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Chapter 25: 4RQ (page 1406)
What are sunk costs? Give an example.
Sunk costs are the costs incurred in the past by the business entities, and they are also consideredto be irrelevantto the decision-making process.
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Members of the board of directors of Security Check have received the following operating income data for the year ended May 31, 2018:
SECURITY CHECK Income Statement For the Year Ended May 31, 2018 |
Product Line |
Industrial Systems | Household Systems | Total |
Net Sales Revenue | \( 360,000 | \) 380,000 | \( 740,000 |
Cost of Goods Sold: | |||
Variable | 37,000 | 47,000 | 84,000 |
Fixed | 260,000 | 63,000 | 323,000 |
Total Cost of Goods Sold | 297,000 | 110,000 | 407,000 |
Gross Profit | 63,000 | 270,000 | 333,000 |
Selling and Administrative Expenses: | |||
Variable | 64,000 | 73,000 | 137,000 |
Fixed | 44,000 | 26,000 | 70,000 |
Total Selling and Administrative Expenses | 108,000 | 99,000 | 207,000 |
Operating Income (Loss) | \) (45,000) | \( 171,000 | \) 126,000 |
Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(80,000 and decrease fixed selling and administrative expenses by \)12,000.
Requirements
1. Prepare a differential analysis to show whether Security Check should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Check’s total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?
Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct materials \(5.00
Direct labor 3.00
Variable overhead 6.00
Fixed overhead 7.00
Manufacturing product cost \)21.00
Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.
Moore Company sells both designer and moderately priced fashion accessories. Top management is deciding which product line to emphasize. Accountants have provided the following data:
Per Item
Designer Moderately Priced
Average sales price \(185 \)87
Average variable costs 105 22
Average contribution margin 80 65
Average fixed costs (allocated) 20 10
Average operating income \(60 \)55
The Moore Company store in Grand Junction, Colorado, has 14,000 square feet of floor space. If Moore Company emphasizes moderately priced goods, it can display 840 items in the store. If Moore Company emphasizes designer wear, it can display only 560 designer items. These numbers are also the average monthly sales in units.
Prepare an analysis to show which product the company should emphasize.
When is nonfinancial information relevant?
Explain the difference between price-takers and price-setters.
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