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Chapter 25: 25-5RQ (page 1406)
When is nonfinancial information relevant?
The non-financial information is considered relevant when managers are required to makequalitative decisionsassociated with the business.
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Priscilla Smiley manages a fleet of 250 delivery trucks for Daniels Corporation. Smiley must decide whether the company should outsource the fleet management function. If she outsources to Fleet Management Services (FMS), FMS will be responsible for maintenance and scheduling activities. This alternative would require Smiley to lay off her five employees. However, her own job would be secure; she would be Daniels’s liaison with FMS. If she continues to manage the fleet, she will need fleet management software that costs \(9,500 per year to lease. FMS offers to manage this fleet for an annual fee of \)300,000. Smiley performed the following analysis:
Retain in-house Outsource to FMS Difference
Annual leasing fee for \(9,500 \)9,500
Software
Annual maintenance of
Trucks 147,000 147,000
Total annual salaries of
Five laid-off employees 185,000 185,000
Fleet management
Service’s annual fee \(300,000 (300,000)
Total differential cost of
Outsourcing \)341,500 \(300,000 \)41,500
Requirements
1. Which alternative will maximize Daniels’s short-term operating income?
2. What qualitative factors should Daniels consider before making a final decision?
When is nonfinancial information relevant?
This problem continues the Piedmont Computer Company situation from Chapter 24. Piedmont Computer Company’s payroll accountant has submitted her resignation and will be leaving the company in two weeks. The company must decide if it will hire a replacement or outsource the payroll position. The current employee earns a salary of \(40,000. Medical insurance, employer payroll taxes, and contributions to the pension plan for this position cost \)7,600. The company has already invested \(22,000 in payroll software. Required annual updates to remain in compliance with all state and federal laws are \)495. The company also spends \(1,750 per year in professional development for this position to ensure the employee stays up-to-date with payroll changes. Piedmont Computer Company pays its employees weekly. Payroll Professionals will processthe company’s weekly payroll for \)1,000 per week. This fee also includes preparing all necessary payroll tax returns, reports, and W-2s.
Requirements
1. Prepare a differential analysis to determine if Piedmont Computer Company should replace the employee or outsource the payroll function.
2. What other factors should Piedmont Computer Company consider in making this decision?
McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.
MCCOLLUM COMPANY
Income Statement
Month Ended June 30, 2018
Total Product A Product B
Net Sales Revenue \(150,000 \)75,000 \(75,000
Variable Costs 90,000 55,000 35,000
Contribution Margin 60,000 20,000 40,000
Fixed Costs 50,000 5,000 45,000
Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)
StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to \(115,000 per period. Sales prices and variable costs are as follows:
Regular Large
Sales price per unit \)8.00 $10.40
Variable cost per unit 3.50 4.40
Requirements
1. Which product should StoreAll emphasize? Why?
2. To maximize profits, how many of each size bin should StoreAll produce?
3. Given this product mix, what will the company’s operating income be?
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