Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices-one in Chicago and one in Minneapolis. The firm classifies the direct costs of consulting jobs as variable costs. A contribution format segmented income statement for the company's most recent year is given below: " $$ \begin{matrix} \text{ } & \text{ } & \text{Office}\\ \text{ } & \text{Total Company} & \text{Chicago} & \text{Minneapolis}\\ \text{Sales} & \text{\$450.000} & \text{100\\%} & \text{\$ 150.000 } & \text{100\\%} & \text{\$ 300.000} & \text{100\\%}\\ \text{Variable expenses} & \text{225.000} & \text{50\\%} & \text{45.000} & \text{30} & \text{180.000} & \text{60}\\ \text{Contribution margin} & \text{225.000} & \text{50\\%} & \text{105.000} & \text{70} & \text{120.000} & \text{40}\\ \text{Traceable fixed expenses} & \text{126.000} & \text{28\\%} & \text{78.000} & \text{52} & \text{48.000} & \text{16}\\ \text{Office segment margin} & \text{99.000} & \text{22\\%} & \text{\$ 27.000} & \text{18\\%} & \text{\$ 72.000} & \text{24\\%}\\ \text{Common fixed expenses not traceable to offices} & \text{63.000} & \text{14\\%}\\ \text{Net operating income} & \text{\$ 36.000} & \text{8\\%}\\ \end{matrix} $$ 1. Compute the companywide break-even point in dollar sales. Also, compute the break-even point for the Chicago office and for the Minneapolis office. Is the companywide break-even point greater than, less than, or equal to the sum of the Chicago and Minneapolis break-even points? Why? 2. By how much would the company's net operating income increase if Minneapolis increased its sales by $75.000 per year? Assume no change in cost behavior patterns. 3. Refer to the original data. Assume that sales in Chicago increase by$50.000 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs. a. Prepare a new segmented income statement for the company using the above format. Show both amounts and percentages. b. Observe from the income statement you have prepared that the contribution margin ratio for Chicago has remained unchanged at 70% (the same as in the above data) but that the segment margin ratio has changed. How do you explain the change in the segment margin ratio?

Chuck Wagon Grills, Inc., makes a single product- a handmade specialty barbecue grill that it sells for $210. Data for last year's operations follow:$

$$\begin{matrix} \text{Units in beginning inventory} & \text{0}\\ \text{Units produced} & \text{20.000}\\ \text{Units sold} & \text{19.000}\\ \text{Units in ending inventory} & \text{1.000}\\ \text{Variable costs per unit:}\\ \text{Direct materials} & \text{\$ 50}\\ \text{Direct labor} & \text{80}\\ \text{Variable manufacturing overhead} & \text{20}\\ \text{Variable selling and administrative} & \text{10}\\ \text{Total variable cost per unit} & \text{\$ 160}\\ \text{Fixed costs:}\\ \text{Fixed manufacturing overhead} & \text{\$ 700.000}\\ \text{Fixed selling and administrative} & \text{285.000}\\ \text{Total fixed costs} & \text{\$ 985.000}\\ \end{matrix}$$

$ 1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill. 2. Assume that the company uses variable costing. Prepare a contribution format income statement for the year. 3. What is the company's break-even point in terms of the number of barbecue grills sold?

A consulting firm submitted a bid for a large research project. The firm’s management initially felt they had a 50–50 chance of getting the project. However, the agency to which the bid was submitted subsequently requested additional information on the bid. Past experience indicates that for 75% of the successful bids and 40% of the unsuccessful bids the agency requested additional information.

What is the prior probability of the bid being successful (that is, prior to the request for additional information)?

Royal Lawncare Company produces and sells two packaged products, Weedban and Greengrow. Revenue and cost information relating to the products follow:

Common fixed expenses in the company total $33,000 annually. Last year the company produced and sold 15,000 units of Weedban and 28,000 units of Greengrow.

Required:

Prepare a contribution format income statement segmented by product lines.

