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Disagree. Cost accounting data plays a key role in many management planning and control decisions. The division president will be able to make better operating and strategy decisions by being involved in key decisions about cost pools and cost allocation bases. Such an understanding, for example, can help the division president evaluate the profitability of different customers.
14-2 14-3
". &. '. #.
The salary of a plant security guard would be a direct cost when the cost object is the security department of the plant. t would be an indirect cost when the cost object is a product. !xhibit "#$" outlines four purposes for allocating costs% To provide information for economic decisions. To motivate managers and employees. To justify costs or compute reimbursement. To measure income and assets for reporting to external parties.
14-4
!xhibit "#$& lists four criteria used to guide cost allocation decisions% ". Cause and effect. &. (enefits received. '. )airness or e*uity. #. +bility to bear. The cause$and$effect criterion and the benefits$received criterion are the dominant criteria when the purpose of the allocation is related to the economic decision purpose or the motivation purpose. 14-5 ,sing the levels approach introduced in Chapter -, the sales$volume variance is a .evel & variance. (y se*uencing through .evel ' /sales$mix and sales$*uantity variances0 and then .evel # /market$si1e and market$share variances0, managers can gain insight into the causes of a specific sales$volume variance caused by changes in the mix and *uantity of the products sold as well as changes in market si1e and market share. 14-6 The total sales$mix variance arises from differences in the budgeted contribution margin of the actual and budgeted sales mix. The composite unit concept enables the effect of individual product changes to be summari1ed in a single intuitive number by using weights based on the mix of individual units in the actual and budgeted mix of products sold. 14-7 + favorable sales$*uantity variance arises because the actual units of all products sold exceed the budgeted units of all products sold. 14-8 The sales$*uantity variance can be decomposed into /a0 a market$si1e variance /because the actual total market si1e in units is different from the budgeted market si1e in units0, and /b0 a market share variance /because the actual market share of a company is different from the budgeted market share of a company0. (oth variances use the budgeted average contribution margin per unit.
"#$"
14-9 Some companies who believe that reliable information on total market si1e is not available, choose not to compute market$si1e and market$share variances. 14-1 Customer profitability analysis highlights to managers how individual customers differentially contribute to total profitability. t helps managers to see whether customers who contribute si1ably to total profitability are receiving a comparable level of attention from the organi1ation. 14-11 Companies that separately record /a0 the list price and /b0 the discount have sufficient information to subse*uently examine the level of discounting by each individual customer and by each individual salesperson. 14-12 2o. + customer$profitability profile highlights differences in current period3s profitability across customers. Dropping customers should be the last resort. +n unprofitable customer in one period may be highly profitable in subse*uent future periods. 4oreover, costs assigned to individual customers need not be purely variable with respect to short$run elimination of sales to those customers. Thus, when customers are dropped, costs assigned to those customers may not disappear in the short run. 14-13 )ive categories in a customer cost hierarchy are identified in the chapter. The examples given relate to the Spring Distributor Company used in the chapter% Customer output-unit-level costs costs of activities to sell each unit /case0 to a customer. +n example is product$handling costs of each case sold. Customer batch- level costs costs of activities that are related to a group of units /cases0 sold to a customer. !xamples are costs incurred to process orders or to make deliveries. Customer-sustaining costs 5 costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer. !xamples are costs of visits to customers or costs of displays at customer sites. Distribution- channel costs 5 costs of activities related to a particular distribution channel rather than to each unit of product, each batch of product, or specific customers. +n example is the salary of the manager of Spring3s retail distribution channel. Corporate- sustaining costs costs of activities that cannot be traced to individual customers or distribution channels. !xamples are top management and general administration costs. 14-14 + process where the inputs are nonsubstitutable leaves workers no discretion as to the inputs /such as, types of materials or labor0 to use. + process where the inputs are substitutable means there is discretion about the exact number and type of inputs to produce output. 14-15 The direct materials efficiency variance is a .evel ' variance. )urther insight into this variance can be gained by moving to a .evel # analysis where the effect of mix and yield changes are *uantified. The mix variance captures the effect of a change in the relative percentage use of each input relative to that budgeted. The yield variance captures the effect of a change in the total number of inputs re*uired to obtain a given output relative to that budgeted.
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14-16 /"6$&7 min.0 C!"# $%%!&$#'!( '( )!"*'#$%", $%#+,($#'-+ $%%!&$#'!( &,'#+,'$.
". Direct costs ndirect costs ;verhead rate 8 9&.#7 8 9"".6& 5 9&.#7 8 9:."& 8 8 '<7=
&. The answers here are less than clear$cut in some cases. O-+,)+$/ C!"# I#+0 A%%!&$#'!( C,'#+,'$ >rocessing of paperwork for purchase Cause and effect Supplies room management fee (enefits received
;perating$room and patient$room handling Cause and effect costs +dministrative hospital costs ,niversity teaching$related costs 4alpractice insurance costs Cost of treating uninsured patients >rofit component (enefits received +bility to bear +bility to bear or benefits received +bility to bear 2one. This is not a cost.
'. +ssuming that 4elt1er3s insurance company is responsible for paying the 9#,<77 bill, 4elt1er probably can only express outrage at the amount of the bill. The point of this *uestion is to note that even if 4elt1er objects strongly to one or more overhead items, it is his insurance company that likely has the greater incentive to challenge the bill. ndividual patients have very little power in the medical arena. n contrast, insurance companies have considerable power and may decide that certain costs are not reimbursable for example, the costs of treating uninsured patients.
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14-17 /Cont@d.0 t is *uite likely that the line managers would seek legal counsel, whenever there were any pertinent legal issues, if the service were free. 4aking the service of the .egal Department free, however, might induce some managers to make excessive use of the service. To avoid any potential abuse, !nviron may want to adjust the rate downward considerably, perhaps at a level lower than what it would cost if outside legal services were sought, but not eliminate it altogether. +s long as the managers know that their respective departments would be charged for using the service, they would be disinclined to make use of it unnecessarily. Aowever, they would be motivated to use it when necessary because it would be considered a Bgood valueC if the standard hourly rate was low enough.
+% Cost allocation based on direct costs% Devenue Direct costs Segment margin +llocated indirect costs Segment pre$tax income Segment pre$tax income = H!#+% R+"#$1,$(# 9"E,#&6,777 9 6,&6E,777 :,<":,&E7 ',-#:,"-& E,E76,-#7 ",67E,<&< <,7"<,676 ',7E",'&7 9/ ",#"&,-E60 9 /",66#,#:&0 $<.E7= $&:.6<= C$"'(! 9"&,'#7,777 #,&#<,-E< <,7:",&'& ',#-7,"-6 9 #,E&",76'-.#6= R+02,$(/# 9'#,7&",777 "-,<"-,&77 "E,&7',<77 "#,667,777 9 ",E6',<77
"#$#
14-18 /Cont@d.0 (% Cost allocation based on floor space% +llocated indirect costs Segment pre$tax income Segment pre$tax income = H!#+% 9-,&-6,777 9 /EE:,&E70 $#.7-= R+"#$1,$(# 9",#66,777 9 6",<&< 7.::= C$"'(! 96,<&7,777 9&,&-",&'& "<.#"= R+02,$(/# 9"#,667,777 9 ",E6',<77
C% Cost allocation based on F of employees +llocated indirect costs Segment pre$tax income Segment pre$tax income = H!#+% 96,<&7,777 9 -<6,-#7 #.-<= R+"#$1,$(# 9",#66,777 9 6",<&< 7.::= C$"'(! 9-,&-6,777 9 <"E,&'& E.E"= R+02,$(/# 9"#,667,777 9 ",E6',<77
'. The segment pre$tax income percentages show the dramatic effect of choice of the cost allocation base on reported numbers% D+(!0'($#!, Direct costs )loor space F of employees H!#+% $<.E7= $#.7#.-< R+"#$1,$(# $&:.6<= 7.:: 7.:: C$"'(! '-.#6= "<.#" E.E"
The decision context should guide a. whether costs should be allocated, and b. the preferred cost allocation base. Decisions about, say, performance measurement may be made on a combination of financial and nonfinancial measures. t may well be that Dembrandt may prefer to exclude allocated costs from the financial measures to reduce areas of dispute. Ghere cost allocation is re*uired, the cause$and$effect and benefits$received criteria are recommended in Chapter "#. The 9"#,667,777 is a fixed overhead cost. This means that on a short$run basis, the cause$and$effect criterion is not appropriate but Dembrandt could attempt to identify the cost drivers for these costs in the long run when these costs are likely to be more variable. Dembrandt should look at how the 9"#,667,777 cost benefits the three divisions. This will help guide the choice of an allocation base in the short run. #. The analysis in re*uirement & should not guide the decision on whether to shut down any of the divisions. The overhead costs are fixed costs in the short run. t is not clear how these costs would be affected in the long run if Dembrandt shut down one of the divisions. +lso, each division is not independent of the other two. + decision to shut down, say, the restaurant likely would negatively affect the attendance at the casino and possibly the hotel. Dembrandt should examine the future revenue and future cost implications of different resource investments in the three divisions. This is a future$oriented exercise, whereas the analysis in re*uirement & is an analysis of past costs.
