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# keep or drop a segment, allocate joint costs after split off

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Unless otherwise indicated, each of the following parts is independent. In all cases, show computations to support your answer.

A. Andrews Home Center has two departments, Bath and Kitchen. The most recent income statement for the company follows:

Department
Total Bath Kitchen
Sales \$3,700,000 \$810,000 \$2,890,000
Variable Expenses 2,072,000 547,000 1,525,000
Contribution Margin \$1,628,000 \$263,000 \$1,365,000
Fixed Expenses 1,481,000 318,000 1,163,000
Net Income \$147,000 \$(55,000) \$202,000
A study indicates that \$84,000 of the fixed expenses being charged to the Bath Department are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 10% decrease in the sales of the Kitchen Department. If the Bath Department is dropped, what will be the effect on the net operating income of the company as a whole? Should the Bath Department be dropped? Explain.

B. Morrison Company produces several products from the processing of krypton, a rare mineral. Material and processing costs total \$93,600 per ton, 28% of which is allocated to the product merifulon. The merifulon produced from a ton of krypton can either be sold at the split-off point for \$41,300 or processed further at a cost of \$21,200, and then sold for \$67,900. Should merifulon be processed further or sold at the split-off point? Explain.

C. Shelby Company produces three products, X, Y, and Z. Data concerning the three products follow (per unit):

X Y Z
Selling Price 59.75 42.55 38.40
Less Variable Expenses
Direct Materials 13.80 12.40 16.60
Labor and Overhead 32.84 10.31 0.22
Total Variable Expenses 46.64 22.71 16.82
Contribution Margin 13.11 19.84 21.58
Contribution Margin Ratio 21.9% 46.6% 56.2%
Demand for the company's products is very strong, with far more orders each month than the company can produce with the available raw materials. The same raw material is used in each product. The material costs \$4.00 per pound, with a maximum of 4,800 pounds available each month. Which orders would you advise the company to accept first, those for X, for Y, or for Z? Which orders second? Third? Explain.

D. For many years, Dixon Company has produced a small electrical part that it uses in the production of its standard line of diesel tractors. The company's unit product cost, based on a production level of 40,000 parts per year, is as follows:

Per Part Total
Direct Materials \$4.80
Direct Labor 3.20

An outside supplier has offered to supply the electrical parts to the Dixon Company for only \$14.50 per part. An estimated 40% of the traceable fixed manufacturing costs represent supervisory salaries and other costs that can be eliminated if the parts are purchased. The other 60% of the traceable fixed manufacturing costs represent depreciation of special equipment that has no resale value.

Economic depreciation on this equipment is due to obsolescence rather than wear and tear. The decision would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle. Show the dollar advantage or disadvantage of accepting the supplier's offer. Should the offer from the outside supplier be accepted? Explain.

E. Jonathon Company produces a single product. The cost of producing and selling a single unit of this product at the company's current activity level of 25,500 units per month is as follows:

Direct Materials 6.45
Direct Labor 9.75
Variable Selling and Administrative Expenses 2.30
Fixed Selling and Administrative Expenses 1.50
The normal selling price is \$42.00 per unit. The company's capacity is 30,000 units per month. An order has been received from an overseas source for 2,800 units at a price of \$31.00 per unit. This order would not affect regular sales. If the order is accepted, by how much will monthly profits increase or decrease? Explain. The order will not change total fixed costs.

F. Refer to the data in (E) above. Assume the company has 1,800 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? Explain.