Crossfire Company segments its business into two regions- East and West. The company prepared the contribution format segmented income statement shown below:

$$\begin{matrix} \text{ } & \text{Total Company} & \text{East} & \text{West}\\ \text{Sales} & \text{\$ 900.000} & \text{\$ 600.000} & \text{\$ 300.000}\\ \text{Variable expenses} & \text{675.000} & \text{480.000} & \text{195.000}\\ \text{Contribution margin} & \text{225.000} & \text{120.000} & \text{105.000}\\ \text{Traceable fixed expenses} & \text{141.000} & \text{50.000} & \text{91.000}\\ \text{Segment margin} & \text{84.000} & \text{\$ 70.000} & \text{\$ 14.000}\\ \text{Common fixed expenses} & \text{59.000}\\ \text{Net operating income} & \text{\$ 25.000}\\ \end{matrix}$$

1. Compute the companywide break-even point dollar in sales. 2. Compute the break-even point in dollar sales for the East region. 3. Compute the break-even point in dollar sales for the West region. 4. Prepare a new segmented income statement based on the break-even dollar sales that you computed in requirements 2 and 3. Use the same format as shown above. What is Crossfire's net operating income in your new segmented income statement? 5. Do you think that Crossfire should allocate its common fixed expenses to the East and West regions when computing the break-even points for each region? Why?

Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company’s bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made. Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget:

a. Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are:

b. All sales are on account. The company normally collects 65% of a quarter’s sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year’s fourth-quarter actual data.

c. Eighty percent of a quarter’s merchandise purchases are paid for within the quarter. The remainder is paid for in the following quarter.

d. Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount,$20,000 each quarter is depreciation.

e. The company will pay $10,000 in dividends each quarter.

f. Land purchases of$75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be for cash.

g. The Cash account contained$10,000 at the end of the current year. The treasurer feels that this represents a minimum balance that must be maintained.

h. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each quarter, up to a total loan balance of$100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year.

i. At present, the company has no loans outstanding.

Required:

1. Calculate the expected cash collections by quarter and in total for next year.

2. Calculate the expected cash disbursements for merchandise purchases by quarter and in total for next year.

3. Calculate the expected cash disbursements for selling and administrative expenses, by quarter and in total for next year.

4. Prepare a cash budget by quarter and in total for next year.

Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement:

$$\begin{array}{lrr} \text{Sales}&\text{\$1,000,000}\\ \text{Variable expenses}&\underline{\text{\hspace{10pt}390,000}}\\ \text{Contribution margin}&\text{610,000}\\ \text{Fixed expenses}&\underline{\text{\hspace{10pt}625,000}}\\ \text{Net operating income (loss)}&\underline{\underline{\text{\$\hspace{5pt}(15,000)}}}\\ \end{array}$$

In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:

Required:

1. Prepare a contribution format income statement segmented by divisions.

2. The Marketing Department has proposed increasing the West Division’s monthly advertising by $15,000 based on the belief that it would increase that division’s sales by 20%. Assuming these estimates are accurate, how much would the company’s net operating income increase (decrease) if the proposal is implemented?

Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company's bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made.

Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget:

a. Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are:

$$\begin{array}{lrr} && \textbf{Merchandise} \\ & \textbf{Sales} & \textbf{ Purchases}\\ \\ \text{Current Year:}\\ \text{$\quad$Fourth quarter actual} & \$200,000 & \$126,000\\ \text{Next Year:}\\ \text{$\quad$First quarter estimated } & 300,000 & 186,000 \\ \text{$\quad$Second quarter estimated} & 400,000 & 246,000 \\ \text{$\quad$Third quarter estimated } & 500,000 & 305,000 \\ \text{$\quad$Fourth quarter estimated} & 200,000 & 126,000 \\ \end{array}$$

b. All sales are on account. The company normally collects 65% of a quarter's sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year's fourth-quarter actual data.

c. Eighty percent of a quarter's merchandise purchases are paid for within the quarter. The remainder is paid for in the following quarter.

d. Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount,$20,000 each quarter is depreciation.

e. The company will pay $10,000 in dividends each quarter.

f. Land purchases of$75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be for cash.

g. The Cash account contained$10,000 at the end of the current year. The treasurer feels that this represents a minimum balance that must be maintained.

h. The company's bank allows borrowing in increments of $1,000 at the beginning of each quarter, up to a total loan balance of$100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year.

i. At present, the company has no loans outstanding.

Required:

1. Calculate the expected cash collections by quarter and in total for next year.

2. Calculate the expected cash disbursements for merchandise purchases by quarter and in total for next year.

3. Calculate the expected cash disbursements for selling and administrative expenses, by quarter and in total for next year.

4. Prepare a cash budget by quarter and in total for next year.

Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for municipalities. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data:

$$\begin{matrix} \text{ } & \text{Year 1} & \text{Year 2} & \text{Year 3}\\ \text{Inventories:}\\ \text{Beginning (units)} & \text{200} & \text{170} & \text{180}\\ \text{Ending (units)} & \text{170} & \text{180} & \text{220}\\ \text{Variable costing net operating income} & \text{\$ 1.080.400} & \text{\$ 1.032.400} & \text{\$ 996.400}\\ \end{matrix}$$

The company's fixed manufacturing overhead per unit was constant at $560 for all three years. 1. Determine each year's absorption costing net operating income. Present your answer in the form of a reconciliation report. 2. In Year 4, the company's variable costing net operating income was$984,400 and its absorption costing net operating income was $1,012,400. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?