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&. >ercentages for new bases of allocation P1%* 2umber of employees >ercentages )loor space /s*uare feet0 >ercentages Divisional administrative >ercentages +llocation of indirect costs P1%* Auman resource management /9",<77,777 H '7=, &6=, #6=0 )acility /9&,-77,777 H &6=, &7=, 66=0 Corporate administration /9#,677,777 H &7=, '7=, 67=0 Total 9 6#7,777 E-6,777 :77,777 9&,""6,777 P$*+, 9 #67,777 6#7,777 ",'67,777 9&,'#7,777 F'2+," 9 <"7,777 ",#<6,777 &,&67,777 9#,6#6,777 '77 '7= '7,777 &6= 9",&77,777 &7= 67= P$*+, &67 &6= &#,777 &7= 9",<77,777 '7= F'2+," #67 #6= EE,777 66= 9',777,777
'. The new approach is preferable because it is based on cause$and$effect relationships between costs and their respective cost drivers in the long run. Auman resource management costs are allocated using the number of employees in each division because the costs for recruitment, training, etc., are mostly related to the number of employees in each division. )acility costs are mostly incurred on the basis of space occupied by each division. Corporate administration costs are allocated on the basis of divisional administrative costs because these costs are incurred to provide support to divisional administrations.
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14-2
".
/&7'7 min.0 C1"#!0+, *,!3'#$2'%'#4, "+,-'&+ &!0*$(4. /in thousands0 C1"#!0+, R+-+(1+" 9 &E7 "<7 "E' '&& &'6 <7 "-# -E "''-' C1"#!0+, C!"#" 9"<& "<# "-< &&6 '7< -# "77 "7< ""7 &'" C1"#!0+, O*+,$#'(5 I(&!0+ 9 -< /#0 /"60 :/-'0 E -# /'&0 &"#&
+very Iroup Duran Systems Detail Systems Gi1ard >artners Santa Clara College Irainger Services Software >artners >roblem Solvers (usiness Systems ;kie !nterprises
Solution !xhibits "#$&7+ and "#$&7( present the summary results. The two most profitable customers provide <7= of total operating income. &. a. The options nstant Service should consider include% ncrease the attention paid to ;kie !nterprises and Gi1ard >artners. These are Jkey customers,J and every effort has to be made to ensure they retain S. S may well want to suggest a minor price reduction to signal how important it is in their view to provide a cost$effective service to these customers. Seek ways of reducing the costs or increasing the revenues of the problem accounts55 Santa Clara College and >roblem Solvers. )or example, are the copying machines at Santa Clara outdated and in need of repairK f yes, an increased charge may be appropriate. Can S provide better on$site guidelines to users about ways to reduce breakdownsK +s a last resort, S may want to consider dropping particular accounts. )or example, if Santa Clara College will not agree to a fee increase but has machines continually breaking down, S may well decide that it is time not to bid on any more work for this customer. 4ajor problems in accurately estimating the operating costs of each customer are% (asic underlying records may not be accurate. )or example, some technicians include travel time, break time, etc., in their time records to create an appearance of high work effort. 2ot all costs for individual repair people are easily assignable to individual customers. )or example, how is the cost of a trip to pick up parts for three customers assigned among individual customersK 4any costs of S are not related to specific customers. )or example, advertising by S is aimed at a general market rather than being targeted to a specific potential customer.
b.
c.
'. a. b. c.
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14-2 /Cont@d.0
SOLUTION E6HIBIT 14-2 A >anel +% Customers Danked on Customer$.evel ;perating ncome C1"#!0+, O*+,$#'(5 I(&!0+ D'-'/+/ B4 R+-+(1+ 738 9 718 : 728 '<= '7 '7 #' &7 < /&0 /:0 /#&0 /'"0 C101%$#'-+ C1"#!0+, O*+,$#'(5 I(&!0+ 748 9"#& &': '"':" #"< #&# #&7 #76 '-' '77 O*+,$#'(5 I(&!0+ $" $ ; !3 T!#$% O*+,$#'(5 I(&!0+ 758 9 748 <3 #-= <7 "7E "'7 "': "#" "#7 "'6 "&# "77
;kie !nt. Gi1ard >. +very Iroup Software >. (usiness S. Irainger S. Duran S. Detail S. >roblem S. Santa Clara
C1"#!0+, O*+,$#'(5 I(&!0+ 718 9"#& :-< -# &E /#0 /"60 /'&0 /-'0 9'77
C1"#!0+, R+-+(1+ 728 9 '-' '&& &E7 "-# "'<7 "<7 "E' -E &'6 9&,777
"#$<
14-2 /Cont@d.0 SOLUTION E6HIBIT 14-2 B B$, C)$,# !3 C1"#!0+, O*+,$#'(5 I(&!0+
;perating ncome ;L !, 9"#& 9"67 G M+DD, 9:+N!DO, 9-< 9"77 S;)TG+D!, 9-#
$9"77
"#$:
Chapel Aill >harmacy has a lower gross margin percentage than Charleston /<.''= vs. "&.67=0 and consumes more resources to obtain this lower margin. &. Gays )igure )our could use this information include% a. >ay increased attention to the top &7= of the customers. This could entail asking them for ways to improve service. +lternatively, you may want to highlight to your own personnel the importance of these customers? e.g., it could entail stressing to delivery people the importance of never missing delivery dates for these customers. Gork out ways internally at )igure )our to reduce the rate per cost driver? e.g., reduce the cost per order by having better order placement linkages with customers. This cost reduction by )igure )our will improve the profitability of all customers. Gork with customers so that their behavior reduces the total Jsystem$wideJ costs. +t a minimum, this approach could entail having customers make fewer orders and fewer line items. This latter point is controversial with students? the rationale is that a reduction in the number of line items /diversity of products0 carried by 4a and >a stores may reduce the diversity of products )igure )our carries.
b.
c.
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14-21 /Cont3d.0 P P P There are several options here% Simple verbal persuasion by showing customers cost drivers at )igure )our. !xplicitly pricing out activities like cartons delivered and shelf$stocking so that customers pay for the costs they cause. Destricting options available to certain customers, e.g., customers with low revenues could be restricted to one free delivery per week.
+n even more extreme example is working with customers so that deliveries are easier to make and shelf$stocking can be done faster. d. ;ffer salespeople bonuses based on the operating income of each customer rather than the gross margin of each customer.
Some students will argue that the bottom #7= of the customers should be dropped. This action should be only a last resort after all other avenues have been explored. 4oreover, an unprofitable customer today may well be a profitable customer tomorrow, and it is myopic to focus on only a "$month customer$profitability analysis to classify a customer as unprofitable.
8 8
"#$""
A$%
','77 8 7.'7 "",777 -,-77 8 7.-7 "",777
Solution !xhibit "#$&& presents the sales$volume, sales$*uantity, and sales$mix variances for lower$tier tickets, upper$tier tickets, and in total for Detroit >enguins in &77#. The sales$*uantity variances can also be computed as%
(udgeted (udgeted +ctual units (udgeted units 8 of all tickets of all tickets sales $ mix cont. margin sold sold per ticket percentage
The sales$*uantity variances are% .ower$tier tickets 8 /"",777 5 "7,7770 H 7.#7 H 9&7 8 9<,777 ) ,pper$tier tickets 8 /"",777 5 "7,7770 H 7.E7 H 9 6 8 ',777 ) +ll tickets 9"",777 ) The sales$mix variance can also be computed as%
(udgeted (udgeted sales $ +ctual sales $ mix percentage mix percentage cont. margin per ticket
The sales$mix variances are% .ower$tier tickets 8 "",777 H /7.'7 5 7.#70 H 9&7 ,pper$tier tickets 8 "",777 H /7.-7 5 7.E70 H 9 6 +ll tickets
'. The Detroit >enguins increased average attendance by "7= per game. Aowever, there was a si1able shift from lower$tier seats /budgeted contribution margin of 9&7 per seat0 to the upper$tier seats /budgeted contribution margin of 96 per seat0. The net result% the actual contribution margin was 96,677 below the budgeted contribution margin.
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14-22 /Cont3d.0 SOLUTION E6HIBIT 14-22 Columnar >resentation of Sales$Nolume, Sales$Quantity and Sales$4ix Nariances for Detroit >enguins F%+='2%+ B1/5+#> A$% U('#" !3 A%% P,!/1&#" S!%/ H A$% S$%+" M'= H B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# 718 >anel +% .ower$tier A$% U('#" !3 A%% P,!/1&#" S!%/ H B1/5+#+/ S$%+" M'= H B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# 728 S#$#'& B1/5+#> B1/5+#+/ U('#" !3 A%% P,!/1&#" S!%/ H B1/5+#+/ S$%+" M'= H B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# 738
/"",777 H 7.'7a0 H 9&7 /"",777 H 7.#7b0 H 9&7 /"7,777 H 7.#7b0 H 9&7 ','77 H 9&7 #,#77 H 9&7 #,777 H 9&7 9EE,777 9<<,777 9<7,777 9&&,777, 9<,777 ) Sales$mix variance Sales$*uantity variance 9"#,777 , Sales$volume variance >anel (% ,pper$tier /"",777 H 7.-7c0 H 96 /"",777 H 7.E7d0 H 96 /"7,777 H 7.E7d0 H 96 -,-77 H 96 E,E77 H 96 E,777 H 96
9'<,677 9'',777 9'7,777 96,677 ) Sales$mix variance 9',777 ) Sales$*uantity variance 9<,677 ) Sales$volume variance 9"7#,677e 9"&",777f 9""7,777g 9"E,677 , 9"",777 ) Total sales$mix variance Total sales$*uantity variance 96,677 , Total sales$volume variance
>anel C% +ll Tickets /Sum of .ower$ tier and ,pper$ tier tickets0
) 8 favorable effect on operating income? , 8 unfavorable effect on operating income. +ctual Sales 4ix% a.ower$tier 8 ','77 R "",777 8 '7= c,pper$tier 8 -,-77 R "",777 8 -7= e9EE,777 S '<,677 8 9"7#,677 (udgeted Sales 4ix% b.ower$tier 8 #,777 R "7,777 8 #7= d,pper$tier 8 E,777 R "7,777 8 E7= f 9<<,777 S 9'',777 8 9"&",777 g 9<7,777 S 9'7,777 8 9""7,777
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14-22 /Cont3d.0
Lower-Tier Upper-Tier Total Problem 1 Sales Volume Variance calculations Lower-tier tickets Upper-tier tickets (ll tickets Problem 2 Sales - $i/ percentages Lower-tier Upper-tier Sales- uantity variance calculations Lower-tier tickets Upper-tier tickets (ll tickets Sales-mi! variance calculations Lower-tier tickets Upper-tier tickets (ll tickets
U . U
U . U
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Aence, the total *uantity of all glasses sold is ",677 units. This computation allows us to fill in all the numbers in Column &. S#+* 3% 2ext, consider Column " of Solution !xhibit "#$&'. Ge know actual units sold of all glasses /",677 units0, the actual sales$mix percentage /given in the problem information as >lain, E7=? Chic, #7=0, and the budgeted unit contribution margin of each product />lain, 9&? Chic, 9E0. Ge can therefore determine all the numbers in Column ".
