville Shirt Company is considering adding a new product line, a cloth shopping bag with custom screen printing that will be sold to grocery stores. If the current market price of cloth shopping bags is \(2.25 and the company desires a net profit of 60%, what is the target cost? The company estimates the full product cost of the cloth bags will be \)0.80. Should the company manufacture the cloth bags? Why or why not?

What is the margin of safety? What are the three ways it can be expressed?

Question: Determining total mixed cost

John Street Barber Shop pays \(25 per month for water for the first 8,000 gallons and \)3.50 per thousand gallons above 8,000 gallons. Calculate the total water cost when the barber shop uses 7,000 gallons, 10,000 gallons, and 13,000 gallons.
See all solutions

Recommended explanations on Business Studies Textbooks

Human Resources

Read Explanation

Influences On Business

Read Explanation

Managerial Economics

Read Explanation

Nature of Business

Read Explanation

Managers

Read Explanation

Intermediate Accounting

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free