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Analyze Managerial Accounting/Segmented Income Statement

Analyze Managerial Accounting/Segmented Income Statement.

3. Omstadt Company produces and sells only two products that are referred to as RIPS and PITS. Production is "for order" only, and no finished goods inventories are maintained; work in process inventories are negligible.
The following data have been extracted relating to last month:
RIPS PITS
Sales $180,000 $180,000
Manufacturing costs:
Materials $18,000 $24,000
Labor $54,000 $48,000
Overhead $72,000 $84,000
Selling expenses $14,400 $10,080
Administrative expenses $12,000 $18,000

An analysis has been made of the manufacturing overhead. Although the items listed above are traceable to the products, $36,000 of the overhead assigned to RIPS and $72,000 of that assigned to PITS is fixed. The balance of the overhead is variable.

Selling expenses consist entirely of commissions paid as a percentage of sales. Direct labor is completely variable.

Administrative expenses in the data above are fixed and cannot be traced to the products but have been arbitrarily allocated to the products.

Required:
Prepare a segmented income statement, in total and for the two products. Use the contribution approach.

7. Lakeshore Tours Inc., operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company's overall operating performance. One such tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from one of these tours is given below:

Ticket revenue
(100 seats × 45% occupancy × $80 ticket price) $3,600 100%
Less variable expenses ($24 per person) 1,080 30%
Contribution margin 2,520 70%
Less fixed tour expenses:
Tour promotion $620
Salary of bus driver 400
Fee, tour guide 825
Fuel for bus 100
Depreciation of bus 400
Liability insurance, bus 250
Overnight parking fee, bus 50
Room and meals, bus driver and tour guide 75
Bus maintenance and preparation 325
Total fixed tour expenses 3,045
Net operating loss $ (525)

Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The "Bus maintenance and preparation" cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used.

Required:
a. Prepare an analysis showing what the impact will be on company profits if this tour is discontinued.
b. The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director's conclusion? Explain your response in one paragraph.

10. THE FEDERAL GOVERNMENT VS. YORK COUNTY: BACKGROUND INFORMATION

You have been hired as a consultant by York County, Pennsylvania to assist with their negotiations with the federal government. Over twenty years ago, York County remodeled an unused wing of its county prison to exclusively house detainees for the Immigration and Naturalization Service (INS). The county prison holds up to 850 detainees. Currently, 550 detainees (men and women) are being housed. The current facility is well suited for housing INS detainees. Per the prison warden, "This is a unique facility. When we set it up, it was designed specifically for INS." The prison includes a gym, law library with computer terminals, a property storage area, and hearing rooms where INS judges sit to hear detainees' cases.

York County charges the federal government $60 per day for each inmate they house. This is less than the $75 average federal rate paid for housing detainees, but more than the federal government thinks is appropriate. The INS General Inspector researched the facility and estimated that it should only cost $38 per day per detainee. York County believes that the INS estimate is grossly understated. The INS estimate appears to have excluded overhead for the facility and is below the alleged actual direct costs incurred by York County. York County reinforces its case for $60 per inmate per day by demonstrating that the average price to house INS detainees is $75 per day per inmate. If a negotiated price cannot be agreed upon, INS has threatened to move the detainees to other facilities.

Required:
As a consultant, what transfer price (range) do you advise York County to accept? Please explain your conclusion and limit your response to no more than two paragraphs.

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3.Omstadt Company produces and sells only two products that are referred to as RIPS and PITS. Production is "for order" only, and no finished goods inventories are maintained; work in process inventories are negligible.
The following data have been extracted relating to last month:
RIPS PITS
Sales $180,000 $180,000
Manufacturing costs:
Materials $18,000 $24,000
Labor $54,000 $48,000
Overhead $72,000 $84,000
Selling expenses $14,400 $10,080
Administrative expenses $12,000 $18,000

An analysis has been made of the manufacturing overhead. Although the items listed above are traceable to the products, $36,000 of the overhead assigned to RIPS and $72,000 of that assigned to PITS is fixed. The balance of the overhead is variable.

Selling expenses consist entirely of commissions paid as a percentage of sales. Direct labor is completely variable.

Administrative expenses in the data above are fixed and cannot be traced to the products but have been arbitrarily allocated to the products.

Required:
Prepare a segmented income statement, in total and for the two products. Use the contribution approach.

First, you need to separate the fixed cost and variable cost from the given data. Fixed
cost is the cost that cannot be changed or fluctuate with the units sales while variable cost
will.

From the given data, the variable costs will include

RIPS PITS TOTAL

Sales 180,000 180,000 360,000

Materials 18,000 24,000 42,000
Direct Labor 54,000 48,000 102,000
Variable overhead 36,000 12,000 48,000
Selling expenses 14,400 10,080 24,480
Total variable
expenses 122,400 94,080 216,480

The fixed costs will include: -

Fixed overhead 36,000 72,000 108,000
Administrative exp. 12,000 18,000 30,000
Total fixed costs 48,000 90,000 138,000

Then, we will prepare the segmented income statement by using the contribution
approach by subtracting total variable expenses from sales to obtain contribution margin.
Then, we will deduct fixed cost to get net operating income/loss.

Omstaldt Company
Segmented Income Statement

TOTAL RIPS PITS
Sales $360,000 $180,000 $180,000
Less variable expenses 216,480 122,400 94,080
Contribution margin 143,520 57,600 85,920
Less fixed tour expenses 138,000 48,000 90,000
Net operating income ...

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