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14-23 /Cont@d.0 Solution !xhibit "#$&' displays the following sales$*uantity, sales$mix, and sales$volume variances% S$%+"-V!%10+ V$,'$(&+ >lain 9",#77 , Chic ",&77 ) +ll Ilasses 9 &77 ,
'. Tinwa Corporation shows an unfavorable sales$*uantity variance because it sold fewer wine glasses in total than was budgeted. This unfavorable sales$*uantity variance is partially offset by a favorable sales$mix variance because the actual mix of wine glasses sold has shifted in favor of the higher contribution margin Chic wine glasses. The problem illustrates how failure to achieve the budgeted market penetration can have negative effects on operating income.
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14-23 /Cont@d.0 SOLUTION E6HIBIT 14-23 Columnar >resentation of Sales$Nolume, Sales$Quantity and Sales$4ix Nariances for Tinwa Corporation F%+='2%+ B1/5+#> A$% U('#" S!%/ !3 A%% B%$""+" A$% S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# >anel +% >lain /",677 7.E0 9& :77 9& A$% U('#" S!%/ !3 A%% B%$""+" B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# /",677 7.<0 9& ",&77 9& S#$#'& B1/5+#> B1/5+#+/ U('#" S!%/ !3 A%% B%$""+" B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# /&,777 7.<0 9& ",E77 9&
9E77 , 9<77 , Sales$mix variance Sales$*uantity variance 9",#77 , Sales$volume variance >anel (% Chic
9',E77
9",<77 ) 9E77 , Sales$mix variance Sales$*uantity variance 9",&77 ) Sales$volume variance >anel C% +ll Ilasses 96,#77 9#,&77 96,E77 9",&77 ) 9",#77 , Total sales$mix variance Total sales$*uantity variance 9&77 , Total sales$volume variance
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S+%%'(5 P,'&+ 718 Lola 9E.77 9#.77 .imor #.77 ;rlem -.77 Total A$% 3!, 2 3 S+%%'(5 P,'&+ 718 9#.67 #.&6 E.<7
S$%+" C!(#,'21#'!( M'= M$,5'( 758 768 9 738 D 748 9 <"E,777 '7 6# "77= ',6E#,777 96,-'7,777
Solution !xhibit "#$&# presents the sales$volume, sales$*uantity, and sales$mix variances for each product and in total for &77'. Sales$volume variance Lola .imor ;rlem Total Sales$*uantity variance Lola .imor ;rlem Total 8 8 +ctual sales (udgeted sales *uantity 5 *uantity in units in units H (udgeted contrib. margin per unit 9"E7,777 ) 'E7,777 ) '77,777 ) 9<&7,777 )
+ctual units (udgeted units (udgeted (udgeted 8 of all products 5 of all products H sales$mix H contrib. margin sold sold percentage per unit 8 8 8 /',777,777 5 &,677,7770 H 7."E H 9&.77 /',777,777 5 &,677,7770 H 7.&# H 9".&7 /',777,777 5 &,677,7770 H 7.E7 H 9&.67 8 8 8 9 "E7,777 ) "##,777 ) -67,777 ) 9",76#,777 )
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14-24 /Cont@d.0 +ctual Sales$mix+ctual units 8 of all products H sales$mix variance sold percentage Lola .imor ;rlem Total 8 8 8 (udgeted (udgeted 5 sales$mix H contrib. margin percentage per unit 8 8 8 9 7 &"E,777 ) #67,777 , 9&'#,777 ,
',777,777 H /7."E 5 7."E0 H 9&.77 ',777,777 H /7.'75 7.� H 9".&7 ',777,777 H /7.6# 5 7.E70 H 9&.67
&. The breakdown of the favorable sales$volume variance of 9<&7,777 shows that the biggest contributor is the 677,777 unit increase in sales resulting in a favorable sales$*uantity variance of 9",76#,777. There is a partially offsetting unfavorable sales$mix variance of 9&'#,777 in contribution margin. SOLUTION E6HIBIT 14-24 S$%+"-M'= $(/ S$%+"-A1$(#'#4 V$,'$(&+ A($%4"'" !3 S!/$ E'(5 3!, 2
F%+='2%+ B1/5+#> A$% U('#" !3 A%% P,!/1&#" S!%/ A$% S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
Lola ',777,777 7."E 9& 8 9 :E7,777 <77,777 .imor ',777,777 7.'7 9".&7 8 ",7<7,777 -&7,777 ;rlem ',777,777 7.6# 9&.67 8 #,767,777 ',-67,777 9E,7:7,777
3
S#$#'& B1/5+#> B1/5+#+/ U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
&,677,777 7."E 9& 89
A$% U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
',777,777 7."E 9& 8 9 :E7,777 <E#,777
&,677,777 7.&# 9".&7 8 &,677,777 7.E7 9&.67 8 96,&-7,777 9",76#,777 ) Sales$*uantity variance
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+verage budgeted contribution margin per unit 8 9&."7< /96,&-7,777 R &,677,7770 Solution !xhibit "#$&6 presents the sales$*uantity variance, market$si1e variance, and market$ share variance for &77'. 4arket$share variance 8 +ctual market si1e in units H +ctual market share (udgeted 5 market share (udgeted contribution H margin per composite unit for budgeted mix
8 &#,777,777 H /7."&6 5 7."70 H 9&."7< 8 &#,777,777 H .7&6 H 9&."7< 8 9",&E#,<77 ) 4arket$si1e variance 8 +ctual market si1e in units 5 (udgeted market si1e in units H (udgeted market share H (udgeted contribution margin per composite unit for budgeted mix
8 /&#,777,777 5 &6,777,7770 H 7."7 H 9&."7< 8 5 ",777,777 H 7."7 H 9&."7< 8 &"7,<77 , The market share variance is favorable because the actual "&.6= market share was higher than the budgeted "7= market share. The market si1e variance is unfavorable because the market si1e decreased #= U/&6,777,777 5 &#,777,7770 R &6,777,777V. Ghile the overall total market si1e declined /from &6 million to &# million0, the increase in market share meant a favorable sales$*uantity variance. Sales$Quantity Nariance 9",76#,777 )
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14-25 /Cont@d.0 SOLUTION E6HIBIT 14-25 M$,@+#-S)$,+ $(/ M$,@+#-S'F+ V$,'$(&+ A($%4"'" !3 S!/$ E'(5 3!, 2
A$% M$,@+# S'F+ A$% M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# &#,777,777 7."&6a 9&."7<b 9E,'&#,777 A$% M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# &#,777,777 7."7c 9&."7< b 96,76:,&77
S#$#'& B1/5+#> B1/5+#+/ M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# &6,777,777 7."7c 9&."7<b 96,&-7,777
) 8 favorable effect on operating income? , 8 unfavorable effect on operating income a +ctual market share% ',777,777 units R &#,777,777 units 8 7."&6, or "&.6= b (udgeted average contribution margin per unit 96,&-7,777 R &,677,777 units 8 9&."7< per unit c (udgeted market share% &,677,777 units R &6,777,777 units 8 7."7, or "7=
b.
c. d.
nstructors may wish to discuss the JSurveys of Company >racticeJ evidence from the ,nited States, Canada, +ustralia, and the ,nited Lingdom in Chapter "# /p. #<<0. &. Total costs in single pool 8 9',777 +llocation base 8 9'7,777 revenue +llocation rate 8 9',777 R 9'7,777 8 97."7 per 9" of revenue See Solution !xhibit "#$&E for additional answers. "#$&"
SOLUTION E6HIBIT 14-26 /in millions0 Devenues ;perating costs +llocated costs, 97."7 per 9" revenue Division income O'% H B$" O'% H B$" U*"#,+$0 D!?("#,+$0 9-,777 9"E,777 ',777 "6,777 -77 9','77 ",E77 9 /E770 C)+0'&$% P,!/1&#" 9#,777 ',<77 #77 9 /&770 C)+0'&$% P,!/1&#" 'W&6 9 #W'7 9 <7 C!**+, M'('(5 9',777 ',&77 '77 9 /6770 C!**+, M'('(5 &W&6 9"E7 'W'7 9 E7 T!#$% 9'7,777 &6,777 ',777 9 &,777
+llocation (ase ". +llocated on basis of identifiable assets Total costs 8 9&,777 &. +llocated on basis of revenues Total costs 8 9E77 +llocated on basis of operating income /if positive0 Total costs 8 9&7< +llocated on basis of number of employees Total costs 8 9":&
O'% H B$" O'% H B$" U*"#,+$0 D!?("#,+$0 "#W&6 9","&7 -W'7 9"#7 EW&6 9#<7 "EW'7 9'&7
'.
$$ 7
#.
