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Keep or drop a segment, special order cost accounting tasks

1. Dockers, Inc. is a retail chain with 125 stores organized into 5 regions. The most recent annual income statement for the Snert, ND store is given below (in $000). It is typical of recent years, and Hagar is considering closing the store because of chronic losses. What factors should Dockers consider in making the decision?

Sales $2,520
COGS 1,650
Gross margin 870
Wages $395
Store management 110
Advertising 180
Regional management 78
Occupancy 83
Depreciation 87 933

Net loss (63)

Advertising consists of 60% local ads, and 40% allocation of national advertising costs. Regional management represents an allocation of the cost of operating the regional office. These are fixed costs except for $1,000/year of travel costs to visit the Snert store. Depreciation costs are $60,000 for the building, and $27,000 for equipment and fixtures. If the store is closed, the building could be rented out for $27,000/year. The equipment and fixtures have no value and would be junked. Occupancy costs include $20,000 of taxes and insurance which must be paid on the building as long as it is owned. The remaining occupancy costs, such as maintenance and utilities, would be paid by a tenant if the building is rented.

2. Savera Corporation manufactures a variety of doodads for retail sale. The doodads carry one of several Savera name brands, and are normally distributed through wholesalers. XOXO, Inc., a large retailer, has approached Savera with an offer to purchase 60,000 units of a customized version of product D38 over the next three months, to be sold under the retailer's house brand. The retailer offers to pay $190/unit, which is considerably less than Savera's normal wholesale price of $280. A design modification would reduce the cost of direct materials by $8/unit. To fill the order, Savera would need to purchase a machine for $40,000, which could be sold for $22,000 after three months. The current cost to produce D38 is $216/unit: direct materials $61, direct labor, $35, and overhead $120. Overhead is 25% variable and 75% fixed. Over the next three months, Savera's budgeted production without the XOXO order is 70% of the plant machine capacity of 50,000 units/month.

What factors should Savera consider in deciding whether to XOXO?

Solution Summary

The solution discusses the decision criteria, walks you through the computations for analyzing the segment data and mentions six qualitative considerations for special order situations.