Boswell Plumbing Products produces a variety of valves, connectors, and fixtures used in commercial and residential plumbing applications. Recently a senior manager walked into the cost accounting department and asked Nick Somner to tell her the cost of the D45 valve. Nick quickly replied, "Why do you want to know?" Noticing that the manager appeared somewhat startled by this question, he explained, "The cost information you need depends on the decision you're going to make. You might be thinking of increasing a scheduled production run of 3,000 D45s by 100 units or sheduling an additional production run, or you might even be thinking of dropping the product. For each of these decisions, the cost information that you need is different."
Using the concept of incremental analysis, expand on Nick's response of "Why do you want to know?"
What cost information would be relevant to a decision to drop the product that would not be relevant to a decision to increase a production run by 100 units?
Concept of incremental analysis
Depending on the decision that has to be made, the cost information will be different. For instance, if the senior manager wanted to increase the production run by 100 more units, then the relevant costs involved in the decision would be the incremental raw ...
The solution provides detailed answers to extend the explanation on each option Nick proposes, and also explaining and identifying relevant cost.
Concept of Contribution Margin in CVP analysis; format of income statement
Please see the attachment.
Discuss the concept of contribution margin (CM). CM is the first step in arriving at CVP analysis. Discuss the importance of computing CM and how often you think organizations should track changes in CM. Do you think CM analysis can be performed at the departmental level? Do you think it can be performed even down to the product level, i.e. produce versus cheese in a grocery store?
Please discuss what you think the informational differences are between the two financial statements. This will further support your first module's learning outcomes in understanding the differences between cost, managerial, and financial accounting. As you can see, both financial statements result in the same operating income, but the way in which they arrive at it is different. Please comment on the differences and which one you think is more informational.
Contribution Income Statement Emphasizing Contribution Margin (in 000s) Financial Accounting Income Statement Emphasizing Contribution Margin (in 000s) Financial Accounting Income Statement Emphasizing Gross Margin (in 000s)
Revenues $ 1,000 Revenues $ 1,000
Variable manufacturing costs $ 250 Cost of goods sold ($ 250 + $ 160) 410
Variable nonmanufacturing costs 270 520
Contribution margin 480 Gross margin 590
Fixed manufacturing costs 160 Nonmanufacturing costs
Fixed nonmanufacturing costs 138 298 ($ 270 + $ 138) 408
Operating income $182 Operating income $ 182