'W'7 9 ":.&
Devenues ;perating costs Cost >ool " +llocation Cost >ool & +llocation Cost >ool ' +llocation Cost >ool # +llocation Division income
O'% H B$" U*"#,+$0 9-,777 ',777 ","&7 "#7 "E7 6-.E 9&,6&&.#
C)+0'&$% C!**+, P,!/1&#" M'('(5 T!#$% 9#,777 9',777 9'7,777 ',<77 ',&77 &6,777  "E7 &,777 <7 E7 E77 < 7 &7< '<.# ":.& ":& 9 /"EE.#0 9 /#':.&0 9 &,777
"#$&&
14-26 /Cont@d0 #. Strengths of Dhodes3 proposal relative to existing single$cost pool method% a. (etter able to capture cause$and$effect relationships. nterest on debt is more likely caused by the financing of assets than by revenues. >ersonnel and payroll costs are more likely caused by the number of employees than by revenues. b. Delatively simple. 2o extra information need be collected beyond that already available. /Some students will list the extra costs of Dhodes3 proposal as a weakness. Aowever, for a company with 9'7 billion in revenues, those extra costs are minimal.0 Geaknesses of Dhodes3 proposal relative to existing single$cost pool method% a. 4ay promote dysfunctional decision making. 4ay encourage division managers to lease or rent assets rather than to purchase assets, even where it is economical for Dichfield ;il to purchase them. This off$balance sheet financing will reduce the Jidentifiable assetsJ of the division and thus will reduce the interest on debt costs allocated to the division. /Dichfield ;il could counteract this problem by incorporating leased and rented assets in the Jidentifiable assetsJ base.0 Note: Some students critici1ed Dhodes3 proposal, even though agreeing that it is preferable to the existing single$cost pool method. These criticisms include% a. >roposal does not ade*uately capture cause$and$effect relationships for the legal and research and development cost pools. )or these cost pools, specific identification of individual projects with an individual division can better capture cause$and$effect relationships. b. >roposal may give rise to disputes over the definition and valuation of Jidentifiable assets.J
c. ,se of actual rather than budgeted amounts in the allocation bases creates interdependencies between divisions. 4oreover, use of actual amounts means that division managers do not know cost allocation conse*uences of their decisions until the end of each reporting period. d. Separate allocation of fixed and variable costs would result in more refined cost allocations. e. Questionable that "77= of central corporate costs should be allocated. 4any students argue that public affairs should not be allocated to any division, based on the notion that division managers may not control many of the individual expenditures in this cost pool.
"#$&'
nterest on debt 9 "7,777,777 9 ',677,777 9 E,677,777 Desearch and development /#7=, '7=, 7=, '7=0 "77,777,777 #7,777,777 '7,777,777 +dvertising /",#77% #,677% &,677% ",E770 &77,777,777 Auman resource management /",777% ',777% &,677% ",6770 Corporate adminis$ tration /"67% #77% &67% &770 Total
$7$
'7,777,777
&<,777,777
:7,777,777
67,777,777
'&,777,777
"67,777,777
"<,-67,777
6E,&67,777
#E,<-6,777
&<,"&6,777
67,777,777
-,677,777
&7,777,777
"&,677,777
"7,777,777
"#$&#
M$/'"!(
S1'#!,"
D+"'5( 9",&-&,777 ":7,<77 ",7<",&77 E::,E77 '<",E77 6",:#7 '",#E7 #:,<77 ':,"77 "-&,'77 9 &7:,'77 9",&67,777 "&6,777 ","&6,777 E<-,677 #'-,677 E",&67 &<,E77 6-,777 6",777 ":-,<67 9 &':,E67
9',6&7,777 9&,#<7,777 ",76E,777 &,#E#,777 ",:'E,777 6&<,777 "7,-<7 "",##7 "&,'77 &,667 #:E,777 ",:<#,777 ",'E#,777 E&7,777 "6,":7 "-,"E7 "#,#77 "",:77
## H #77 8 "-,E77 E& H &77 8 "&,#77 c &"& H '7 8 E,'E7 d &67 H &6 8 E,&67 e 9&77 5 9"#7 8 9E7 f 9&77 5 9"E7 8 9#7 g 9&77 5 9"-7 8 9'7 h 9&77 5 9"<7 8 9&7
b
&. Ley challenges facing Sims are% a. Deduce level of price discounting, especially by +pril b. Deduce level of customer$level costs, especially by Suitors and Design The +(C cost system highlights areas where the Suitors and Design accounts are troublesome. They have% + high number of orders,
"#$&6
'. Solution !xhibit "#$&< presents a customer cost hierarchy report for Moot@s Suits,
"#$&E
3
C1"#!0+, D'"#,'21#'!( C)$((+%" K)!%+"$%+ C1"#!0+," R+#$'% C1"#!0+," T!#$% 758 9&,&7E,&77 ",-6-,&67 ##<,:67 &"7,777 9 &'<,:67 S1'#!," 768 9",7<",&77 <-",:77 9 &7:,'77 D+"'5( 778 9","&6,777 <<6,'67 9 &':,E67
T!#$% 718 Devenues /at actual prices0 Customer$level optg. costs Customer$level operating income Distribution$channel costs Distribution$channel$level operating income Corporate$sustaining costs ;perating income 9 :#",&'7 &67,777 E:",&'7 ",67",&'7 6E7,777 9E,E6#,&77 6,"6&,:-7
"#$&-
Devenues at list pricesa Discountb Devenues /at actual prices0 Cost of goods soldc Iross margin Customer$level operating costs ;rder takingd Customer visitse Delivery vehiclesf >roduct handlingg !xpedited runsh Total Customer$level operating income
P 9&:,:6& 7 &:,:6& &#,:E7 #,::& ",677 "E7 &<7 ",7#7 7 &,:<7 9 &,7"&
A 9"&E,777 &,"77 "&',:77 "76,777 "<,:77 &,677   #,'-6 7 -,'66 9 "",6#6
R 9<-6,6&7 -&,:E7 <7&,6E7 -&:,E77 -&,:E7 ',777 #<7 'E7 '7,#77 7 '#, 9 '<,-&7
S 9#6-,:&7 "6,&E# ##&,E6E '<",E77 E",76E &,677 "E7 E#7 "6,:77 7 ":,&77 9 #",<6E
T 96E,"E7 6,E"E 67,6## #E,<77 ',-## ',777  ",E77 ",:67 '77 -,7:7 9 /','#E0
a 9"#.#7 &,7<7? <,-67? E7,<77? '",<77? ',:77 b /97.77 67,7770? /97.&# <,-670? /9".&7 E7,<770? /97.#< '",<77? 9".## ',:770 c 9"& &,7<7? <,-67? E7,<77, '",<77? ',:77 d 9"77 "6? &6? '7? &6? '7 e 9<7 &? '? E? &? ' f 9& /"7 "#0? /'7 #0? /E7 '0? /#7 <0? /&7 #70 g 97.67 &,7<7? <,-67? E7,<77? '",<77? ',:77 h 9'77 7? 7? 7? 7? "
Customer S is the most profitable customer, despite having only 6&= of the unit volume of Customer D. + major explanation is that Customer D receives a 9".&7 discount per case while Customer S receives only a 97.#< discount per case. Customer T is unprofitable, despite the smaller customer > being profitable. Customer T receives a 9".## discount per case, makes more fre*uent orders, re*uires more customer visits, and re*uires more delivery miles than Customer >. &. Separate reporting of both the list selling price and the actual selling price enables Spring Distribution to examine which customers receive different discounts and how salespeople may differ in the discounts they grant. There is a si1e pattern in the discounts across the 6 customers, except for Customer T% S$%+" V!%10+ D /E7,<77 cases0 S /'",<77 cases0 Q /<,-67 cases0 T /',:77 cases0 D'"&!1(# *+, &$"+ 9".&7 97.#< 97.&# 9".##
"#$&<
97.77
"#$&:
14-29 /Cont3d.0 The reasons for the 9".## discount for T should be explored. '. Dropping customers should be the last resort taken by Spring Distribution. )actors to consider include% a. Ghat is the expected future profitability of each customerK +re the currently unprofitable /T0 or low$profit />0 customers likely to be highly profitable in the futureK b. +re there externalities from having some customers, even if they are unprofitable in the short runK )or example, some customers have a mar*ue$value that is Jin effectJ advertising that benefits the business. c. Ghat costs are avoidable if one or more customers are droppedK
d. Can the relationship with the JproblemJ customers be restructured so that there is a Jwin$ winJ situationK )or example, could Customer T get by with fewer deliveries per monthK
14-3
".
