ACC350 Week 4 P20-22A P20-23A P20-25A P20-26A

QUESTION

Acc350 Managerial Accounting: Week 4 Assignment
(P20-22A, P20-23A, P20-25A, P20-26A)
Acc350
Managerial Accounting
ACC350
Week 4 P20-22A P20-23A P20-25A P20-26A

P20-22A Making Special
Order and Pricing Decisions
Green
Thumb operates a commercial plant nursery where it propagates plants for garden
centers throughout the region. Green Thumb has $ 4,800,000 in assets. Its
yearly fixed costs are $ 600,000, and the variable costs for the potting soil,
container, label, seedling, and labor for each gallon- size plant total $ 1.35.
Green Thumb’s volume is currently 470,000 units. Competitors offer the same
plants, at the same quality, to garden centers for $ 3.60 each. Garden centers
then mark them up to sell to the public for $ 9 to $ 12, depending on the type
of plant.

Requirements
1.
Green Thumb’s owners want to earn a 10% return on investment on the ­company’s
assets. What is Green Thumb’s target full product cost?
2.
Given Green Thumb’s current costs, will its owners be able to achieve their ­target
profit?
3. Assume Green Thumb has identified ways to cut its variable costs to $ 1.20
per unit. What is its new target fixed cost? Will this decrease in variable
costs allow the company to achieve its target profit?
4. Green Thumb started an aggressive advertising campaign strategy to
differentiate its plants from those grown by other nurseries. Monrovia Plants
made this strategy work, so Green Thumb has decided to try it, too. Green Thumb
does not expect volume to be affected, but it hopes to gain more control over ­pricing.
If Green Thumb has to spend $ 115,000 this year to advertise and its variable
costs continue to be $ 1.20 per unit, what will its cost- plus price be? Do you
think Green Thumb will be able to sell its plants to garden centers at the ­cost-
plus price? Why or why not?

P20-23A Making dropping a product and
product-mix decisions

Members
of the board of directors of Safe Zone have received the following operating
income data for the year ended May 31, 2012:

SAFE
ZONE
Income
Statement
For
the Year Ended May 31, 2012″
Product
Line Total
Industrial
Household
Systems
Systems
Sales
revenue 370,000 390,000 760,000
Cost
of goods sold:
Variable
36,000 42,000 78,000
Fixed
260,000 65,000 325,000
Total
cost of goods sold 296,000 107,000 403,000
Gross
profit 74,000 283,000 357,000
Marketing
and administrative expenses:
Variable
66,000 75,000 141,000
Fixed
44,000 24,000 68,000
Total
marketing and administrative exp. 110,000 99,000 209,000
Operating
income (loss) $(36,000) $184,000 $148,000

Members
of the board are surprised that the industrial systems product line is losing
money. 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 $84,000 and decrease fixed marketing and administrative
expenses by $14,000.

Requirements

1. Prepare an incremental analysis to show whether Safe Zone should drop the
industrial systems product line.
2.
Prepare contribution margin income statements to show Safe Zone’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?

P20-25A Making outsourcing decisions
Outdoor
Life manufactures snowboards. Its cost of making 2,000 bindings is as follows:
Direct
materials 17,550
Direct
labor 3,400
Variable
overhead 2,040
Fixed
overhead 6,300
Total
manufacturing costs for 2,100 bindings 29,290

Suppose
Lancaster will sell bindings to Outdoor Life for $14 each. Outdoor Life would
pay $3 per unit to transport the bindings to its manufacturing plant, where it
would add its own logo at a cost of $0.70 per binding.

Requirements
1.
Outdoor Life’s accountants predict that purchasing the bindings from Lancaster
will enable the company to avoid $2,100 of fixed overhead. Prepare an analysis
to show whether Outdoor Life should make or buy the bindings.
2.
The facilities freed by purchasing bindings from Lancaster can be used to manufacture
another product that will contribute $2,700 to profit. Total fixed costs will
be the same as if Outdoor Life had produced the bindings. Show which
alternative makes the best use of Outdoor Life’s facilities: (a) make bindings,
(b) buy bindings and leave facilities idle, or (c) buy bindings and make
another product.

P20-26A Making sell as is or process
further decisions
Smith
Petroleum has spent $204,000 to refine 62,000 gallons of petroleum distillate,
which can be sold for $6.40 a gallon. Alternatively, Smith can process the
distillate further and produce 56,000 gallons of cleaner fluid. The additional
processing will cost $1.75 per gallon of distillate. The cleaner fluid can be
sold for $9.00 a gallon. To sell the cleaner fluid, Smith must pay a sales
commission of $0.13 a gallon and a transportation charge of $0.18 a gallon.

Requirements:

1. Diagram Smith’s decision alternatives.
2.
Identify the sunk cost. Is the sunk cost relevant to Smith’s decision?
3.
Should Smith sell the petroleum distillate or process it into cleaner fluid?
Show the expected net revenue difference between the two alternatives.

ANSWER:

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