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Chapter 25: Q25-14RQ (page 1406)
When completing a differential analysis, when are the differences shown as positive amounts? As negative amounts?
Answer
Ifrevenues increase from alternative one to two, it is positive, and ifrevenue decreasesfrom alternative one to two, it is shown as negative.
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Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acres’s reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.
Requirements
1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?
2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?
What questions should managers answer when considering outsourcing?
Nautical manufactures flotation vests in Tampa, Florida. Nautical’s contribution margin income statement for the month ended December 31, 2018, contains the following data:
NAUTICAL
Income Statement
For the Month Ended December 31, 2018
Sales in Units 29,000
Net Sales Revenue \(551,000
Variable Costs:
Manufacturing 116,000
Selling and Administrative 111,000
Total Variable Costs 227,000
Contribution Margin 324,000
Fixed Costs:
Manufacturing 123,000
Selling and Administrative 92,000
Total Fixed Expenses 215,000
Operating Income \)109,000
Suppose Water Works wishes to buy 4,800 vests from Nautical. Nautical will not incur any variable selling and administrative expenses on the special order. The Nautical plant has enough unused capacity to manufacture the additional vests. Water Works has offered \(15 per vest, which is below the normal sales price of \)19.
Requirements
1. Identify each cost in the income statement as either relevant or irrelevant to Nautical’s decision.
2. Prepare a differential analysis to determine whether Nautical should accept this special sales order.
3. Identify long-term factors Nautical should consider in deciding whether to accept the special sales order.
What is target pricing? Who uses it?
Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:
Direct materials \(17,590
Direct labor 3,200
Variable overhead 2,080
Fixed overhead 6,300
Total manufacturing costs for 1,900 bindings \)29,170
Suppose Livingston will sell bindings to Snow Ride for \(13 each. Snow Ride would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.
Requirements
1. Snow Ride’s accountants predict that purchasing the bindings from Livingston will enable the company to avoid \)2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings.
2. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Ride’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.
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