/#7 min.0 C1"#!0+, %!4$%#4 &%12" $(/ *,!3'#$2'%'#4 $($%4"'". B!%/ P,!5,$0 Devenues &,#'7 H &7 H /9&77 7.:70 &,#'7 H '7 H /9&77 7.<70 &,#'7 H "7 H /9&77 7.-70 Total revenues Nariable Costs Aotel variable costs, &,#'7 E7 9E6 Gine Costs &,#'7 67 96 &,#'7 "7 9&7 Destaurant costs &,#'7 &7 9"7 &,#'7 '7 9"6 &,#'7 "7 9&7 Total variable costs Contribution margin
9 <,-#<,777 "",EE#,777 ',#7&,777 &',<"#,777 :,#--,777 E7-,677 #<E,777 #<E,777 ",7:',677 #<E,777 "&,E'E,777 9"","-<,777
"#$'7
14-3 /Cont@d.0 S'%-+, P,!5,$0 Devenues <,'#7 &7 /9&77 7.:70 <,'#7 "6 /9&77 7.<70 Total revenues Nariable Costs Aotel variable costs, <,'#7 H '6 H 9E6 Gine costs, <,'#7 H '6 H 96 Destaurant Costs <,'#7 &7 9"7 <,'#7 "6 9"6 Total variable costs Contribution margin B,!(F+ P,!5,$0 Devenues, <7,'77 "7 /9&77 7.:70 Nariable costs Aotel variable costs, <7,'77 "7 9E6 Gine costs <7,'77 "7 96 Destaurant costs <7,'77 "7 9"7 Total variable costs Contribution margin N! P,!5,$0 Devenues, &":,777 H " H 9&77 Nariable costs, &":,777 H " H 9E6 Contribution margin L!4$%#4 P,!5,$0 Iold Silver (ron1e 2o program Total T!#$% R+-+(1+" 9 &',<"#,777 67,7#7,777 "##,6#7,777 #',<77,777 9&E&,":#,777 V$,'$2%+ C!"#" 9 "&,E'E,777 &',:--,677 E#,,777 "#,&'6,777 9""6,7<<,677
9#',<77,777 "#,&'6,777 9&:,6E6,777 C!(#,'21#'!( M$,5'( 9 "","-<,777 &E,7E&,677 <7,'77,777 &:,6E6,777 9"#-,"76,677 C!(#,'2. M$,5'( T!#$% R+-+(1+" #E.:#= 6&.7< 66.6E E-.67
The no$program group of customers has the highest contribution margin per revenue dollar. Aowever, it comprises only "E.-"= /9#',<77,777 9&E&,":#,7770 of total revenues. The gold program has the lowest contribution margin per revenue dollar. Aowever, it is misleading to evaluate each program in isolation. + key aim of loyalty programs is to promote a high fre*uency of return business. The contribution margin to total revenue ratio of each program in isolation does not address this issue. "#$'"
14-3 /Cont3d.0 &. Devenues Nariable costs Contribution margin )ixed costs ;perating income '. 2umber of room nights Iold, &,#'7 H E7 Silver, <,'#7 H '6 (ron1e, <7,'77 H "7 2o program, &":,777 H " 9&E&,":#,777 ""6,7<<,677 "#-,"76,677 "#7,6<7,777 9 E,6&6,677 "#6,<77 &:",:77 <7',777 &":,777 ",#6:,-77
+verage room rate per night% +verage variable cost per night%
#. Sherriton Aotels has fixed costs of 9"#7,6<7,777. + key challenge is to attract a high number of repeat business customers. .oyalty programs aim to have customers return to Sherriton multiple times. Their aim is increasing the revenues beyond what they would be without the program. t is to be expected that the higher the level of nights stayed, the greater the inducements necessary to keep attracting the customer to return. Aowever, given the low level of variable costs to room rates, there is considerable cushion available for Sherriton to offer high inducements for fre*uent stayers. Sherriton could adopt a net present value analysis of customers who are in the different loyalty clubs. t would be informative for Sherriton to have information on how much of each customer@s total lodging industry expenditures it captures. t may well want to give higher levels of inducements to fre*uent stayers if the current program attracts only, say, '7= of each of its fre*uent customer@s total business in cities where it has lodging properties available.
"#$'&
Devenues at list prices 9#77,777 Discount '7,777 Devenues /at actual prices0 '-7,777 Cost of goods sold '&6,777 Iross margin #6,777 Customer$level operating costs >roduct handling 6,777 ;rder processing <77 Delivery% Degular '77 !xpedited "&7 Sales visit #<7 Total cust.$level optg.costs E,-77 Customer$level operating income 9 '<,'77
"#$''
14-31 /Cont@d.0 &. C1"#!0+, D'"#,'21#'!( C)$((+%" 7A%% $0!1(#" '( #)!1"$(/" !3 U.S. /!%%$,"8 K)!%+"$%+ C1"#!0+," R+#$'% C1"#!0+," N!,#) A0+,'&$ S!1#) A0+,'&$ B'5 S$0 K)!%+"$%+, K)!%+"$%+, T!#$% S#+,+! 9'-7,777 ''",-77 9 '<,'77 9667,777 #:<,&77 9 6",<77 9&&',777 &7E,E<7 "E,'&7 "7,777 9 E,'&7 9 9"&',777 ""',#77 :,E77 9
T!#$% Devenues /at actual prices0 9","#',777 Customer$level costs ",7'E,6<7 Customer$level operating income "7E,#&7 Distribution$ channel costs #7,777 Distribution$ channel$ level operating income EE,#&7 Corporate$ sustaining costs E7,777 ;perating income 9 E,#&7
"#$'#
B1/5+#+/ S$%+" M'= "&.6= /"&,677 R "77,7770 '-.6= (37,500 100,000) 67.7= /67,777 R "77,7770 "77.7=
"#$'6
(udgeted +ctual sales (udgeted sales *uantity contrib. margin *uantity 8 H in units per unit in units
H H H
9":9"-" 9 <#
(udgeted +ctual units (udgeted +ctual of all H sales mix sales mix H contrib. margin products sold per unit percentage percentage
""7,777 ""7,777 ""7,777 H /7."7 H /7.#7 H /7.67 7."&60 7.'-60 7.670 H H H 9":9"-" 9 <# 96#",-67 , #-7,&67 ) 7) 9 -",677 ,
>alm>ro >almC!
8 8
>almLid 8
(udgeted units (udgeted (udgeted +ctual units H sales mix H contrib. margin of all of all 8 products sold per unit products sold percentage
>alm>ro >almC! >almLid /""7,777 /""7,777 /""7,777 "77,7770 "77,777 "77,7770 H H H 7."&6 7.'-6 7.67 H H H 9":9"-" 9 <# 9 &#E,&67 ) E#",&67 ) #&7,777 ) 9",'7-,677 )
"#$'E
14-32 /Cont@d.0 Solution !xhibit "#$'& presents the sales$volume variance, the sales$mix variance, and the sales$ *uantity variance for >alm >ro, >alm C!, and >almLid and in total for Third Quarter &77# SOLUTION E6HIBIT 14-32 S$%+"-M'= $(/ S$%+"-A1$(#'#4 V$,'$(&+ A($%4"'" !3 A1""'+ I(3!($1#'&" 3!, T)',/ A1$,#+, 2 4
F%+='2%+ B1/5+#> A$% U('#" !3 A%% P,!/1&#" S!%/ A$% S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
>alm >ro ""7,777 7."7 9":- 89 &,"E-,777 >almC! ""7,777 7.#7 9"-" 8 -,6&#,777 >almLid ""7,777 7.67 9 <# 8 #,E&7,777 9"#,'"",777
A$% U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
""7,777 7."&6 9":- 89 &,-7<,-67 ""7,777 7.'-6 9"-" 8 -,76',-67 ""7,777 7.67 9 <# 8 #,E&7,777 9"#,'<&,677 9-",677 , Sales$mix variance 9",&'E,777 ) Sales$volume variance
S#$#'& B1/5+#> B1/5+#+/ U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
"77,777 7."&6 9":- 89 &,#E&,677 "77,777 7.'-6 9"-" 8 E,#"&,677 "77,777 7.67 9 <# 8 #,&77,777 9"',7-6,777 9",'7-,677 ) Sales$*uantity variance
#.
The following factors help us understand the differences between actual and budgeted amounts. The difference in actual versus budgeted contribution margins was 9","7-,777 unfavorable /9"",:E<,777 9"',7-6,7770. Aowever, the contribution margin from the >almC! exceeded budget by 9&,7-:,677 while the contributions from the >alm>ro and the >almLid were lower than expected and offset this gain. This is attributable to lower unit sales in the case of >alm>ro and lower contribution margins in the case of >almLid. n percentage terms, the >almC! accounted for -"= of actual contribution margin versus a planned #:= contribution margin. Aowever, the >alm>ro accounted for "E= versus planned ":= and the >almLid accounted for only "'= versus a planned '&=. n unit terms /rather than in contribution terms0, the >almLid accounted for 67= of the sales mix as planned. Aowever, the >alm>ro accounted for only "7= versus a budgeted "&.6= and the >almC! accounted for #7= versus a planned '-.6=. Nariance analysis for the >alm>ro shows an unfavorable sales$mix variance outweighing a favorable sales$*uantity variance and producing an unfavorable sales$ volume variance. The drop in sales$mix share was far larger than the gain from an overall greater *uantity sold. The >almC! gained both from an increase in share of the sales mix as well as from the increase in the overall number of units sold.
