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    Maxwell's Department Store: Performance reports P1-4, E1-14

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    Exercise1-14 (Opportunity Cost)

    Parrish Plumbing provides plumbing services to residential customers from Monday through Friday. Ken Parrish, the owner, believes that it is important for his employees to have Saturday and Sunday off to spend with their families. However, he also recognizes that his policy has implications for profitability, and he is considering staying open on Saturday.

    Ken estimates that if his company stays open on Saturdays, it can generate 2,500 of daily revenue each day for 52 days per year. The incremental daily costs will be $700 for labor, $500 for parts, $100 for transportation, and $200 for office staff. These cost do not include a share of monthly rent or a share of depreciation related to office equipment.

    Ken is determined not to have employees work on Sunday, but he would like to know the opportunity cost of not working on Saturday. Provide Ken with an estimate of the opportunity cost and explain why you do not have to consider rent or depreciation of office equipment in your estimate.

    Problems 1-2 (Incremental Analysis) consider the production cost information for Santiago's Salsa in problem 1-1. The company is currently producing and selling 325,000 jars of Salsa annually. The jars sell for $5.00 each. The company is considering lowering the price to $4.60. Suppose this action will increase sales to 375,000 jars.

    Required:

    A) What is the incremental cost associated with producing an extra 50,000 jars of salsa?
    B) What is the incremental revenue associated with the price reduction of $0.40 per jar?
    C) Should Santiago's lower the price of its salsa?

    Problem 1-4. Performance Reports: A performance report that compares budgeted and actual profit in the sporting goods department of Maxwell's Department Store for the month of December follows:

    Maxwell's Department Store
    Sporting Goods
    Performance Report December 2011
    Budget Actual Different
    Sales $700,000 $775,000 $75,000
    Less
    Cost of merchandise $350,000 $430,000 $80,000
    Salaries of Sales staff $70,000 $78,000 $8,000
    Controllable Profit $280,000 $267,000 ($13,000)

    Evaluate the department in terms of its increases in sales and expenses. Do you believe it would be useful to investigate either or both of the increases in expenses?

    Consider storewide electricity cost. Would this cost be a controllable or a non-controllable cost for the manager of sporting goods? Would it be useful to include a share of storewide electricity cost on the performance report for sporting goods?

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    Solution Preview

    See attached Excel file.

    Exercise1-14 (Opportunity Cost)

    Opportunity cost:

    Lost revenue $2,500

    Expenses avoided:

    Labor $700
    Parts $500
    Transp $100
    Staff $200

    Profit (revenue less expenses) $2,500 - 1,500 = $1,000

    You ignore the rent and depreciation because they are fixed costs and will not change if you stay open on Saturday.

    -------------------------

    Problem 1-1 Budgets in Managerial Accounting: Santiago's Salsa is in the process of preparing a production cost budget for May. Actual costs ...

    Solution Summary

    Guidance indicates the process and the computations to complete requirements. The logic of each is indicated.

    $2.19

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