VideoWonders manufactures two different brands of DVD players that are sold unde
ID: 2332780 • Letter: V
Question
VideoWonders manufactures two different brands of DVD players that are sold under two different brand names. The first product is simply called the VCH and is a plain vanilla product that is marketed through large consumer outlets such as Costco or Wal-Mart. The Imputed Interest on Average Annual Sales Accounts Receivable, Revenues 45-day Payment Terms Microtek $7,500,000 $55,479 Bogden $10,000,000 73,973 KDL $12,000,000 88,767 GM $36,000,000 266,301 Customer Profitability Analysis VCH line is a very basic model designed for the low end of the market and has limited features. The SuperVision line is designed for the upper end and is sold through smaller boutique-type retail stores or contractors who install home-theater systems. As part of the annual review, the controller has prepared the product-line income statements shown in Table 1 below
Based on the above income statements, top management feels that they should discontinue the sale of the VCH line as it has a negative return. You have been asked to review VCH’s profitability and to make a recommendation to top management about what to do. As part of your investigation, you have undertaken a study of the costs for the two products and you have uncovered the following additional information:
Additional Information:
i. The SuperVision line is produced in small batches and the product is customized to the needs of the installers. This adds to setup costs and costs of adding extra features that are not part of the VCH line. An activity analysis shows that nearly 55 percent of the fixed overhead costs can be attributed to the SuperVision line.
ii. The SuperVision customers are more demanding. They order in smaller batches; orders have to be specially handled and packaged. A 24-hour support line is set up for these customers. Because these are smaller businesses, they are given more sales discounts to make them pay on time. The SuperVision customers also require additional credit checking and collection costs. The VCH customers are big companies; they order in large quantities, use bulk packing, pay on time, and require little credit or collection activities.
iii. The SuperVision line is advertised on TV and in magazines. This is more costly. There is little advertising for the VCH line and the stores, as part of their normal sales promotions, handle most of it.
Question 1. Using the information in Table 2, identify the selling and G&A costs directly attributable (those that can be traced uniquely) to each of the two products. What is the direct profit margin before allocation of any common costs?
Question 2. What is the net profit from the two lines assuming that any residual common costs are allocated based on sales revenue?
Question 3. Would you still recommend discontinuing the VCH line? Explain your reasons briefly.
Question 4. Can you think of some of the behavioral effects of the current income reporting format shown in Table 1 of this problem? If you think the report can lead to dysfunctional effects, how might you redesign the income statement to alleviate some of these effects?
Table 1 VideoWonders Inc. Product-Line Income Statements (Annual Data) VCH Line SuperVisionTotal $16,000,000 $12,000,000 $28,000,000 Revenue Variable mfg cost Fixed manufacturing cost* 681,818 20,000,000 14618,182 7,881818 22,500,000 5,500,000 12,800,000 7,200,000 2,500,000 Total manufacturing cost Gross margin Selling and G&A expenses: Sales commissions Common sales and G&A costs" Net income Return on sales 1,818,182 1,381,818 40,000 -623,896 4,118,182 60,000 1,965,714 1,474,286 2,583,896 21.53% 100,000 3,440,000 1,960,000 -3.90% Allocated based on direct labor hours used "Allocated on the basis of revenues ased on the above income statements, top management feels that they should discontinue the sale of the VCH line as it has a negative return. You have been asked to review V profitability and to make a recommendation to top management about what to do. As part of your investigation, you have undertaken a study of the costs for the two products and you have uncovered the following additional in ( CH'sExplanation / Answer
Prodct Line Income Statement VCH SuperVision Total Revenue $16,000,000 $12,000,000 $28,000,000 Variable mfg cost $12,800,000 $7,200,000 $20,000,000 Fixed mfg cost $1,818,182 $681,818 $2,500,000 Total mfg cost $14,618,182 $7,881,818 $22,500,000 Gross margin $1,381,818 $4,118,182 $5,500,000 Selling and G&A expenses: Sales commission $40,000 $60,000 $100,000 Common Sales and G&A expense $1,965,414 $1,474,286 $3,439,700 Net Income ($623,896) $2,583,896 $1,960,000 Return on sales -3.90% 21.53% Q1 Selling and G&A cost directly attrbutable to each product VCH Supervision Total Sales Commission $40,000 $60,000 $100,000 Sales dicount $80,000 $360,000 $440,000 VCH=(0.005*16000000) SuperVision=0.03*12000000 Advertising $200,000 $600,000 $800,000 Order filling cost $980 $98,000 $98,980 VCH=40*24.5 SuperVision=4000*24.5 Special packaging $20,000 $36,000 $56,000 VCH=0.5*40000 SuperVision=3*12000 Customer Support $0 $175,200 $175,200 Credit and collection cost $160,000 $960,000 $1,120,000 VCH=0.01*16000000 SuperVision=0.08*12000000 Totalallocated Selling and G&A expenses $500,980 $2,289,200 $2,790,180 CALCULATION OF DIRECT PROFIT MARGIN VCH Supervision Gross margin $1,381,818 $4,118,182 Directly attributable Selling and G&A expenses $500,980 $2,289,200 Direct Profit margin before allocation of common cost $880,838 $1,828,982 NET PROFIT AFTER ALLOCATION OF COMMON COST Total Selling and G& A expenses $3,539,700 (3439700+100000) Directly attributable Selling and G&A expenses $2,790,180 (500980+2289200) X Residual CommonSelling and G&A expenses $749,520 A Total Sales Revenue $28,000,000 (16000000+12000000) B Sales Revenue of VCH $16,000,000 C Sales Revenue of SuperVision $12,000,000 D Proportion of VCH on totalSales Revenue 0.571428571 (16000000/28000000) E Proportion of SuperViion on totalSales Revenue 0.428571429 (12000000/28000000) F=D*X Residual Common Selling and G&A expenses allocated to VCH $428,297 G=E*X Residual Common Selling and G&A expenses allocated to SuperVision $321,223 VCH Supervision Direct Profit margin before allocation of common cost $880,838 $1,828,982 Residual Common cost allocated $428,297 $321,223 Net Profit $452,541 $1,507,759 Q3 VCH line is profitable It should not be closed Q4 Allocationof common cost should be accurately carried out Activity Based Costing may helpin accurate allocation of common cost and proper reporting , This will help in taking correct decisions
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