"#$'-
The >almLid maintained sales$mix share at 67= as a result, the sales$mix variance is 1ero. Aowever, >almLid sales did gain from the overall increase in units sold.
"#$'<
14-32 /Cont3d.0 ;verall, there was a favorable total sales-volume variance. Aowever, the large drop in >almLid@s contribution margin per unit combined with a decrease in the actual number of >alm>ro units sold as well as a drop in the actual contribution margin per unit below budget, led to the total contribution margin being much lower than budgeted.
;ther factors could be discussed herefor example, it seems that the >almLid did not achieve much success with a three digit price pointselling price was budgeted at 9"#: but dropped to 9"7&. +t the same time, variable costs increased. This could have been due to a marketing push that did not succeed.
+verage contribution margin per unit% +ctual 8 9"7<.<7 /9"",:E<,777 ""7,7770 (udgeted 8 9"'7.-6 /9"',7-6,777 "77,7770
+ctual market si1e in units
+ctual (udgeted market market share share (udgeted contribution margin per composite unit for budgeted mix
(udgeted
(udgeted
contribution margin market per composite unit share for budgeted mix
"#$':
14-33 /Cont@d.0 Solution !xhibit "#$'' presents the market$share variance, the market$si1e variance, and the sales$*uantity variance for Third Quarter &77#. SOLUTION E6HIBIT 14-33 M$,@+#-S)$,+ $(/ M$,@+#-S'F+ V$,'$(&+ A($%4"'" !3 A1""'+ I(3!($1#'&" 3!, T)',/ A1$,#+, 2 4
S#$#'& B1/5+#> B1/5+#+/ M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# #77,777 7.&6c 9"'7.-6b 9"',7-6,777
A$% M$,@+# S'F+ A$% M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# 677,777 7.&&a 9"'7.-6b 9"#,'<&,677
A$% M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# 677,777 7.&6c 9"'7.-6 b 9"E,'#',-67
+ctual market share% ""7,777 units R 677,777 units 8 7.&&, or &&= (udgeted average contribution margin per unit 9"',7-6,777 R "77,777 units 8 9"'7.-6 per unit (udgeted market share% "77,777 units R #77,777 units 8 7.&6, or &6=
b c
&. Ghile the market share declined /from &6= to &&=0, the overall increase in the total market si1e meant a favorable sales$*uantity variance% S$%+"-A1$(#'#4 V$,'$(&+ 9",'7-,677 )
"#$#7
14-33 /Cont@d.0 '. The re*uired actual market si1e is the budgeted market si1e, i.e., #77,777 units. This can easily be seen by setting up the following e*uation%
(udgeted (udgeted (udgeted +ctual contributi on margin 4arket $ si1e = market si1e market si1e market variance per composite unit in units in units share for budgeted mix
8 /4 #77,7770 H 7.&6 H 9"'7.-6 Ghen 4 8 #77,777, the market$si1e variance is 97. +ctual 4arket$Share Calculation +gain, the answer is the budgeted market share, &6=. (y definition, this will hold irrespective of the actual market si1e. This can be seen by setting up the appropriate e*uation% +ctual 4arket Si1e H /4 &6=0 H 9"'7.-6 8 97 Ghen 4 8 &6=, the market$share variance is 97.
"#$#"
"#$#&
14-34
/Cont@d.0
+ summary of the variances is% S$%+"-V!%10+ V$,'$(&+ Chocolate chip 9&6,&77 ) ;atmeal raisin "E,"77 , Coconut ",7#7 , Ghite chocolate &#,E77 ) 4acadamia nut &7,#E7 ) +ll cookies 96',"&7 ) S$%+"-M'= V$,'$(&+ Chocolate chip 9 -,&77 ) ;atmeal raisin &-,E77 , Coconut E, , Ghite chocolate &",E77 ) 4acadamia nut "","E7 ) +ll cookies 9 E,"&7 ) S$%+"-A1$(#'#4 V$,'$(&+ Chocolate chip 9"<,777 ) ;atmeal raisin "",677 ) Coconut 6,&77 ) Ghite chocolate ',777 ) 4acadamia nut :,'77 ) +ll cookies 9#-,777 )
#. Debbie3s Delight shows a favorable sales$*uantity variance because it sold more cookies in total than was budgeted. Together with the higher *uantities, Debbie3s also sold more of the high$contribution margin white chocolate and macadamia nut cookies relative to the budgeted mix55hence, Debbie3s also showed a favorable total sales$mix variance.
"#$#'
14-34 /Cont@d.0 SOLUTION E6HIBIT 14-34 Columnar >resentation of Sales$Nolume, Sales$Quantity, and Sales$4ix Nariances for Debbie3s Delight nc.
F%+='2%+ B1/5+#> A$% P!1(/" !3 A%% C!!@'+" S!%/ D A$% S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 718 >anel +% Chocolate Chip /"&7,777 H 7.#<a0 H 9& 6-,E77 H 9& A$% P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 728 /"&7,777 H 7.#6b0 H 9& 6#,777 H 9& S#$#'& B1/5+#> B1/5+#+/ P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 738 /"77,777 H 7.#6b0 H 9& #6,777 H 9&
9""6,&77
9"7<,777
9:7,777
9-,&77 ) Sales$mix variance 9"<,777 ) Sales$*uantity variance
9#",#77
9E:,777
96-,677
9&-,E77 , Sales$mix variance 9"",677 ) Sales$*uantity variance
"#$##
14-34 /Cont@d.0 SOLUTION E6HIBIT 14-34 /Cont@d.0 Columnar >resentation of Sales$Nolume, Sales$Quantity, and Sales$4ix Nariances for Debbie3s Delight nc.
F%+='2%+ B1/5+#> A$% P!1(/" !3 A%% C!!@'+" S!%/ D A$% S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 718 >anel D% Ghite Chocolate /"&7,777 H 7.""g0 H 9'.77 "',&77 H 9'.77 9':,E77 9"<,777 9"6,777 A$% P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 728 /"&7,777 H 7.76h0 H 9'.77 E,777 H 9'.77 S#$#'& B1/5+#> B1/5+#+/ P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 738 /"77,777 H 7.76h0 H 9'.77 6,777 H 9'.77
9&#,E77 ) Sales$volume variance >anel !% 4acadamia 2ut /"&7,777 H 7."6k0 H 9'."7 /"77,777 H 7."6k0 H 9'."7 /"&7,777 H 7."<j0 H 9'."7 "<,777 H 9'."7 "6,777 H 9'."7 &",E77 H 9'."7 9EE,:E7 966,<77 9#E,677 9:,'77 ) 9"","E7 ) Sales$*uantity variance Sales$mix variance 9&7,#E7 ) Sales$volume variance 9&<<,"&7l 9&<&,777m 9&'6,777n
96',"&7 ) Total sales$volume variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income. +ctual Sales 4ix% gGhite Chocolate j4acadamia 2ut (udgeted Sales 4ix% hGhite Chocolate k4acadamia 2ut
m9"7<,777 S 9E:,777 S 9'",&77 S 9"<,777 S 966,<77 8 9&<&,777 n9:7,777 S 96-,677 S 9&E,777 S 9"6,777 S 9#E,677 8 9&'6,777
"#$#6
The budgeted average contribution margin per unit /also called budgeted contribution margin per composite unit for budgeted mix0 is 9&.'6% B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 9&.77 &.'7 &.E7 '.77 '."7 B1/5+#+/ S$%+" V!%10+ '( P!1(/" #6,777 &6,777 "7,777 6,777 "6,777 "77,777 B1/5+#+/ C!(#,'21#'!( M$,5'( 9 :7,777 6-,677 &E,777 "6,777 #E,677 9&'6,777
Chocolate chip ;atmeal raisin Coconut Ghite chocolate 4acadamia nut +ll cookies 8
8 HH 8 /:E7,777 5 ",777,7770 H 7."77 H 9&.'6 8 9:,#77 , 8 HH 8 :E7,777 H /7."&6 5 7."770 H 9&.'6 8 96E,#77 ) (y increasing its actual market share from the "7= budgeted to the actual "&.67=, Debbie3s Delight has a favorable market$share variance of 96E,#77. There is a smaller offsetting unfavorable market$si1e variance of 9:,#77 due to the #7,777 unit decline in the Chicago market /from ",777,777 budgeted to an actual of :E7,7770. 14-35 /Cont@d.0 Solution !xhibit "#$'6 presents the sales$*uantity, market$share, and market$si1e variances for Debbie@s Delight nc. in +ugust &77'.
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SOLUTION E6HIBIT 14-35 M$,@+#-S)$,+ $(/ M$,@+#-S'F+ V$,'$(&+ A($%4"'" !3 D+22'+J" D+%'5)# 3!, A151"# 2
A$% M$,@+# S'F+ A$% M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# :E7,777 7."&6a 9&.'6b 9&<&,777
96E,#77 )
A$% M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# :E7,777 7."7c 9&.'6b 9&&6,E77
S#$#'& B1/5+#> B1/5+#+/ M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# ",777,777 7."7c 9&.'6b 9&'6,777
4arket$share variance
+ctual market share% "&7,777 units R :E7,777 units 8 7."&6, or "&.6= (udgeted average contribution margin per unit% 9&'6,777 R ",777,777 units 8 9&.'6 per unit (udgeted market share% "77,777 units R ",777,777 units 8 7."7, or "7=
b c
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14-36 /&75&6 min.0D',+&# 0$#+,'$%" +33'&'+(&4, 0'= $(/ 4'+%/ -$,'$(&+" /Chapter +ppendix0.