During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

$$\begin{array}{lrr} \text{}&\textbf{Year 1}&\textbf{Year 2}\\[5pt] \text{Sales (@ \$25 per unit)}&\text{\$1,000,000}&\text{\$1,250,000}\\ \text{Cost of goods sold (@ \$18 per unit)}&\underline{\text{\hspace{10pt}720,000}}&\underline{\text{\hspace{10pt}900,000}}\\ \text{Gross margin}&\text{280,000}&\text{350,000}\\ \text{Selling and administrative expenses *}&\underline{\text{\hspace{10pt}210,000}}&\underline{\text{\hspace{10pt}230,000}}\\ \text{Net operating income}&\underline{\underline{\text{\$\hspace{12pt}70,000}}}&\underline{\underline{\text{\$\hspace{7pt}120,000}}}\\ \end{array}$$

The company’s $18 unit product cost is computed as follows:

$$\begin{array}{lrr} \text{Direct materials}&\text{\$\hspace{5pt}4}\\ \text{Direct labor}&\text{7}\\ \text{Variable manufacturing overhead }&\text{1}\\ \text{Fixed manufacturing overhead (\$160,000 $\div$ 40,000 units) }&\underline{\text{\hspace{5pt}6}}\\ \text{Absorption costing unit product cost}&\underline{\underline{\text{\$18}}}\\ \end{array}$$

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the two years are:

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $58 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

    a. Compute the unit product cost for Year 1, Year 2, and Year 3.
    b. Prepare an income statement for Year 1, Year 2, and Year 3.
   

3. Assume the company uses absorption costing:

    a. Compute the unit product cost for Year 1, Year 2, and Year 3.
    b. Prepare an income statement for Year 1, Year 2, and Year 3.
   

4. Compare the net operating incomes that you computed in requirements 2 and 3 to the break-even point in unit sales that you computed in requirement 1. Which net operating income figures (variable costing or absorption costing) seem counterintuitive? Why?

Refer to the data in the recent Exercise, Assume that Minneapolis' sales by major market are:

The company would like to initiate an intensive advertising campaign in one of the two market segments during the next month. The campaign would cost $\$ 5,000$. Marketing studies indicate that such a campaign would increase sales in the Medical market by $\$ 40,000$ or increase sales in the Dental market by $\$ 35,000$.

1. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market?

2. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Dental Market?

3. In which of the markets would you recommend that the company focus its advertising campaign?

4. In Exercise 7-16, Minneapolis shows $\$ 48,000$ in traceable fixed expenses. What happened to the $\$ 48,000$ in this exercise?

Refer to the data in above exercise . Assume that Minneapolis’ sales by major market are:

The company would like to initiate an intensive advertising campaign in one of the two market segments during the next month. The campaign would cost $\$5,000.$ Marketing studies indicate that such a campaign would increase sales in the Medical market by $\$40,000$ or increase sales in the Dental market by

$$\$35,000.$$

Required:

1. In which of the markets would you recommend that the company focus its advertising campaign? Show computations to support your answer.
2. In Exercise 10–13, Minneapolis shows $\$48,000$ in traceable fixed expenses. What happened to the $48,000 in this exercise?

Valsh Company manufactures and sells one product. The following information pertains to each of the company's first two years of operations:

$$\begin{matrix} \text{Variable costs per unit:}\\ \text{Manufacturing:}\\ \text{Direct materials} & \text{\$ 25}\\ \text{Direct labor} & \text{\$ 15}\\ \text{Variable manufacturing overhead} & \text{\$ 5}\\ \text{Variable selling and administrative } & \text{\$ 25}\\ \text{Fixed costs per year:}\\ \text{Fixed manufacturing overhead} & \text{\$ 250.000}\\ \text{Fixed selling and administrative expenses} & \text{\$ 80.000}\\ \end{matrix}$$

During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40.000 units and sold 50.000 units. The selling price of the company's product is $60 per unit. 1. Assume the company uses variable costing: a. Compute the unit product cost for Year 1 and Year 2. b. Prepare an income statement for Year 1 and Year 2. 2. Assume the company uses absorption costing: a. Compute the unit product cost for Year 1 and Year 2. b. Prepare an income statement for Year 1 and Year 2. 3. Explain the difference between variable costing and absorption costing net operating income in Year 1. Also, explain why the two net operating income figures differ in Year 2.