American Public University ACCT 406 Chapter 8 – P8-1A

P7-5A – Prepare incremental analysis concerning elimination of divisions.P8-1A – Use cost-plus pricing to determine various amountsProblem P7-5A Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $2,13,000 and the following divisional results. Division I II III IV Sales $2,50,000 $2,00,000 $5,00,000 $4,50,000 Cost of goods sold Direct labor costs 2,00,000 1,92,000 3,00,000 2,50,000 Selling and administrative expenses Machine hours 75,000 60,000 60,000 50,000 Income (loss) from operations Setup hours ($25,000) ($52,000) $1,40,000 $1,50,000 Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 75% 90% 80% 75% Selling and administrative expenses Machine hours 40% 70% 50% 60% Discontinuance of any division would save 50% of the fixed costs and expenses for that division. Top management is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of the divisions should be continued. Instructions: (a) Compute the contribution margin for Divisions I and II. Division I Division II Sales Amount Amount Variable costs Cost of goods sold Formula Amount Selling and administrative Formula Amount Total variable expenses Formula Formula Contribution margin Formula Formula (b)(1) Prepare an incremental analysis concerning the possible discontinuance of Division I. Division I Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) Formula Formula Formula Fixed costs Cost of goods sold Formula Formula Formula Selling and administrative Formula Formula Formula Total fixed expenses Formula Formula Formula Income (loss) from operations Formula Formula Formula (b)(2) Prepare an incremental analysis concerning the possible discontinuance of Division II. Division II Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) Amount Amount Formula Fixed costs Title Formula Formula Formula Title Formula Formula Formula Title Formula Formula Formula Title Formula Formula Formula (b)(3) What course of action do you recommend for each division? Enter text answer here. Enter text answer here. (c) Prepare a columnar condensed income statement for Moreno Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II’s unavoidable fixed costs are allocated equally to the continuing divisions. GUTIERREZ MANUFACTURING COMPANY CVP Income Statement For the Quarter Ended March 31, 2014 Divisions I III IV Total Sales Amount Amount Amount Formula Variable costs Title Formula Formula Formula Formula Title Formula Formula Formula Formula Title Formula Formula Formula Formula Contribution margin Formula Formula Formula Formula Fixed costs Title Formula Formula Formula Formula Title Formula Formula Formula Formula Title Formula Formula Formula Formula Income (loss) from operations Formula Formula Formula Formula Enter text answer here. Enter text answer here. (d) Reconcile the total income from operations, $2,13,000 with the total income from operations without Division II. P8-1A – Use cost-plus pricing to determine various amounts Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse Problem P8-1A Dewitt Corporation needs to set a target price for its newly designed product M14-M16. The following data relate to this new product. Per unit Total Direct materials $20.00 Direct labor 40.00 Variable manufacturing overhead 10.00 Fixed manufacturing overhead $14,40,000 Variable selling and administrative expenses 5.00 Fixed selling and administrative expenses 9,60,000 These costs are based on a budgeted volume of 80,000 units produced and sold each year.Dewitt uses cost-plus pricing methods to set its target selling price. The markup on total unit cost is 30% Instructions: (a)(1) Compute the total variable cost per unit for M14-M16. Title Amount Title Amount Title Amount Title Amount Title Formula (a)(2) Compute the total fixed cost per unit for M14-M16. Total Costs ÷ Budgeted Volume = Cost per Unit Title Amount ÷ Quantity = Formula Title Amount ÷ Quantity = Formula Title Amount ÷ Quantity = Formula (a)(3) Compute the total cost per unit for M14-M16. Title Amount Title Amount Title Formula (b) Compute the desired ROI per unit for M14-M16. Title Amount Title Percentage Title Formula (c) Compute the target selling price for M14-M16. Title Amount Title Amount Title Formula (d) Compute variable cost per unit, fixed cost per unit, and total cost per unit assuming that 60,000 M14-M16s are sold during the year. (Round to two decimal places.)

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