" X &. +ctual total *uantity of all inputs used and actual input mix percentages for each input are as follows% C)+0'&$% !chol >rotex (en1 CT$#7 Total A$% A1$(#'#4 &#,7<7 "6,#<7 'E,"&7 "7,'&7 <E,777 A$% M'= P+,&+(#$5+ &#,7<7 R <E,777 8 "6,#<7 R <E,777 8 'E,"&7 R <E,777 8 "7,'&7 R <E,777 8 7.&< 7."< 7.#& 7."& ".77
(udgeted total *uantity of all inputs allowed and budgeted input mix percentages for each input are as follows% C)+0'&$% B1/5+#+/ A1$(#'#4 B1/5+#+/ M'= P+,&+(#$5+ !chol &6,&77 &6,&77 R <#,777 8 7.'7 >rotex "E,<77 "E,<77 R <#,777 8 7.&7 (en1 '',E77 '',E77 R <#,777 8 7.#7 CT$#7 <,#77 <,#77 R <#,777 8 7."7 Total <#,777 ".77 Solution !xhibit "#$'E presents the total direct materials efficiency, yield, and mix variances for +ugust &77'. Total direct materials efficiency variance can also be computed as% 8 H !chol 8 /&#,7<7 5 &6,&770 H 97.&7 8 9&&# ) >rotex 8 /"6,#<7 5 "E,<770 H 97.#6 8 6:# ) (en1 8 /'E,"&7 5 '',E770 H 97."6 8 '-< , CT#7 8 /"7,'&7 5 <,#770 H 97.'7 8 6-E , Total direct materials efficiency variance 9"'E , The total direct materials yield variance can also be computed as the sum of the direct materials yield variances for each input% 8 !chol 8 /<E,777 5 <#,7770 >rotex 8 /<E,777 5 <#,7770 (en1 8 /<E,777 5 <#,7770 CT#7 8 /<E,777 5 <#,7770 Total direct materials yield variance H H H H 7.'7 H 97.&7 7.&7 H 97.#6 7.#7 H 97."6 7."7 H 97.'7 8 8 8 8 H &,777 H 7.'7 H 97.&7 &,777 H 7.&7 H 97.#6 &,777 H 7.#7 H 97."6 &,777 H 7."7 H 97.'7 H 8 8 8 8 9"&7 , "<7 , "&7 , E7 , 9#<7 ,
"#$#<
14-36 /Cont3d.0 The total direct materials mix variance can also be computed as the sum of the direct materials mix variances for each input%
+ctual total *uantity of all inputs used (udgeted price of inputs
8 H direct materials H direct materials !chol 8 /7.&< 5 7.'70 H <E,777 H 97.&7 >rotex 8 /7."< 5 7.&70 H <E,777 H 97.#6 (en1 8 /7.#& 5 7.#70 H <E,777 H 97."6 CT#7 8 /7."& 5 7."70 H <E,777 H 97.'7 Total direct materials mix variance 8 5 7.7& H <E,777 H 97.&7 8 5 7.7& H <E,777 H 97.#6 8 7.7& H <E,777 H 97."6 8 7.7& H <E,777 H 97.'7 8 8 8 8 9'## ) --# ) &6< , 6"E , 9'## )
'. !nergy >roducts used a larger total *uantity of direct materials inputs than budgeted, and so showed an unfavorable yield variance. The mix variance was favorable because the actual mix contained more of the cheapest input, (en1, and less of the most costly input, >rotex, than the budgeted mix. The favorable mix variance offset some, but not all, of the unfavorable yield variance55the overall efficiency variance was unfavorable. !nergy >roducts will find it profitable to shift to the cheaper mix only if the yield from this cheaper mix can be improved. !nergy >roducts must also consider the effect on output *uality of using the cheaper mix, and the potential conse*uences for future revenues. SOLUTION E6HIBIT 14-36 Columnar >resentation of Direct 4aterials !fficiency,Oield and 4ix Nariances for The !nergy >roducts Company for +ugust &77'
F%+='2%+ B1/5+#> B1/5+#+/ T!#$% A1$(#'#4 !3 A%% I(*1#" A%%!?+/ 3!, A$% O1#*1# A&)'+-+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+ 738 <#,777 H 7.'7 H97.&7 8 9 6,7#7 <#,777 H 7.&7 H 97.#6 8 -,6E7 <#,777 H 7.#7 H 97."6 8 6,7#7 <#,777 H 7."7 H 97.'7 8 &,6&7
9&7,"E7
A$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H A$% I(*1# M'= H B1/5+#+/ P,'&+ 718 <E,777 H 7.&< H 97.&7 8 9 #,<"E <E,777 H 7."< H 97.#6 8 E,:EE <E,777 H 7.#& H 97."6 8 6,#"< <E,777 H 7."& H 97.'7 8 ',7:E
9&7,&:E
A$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+ 728 <E,777 H 7.'7 H 97.&7 8 9 6,"E7 <E,777 H 7.&7 H 97.#6 8 -,-#7 <E,777 H 7.#7 H 97."6 8 6,"E7 <E,777 H 7."7 H 97.'7 8 &,6<7
9&7,E#7
9"'E , Total efficiency variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income
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14-37 /'6 min.0 D',+&# 0$#+,'$%" *,'&+, +33'&'+(&4, 0'= $(/ 4'+%/ -$,'$(&+"
/Chapter +ppendix0. ". Solution !xhibit "#$'-+ presents the total price variance /9',"77)0, the total efficiency variance /9&,6E7,0, and the total flexible$budget variance /96#7)0. Total direct materials price variance can also be computed as% 8 H Tolman 8 /97.&< 5 97.'70 H E&,777 Iolden Delicious 8 /97.&E 5 97.&E0 H "66,777 Dibston 8 /97.&7 5 97.&&0 H :',777 Total direct materials price variance Total direct materials efficiency variance can also be computed as% 8 H Tolman 8 / E&,777 5 #6,7770 H 97.'7 Iolden Delicious 8 /"66,777 5 "<7,7770 H 97.&E Dibston 8 / :',777 5 -6,7770 H 97.&& Total direct materials efficiency variance 8 8 8 96,"77 , E,677 ) ',:E7 , 9&,6E7 , 8 8 8 9", ) 7 ",<E7 ) 9',"77 )
SOLUTION E6HIBIT 14-37A Columnar >resentation of Direct 4aterials >rice and !fficiency Nariances for Ireenwood nc. for 2ovember &77'
A$% C!"#" I(&1,,+/ 7A$% I(*1#" D A$% P,'&+"8 718 E&,777 H 97.&< 8 9"-,'E7 "66,777 H 97.&E 8 #7,'77 :',777 H 97.&7 8 "<,E77 9-E,&E7 F%+='2%+ B1/5+# 7B1/5+#+/ I(*1#" A%%!?+/ 3!, A$% O1#*1#" A&)'+-+/ D B1/5+#+/ P,'&+"8 738 #6,777 H 97.'7 8 9"',677 "<7,777 H 97.&E 8 #E,<77 -6,777 H 97.&& 8 "E,677 9-E,<77 9&,6E7 , 96#7 ) Total flexible$budget variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income
A$% I(*1# D B1/5+#+/ P,'&+" 728 E&,777 H 97.'7 8 9"<,E77 "66,777 H 97.&E 8 #7,'77 :',777 H 97.&& 8 &7,#E7 9-:,'E7 9',"77 ) Total price variance
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14-37 /Cont3d.0 &. Solution !xhibit "#$'-( presents the total direct materials yield and mix variances for Ireenwood nc. for 2ovember &77'. The total direct materials yield variance can also be computed as the sum of the direct materials yield variances for each input%
8 H H
Tolman 8 /'"7,777 5 '77,7770 H 7."6 H 97.'7 8 "7,777 H 7."6 H 97.'7 8 Iolden Delicious 8 /'"7,777 5 '77,7770 H 7.E7 H 97.&E 8 "7,777 H 7.E7 H 97.&E 8 Dibston 8 /'"7,777 5 '77,7770 H 7.&6 H 97.&& 8 "7,777 H 7.&6 H 97.&& 8 Total direct materials yield variance
The total direct materials mix variance can also be computed as the sum of the direct materials mix variances for each input%
8HH
Tolman 8 /7.&7 5 7."60 H '"7,777 H 97.'7 8 7.76 H '"7,777 H 97.'7 8 9#,E67 , Iolden Delicious 8 /7.67 5 7.E70 H '"7,777 H 97.&E 8 5 7."7 H '"7,777 H 97.&E 8 <,7E7 ) Dibston 8 /7.'7 5 7.&60 H '"7,777 H 97.&& 8 7.76 H '"7,777 H 97.&& 8 ',#"7 , Total direct materials mix variance 9 7, '. Ireenwood paid less for Tolman and Dibston apples and, so, had a favorable direct materials price variance of 9',"77. t also had an unfavorable efficiency variance of 9&,6E7. Ireenwood would need to evaluate if these were unrelated events or if the lower price resulted from the purchase of apples of poorer *uality that affected efficiency. The net effect in this case from a cost standpoint was favorable55the savings in price being greater than the loss in efficiency. ;f course, if the applesauce is of poorer *uality, Ireenwood must also evaluate the potential effects on current and future revenues that have not been considered in the variances described in re*uirements " and &. The unfavorable efficiency variance is entirely attributable to an unfavorable yield. The actual mix does deviate from the budgeted mix but at the budgeted prices, the greater *uantity of Tolman and Dibston apples used in the actual mix exactly offsets the fewer Iolden Delicious apples used. +gain, management should evaluate the reasons for the unfavorable yield variance. s it due to poor *uality Tolman and Dibston apples /recall from re*uirement " that these apples were ac*uired at a price lower than the standard price0K s it due to the change in mix /recall that the mix used is different from the budgeted mix, even though the mix variance is 970K solating the reasons can lead management to take the necessary corrective actions.
