1. Bed & Bath, a retailing company, has two departments, Hardware and Linens. Th
ID: 2470061 • Letter: 1
Question
1. Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:
Department
A study indicates that $372,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 17% decrease in the sales of the Hardware Department.
If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?
2. Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 88,800 units per year is:
The normal selling price is $20 per unit. The company’s capacity is 112,800 units per year. An order has been received from a mail-order house for 2,000 units at a special price of $17.00 per unit. This order would not affect regular sales.
If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company’s total fixed costs.)
Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? (Round your answer to 2 decimal places.)
1. Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:
Explanation / Answer
Answer:
1. If the Linen Department is dropped then;
Sales = $ 3,180,000 - 17% = $ 2,639,400
Variable Expenses = $ 862,000 - 17% = $ 715,460
Contribution Margin = $ 2,639,400 - $715,460 = $ 1,923,940
Fixed Expenses = $ 1,430,000 + $ 372,000 = $ 1,802,000
Net Operating Income = $ 1,923,940 - $ 1,802,000 = $ 121,940
Hence, the whole net operating income will decrease from $ 753,000 to $ 121,940 if the Linen Department is dropped.
2. Normal Capacity = 88,800 units per year
Installed capacity = 112,800 units per year
this means that for any increase in production from 88,800 units upto 112,800 units per year there shall be no additional fixed manufacturing expenses and as per the given question there shall be no change in fixed selling expenses as well.
At Normal Production the Company has a Contribution margin per unit of $ 13.10 ($ 20 - $ 1.90 - $ 3.00 - $ 0.80- $ 1.20) and Total Fixed Costs = ($ 4.35 x 88,800) + ($ 2.00 x 88,800) = $ 563,880.
a. The Sale price under bulk order of 2,000 units is proposed to be $ 17.00 per unit hence any sale under special order will add $ 17.00 - $ 13.10 = $ 3.90 per unit to the profit of the Company. That is the Companys total profit will increase by $ 3.90 x 2000 = $ 7,800.
b. The units left from the last years production shall be sold minimum for an amount equal to their variable costs that is $ 20 - $ 13.10 = $ 6.90. Below this price the Company will incur losses. At the sale price of $ 6.90 per unit the inferior 500 units will have no profit no loss situation.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.