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14-37 /Cont3d.0 SOLUTION E6HIBIT 14-37B Columnar >resentation of Direct 4aterials Oield and 4ix Nariances for Ireenwood nc. for 2ovember &77'
F%+='2%+ B1/5+#> B1/5+#+/ T!#$% A1$(#'#4 !3 A%% I(*1#" A%%!?+/ 3!, A$% O1#*1# A&)'+-+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+" 738
'77,777 H 7."6 H 97.'7 8 '77,777 H 7.E7 H 97.&E 8 '77,777 H 7.&6 H 97.&& 8 9"',677 #E,<77 "E,677 9-E,<77
A$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H A$% I(*1# M'= H B1/5+#+/ P,'&+" 718
Tolman Delicious Dibston '"7,777 H 7.&7 H 97.'78 '"7,777 H 7.67 H 97.&E 8 '"7,777 H 7.'7 H 97.&& 8 9"<,E77 #7,'77 &7,#E7 9-:,'E7
A$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+" 728
'"7,777 H 7."6 H 97.'7 8 9"',:67 '"7,777 H 7.E7 H 97.&E 8 #<,'E7 '"7,777 H 7.&6 H 97.&& 8 "-,767 9-:,'E7
7 Total mix variance 9&,6E7 , Total efficiency variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income.
14-38 /"65&7 min.0 C1"#!0+, *,!3'#$2'%'#4, ,+"*!("'2'%'#4 3!, +(-',!(0+(#$% &%+$(-1*, +#)'&".
". Customer$profitability analysis examines how individual customers differ in their profitability. The revenues and costs of each customer can be estimated with varying degrees of accuracy. Devenues of ) typically would be known at the time of sale. 4any costs also would be known, e.g., the cost of materials used to manufacture the fluids sold to each customer. + major area of uncertainty is future costs associated with obligations arising from the sale. There are several issues here% a. ,ncertainty as to the existence and extent of legal liability. !ach customer has primary responsibility to dispose of its own toxic waste. Aowever, under some ,.S. laws /such as the JSuperfundJ laws0, suppliers to a company may be partially liable for disposal of toxic material. >apandopolis needs to determine the extent of )3s liability. t would be necessary to seek legal guidance on this issue. b. ,ncertainty as to when the liability will occur. The further in the future, the lower the amount of the liability /assuming discounting for the time$value of money occurs.0 c. ,ncertainty as to the amount of the liability, given that the liability exists and the date of the liability can be identified. >apandopolis faces major difficulties here55see the answer to re*uirement &.
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14-38 /Cont3d.0 4any companies argue that uncertainties related to /a0, /b0, and /c0 make the inclusion of Jhard$dollar estimates meaningless.J Aowever, at a minimum, a contingent liability should be recogni1ed and included in the internal customer$profitability reports. &. >apandopolis3 controller may believe that if estimates of future possible legal exposure are sufficiently uncertain, then they should not be recorded. Ais concern about Jsmoking gunsJ may have a very genuine basis55that is, if litigation arises, third parties may misrepresent >apandopolis3 concerns to the detriment of ). +ny written comments that she makes may surface 6 or "7 years later and be interpreted as Jwidespread knowledgeJ within ) that they have responsibility for large amounts of environmental clean$up. Iiven this background, >apandopolis still has the responsibility to prepare a report in an objective and competent way. 4oreover, she has visited "7 customer sites and has details as to their toxic$waste handling procedures. f +cme goes bankrupt and has no liability insurance, one of the Jdeep pocketsJ available to meet toxic waste handling costs is likely to be ). +t a minimum, she should report the likely bankruptcy and the existence of )3s contingent liability for toxic$waste clean$up in her report. Ghether she *uantifies this contingent liability is a more difficult *uestion. >apandopolis has limited information available to make a meaningful *uantification. She is not an employee of +cme 4etal and has no information about +cme3s liability insurance. 4oreover, she does not know what other parties /such as other suppliers0 are also jointly liable to pay +cme3s clean$up costs. The appropriate course appears to highlight the contingent liability but to not attempt to *uantify it.
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Note% The above analysis uses the average 7.6= bad debt provision. (ay (ank may want to adjust individual customer$profitability reports at a subse*uent date to reflect actual bad debt experience. &. Revenues )ees 4erchant payments nterest spread Costs (ad debt JprovisionJ Transaction costs Customer in*uiries Card replacement P,!3'#$2%+ C1"#!0+," U(*,!3'#$2%+ C1"#!0+,"
>ays fee )ee waived Aigh billings and high billings .ow billings and low billings per transaction per transaction Aigh outstanding balance >ays on time and has no outstanding balance >ays account Defaults on account .ow number of transactions X Aigh number of transactions X high billings per low billings per transaction transaction Mero or few in*uiries 4any in*uiries 2o replacements 4ultiple replacements
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14-39 /Cont3d.0 '. The pros of charging for individual services include% a. +dditional source of revenues. f (ay (ank is able to charge more than the cost of each service, it may prefer that customers be prolific users of its services. b. f (ay (ank is not able to charge the Jfull costJ for each service, the charge may reduce customer usage /thus reducing the losses associated with providing services at below cost0. )or example, Customer ( may make fewer in*uiries about his or her balance. The cons of charging for individual services include% a. 4ay cause customers to drop card or decrease its usage vis$Y$vis competitors@ cards that have 1ero or minimal charges. b. 4ay attract much negative publicity from consumer groups who target companies such as banks and credit card companies. #. )actors to consider include% a. The growth potential of individual customers. Some low$volume credit customers /such as students0 may be high$volume users in the medium run. b. The costs saved by discontinuing low$volume credit card customers. 4any costs may be relatively JfixedJ and may not be eliminated by dropping customers. c. The publicity (ay (ank may attract from discontinuing these customers. There is the potential for much negative publicity from such decisions. d. +lternatives available to discontinuance, e.g., adopt individual service charges. 6. The pros of providing the service at .ucky Doller include% a. >otential increased profitability due to higher usage by )reedom Card holders at .ucky Doller. b. >otential increased attraction to current and future )reedom Card holders. +s a general rule, the more services available, the more attractive the card. >ossible cons include% a. >otential bad debts. Ghile money advances in general may have been profitable, it is possible that some specific money advance outlets may be unprofitable. Nerdolini should examine this issue in more detail to determine if (ay (ank has made money advances at other gambling venues. b >otential negative publicity from media stories arguing that the (ay (ank is helping gamblers to lose money. These stories often focus on individuals with gambling addictions. c. !thical position of the (ay (ank regarding gambling. >roviding a money advance service at the casino may conflict with the ethical beliefs of senior management or the (oard of Directors.
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I(#+,(+# E=+,&'"+ /Cont@d.0 #c. #d. Ghat is the additional implication of shared expenses between +gilent and A> now that they are independent companiesK Scroll down the JTransactions with Aewlett$>ackardJ footnote. Ghat other separation agreements have +gilent and A> entered intoK
S!%1#'!( #! I(#+,(+# E=+,&'"+ "a. + significant portion of the segments3 expenses arise from shared services and infrastructure that A> has historically provided to the segments in order to reali1e economies of scale and to use resources efficiently. These expenses include costs of centrali1ed research and development, legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs. A> has historically provided services to the segments in order to reali1e economies of scale and to use resources efficiently. These allocations have been determined on bases that A> considers to be a reasonable reflection of the utili1ation of services provided to or benefits received by the segments. f costs were specifically identified to each segment, amounts could vary from the allocated cost. A> may face problems if it bases compensation on the profitability of individual business segments. Since the cost of shared expenses are not bargained for in an arms length transaction, managers may argue about their reasonableness. 4anagers should be evaluated on the basis of controllable costs and revenues or perhaps the performance of the entire organi1ation. +gilent3s sales to A> for the period 2ovember ", ":::, to Tune &, &777, were 9'#" million, >urchases from A> were approximately 9"&& million. +gilent and A> entered into interim service level agreements, for various services, including information technology, financial, accounting, building, and legal services. These services are generally being provided for fees e*ual to the actual direct and indirect costs of providing the services plus 6=. +gilent received 9&E- million from A> and A> received 9:6 million in services from +gilent. n addition to tax implications, there will be tax implications for the shareholder of each company. +ny misallocation of expenses will affect each company3s cash flow, earnings, and share price.
"b. "c.
&.
#b. #c.
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I(#+,(+# E=+,&'"+ /Cont@d.0 6. +gilent and A> have entered into separation agreements covering% Ieneral +ssignment and +ssumption of +ssets and .iabilities ndemnification and nsurance 4atters !mployee 4atters Tax Sharing Deal !state 4atters nformation Technology Sharing ntellectual >roperty !nvironmental 4atters
'.
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#.
+lthough the company is privately held, it still must produce internal financial reports for use by management and external reports for tax purposes. The company also has a majority shareholder, ;cean Spray, for whom reports must be generated. Cost allocation can help with appropriately valuing inventory and assets associated with operations.
"#$6: