06 Ch 6 - A306 Disc Handout

A306 - Management Accounting & Analysis Discussion Handout Chapter 6 Question 1: ______________ is/are the maximum volume of activity that a company can sustain. a. Resources b. Discretionary orders c. Inventory d. Employees e. Capacity Question 2: Which statement is false? a. Capacity costs are controllable over the long-term. b. To determine if a segment should be dropped, management should focus on the segment's contribution margin less its traceable fixed costs. c. Because indirect manufacturing costs are not traceable to individual products, companies must allocate them to products d. If a segment is dropped, then the common fixed costs for the total company will change. e. While contribution margin is the appropriate measure of value for short-term decisions, segment margin is the appropriate measure for long-term decisions
Walkthrough Problem 1: Reichert Farm Supply makes farm tractors. Currently the company purchases the ignition component from an outside supplier. However the company is considering making the 40,000 components themselves. The production cost per unit is $9.20 as shown below: If the company decides to make the component, a supervisor would have to be hired (salary of $60,000) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation is due to obsolescence rather than wear and tear. Determine the financial advantage or disadvantage of making the part instead of purchasing it from an outside supplier. Walkthrough Problem 2: Reichert Linens, a retail company, has 2 divisions - Bath and Kitchen. The company's most recent monthly CM Income Stmt follows: P er unit T otal Direct materials $3.10 Direct labor $2.70 Supervision $1.50 $60,000 Depreciation $1.00 $40,000 Var mfg overhead $0.60 Rent $0.30 $12,000 Unit product cost $9.20
Total Bath Kitchen Sales $4,000,000 $3,000,000 $1,000,000 Var expenses 1,300,000 900,000 400,000 Contrib margin 2,700,000 2,100,000 600,000 Fixed expenses 2,200,000 1,400,000 800,000 NOI (loss) $ 500,000 $ 700,000 $ (200,000) A study indicates that $340,000 of the fixed expenses being charged to Kitchen are sunk costs or allocated costs that will continue even if the Kitchen division is dropped. In addition, the elimination of the Kitchen division will result in a 10% decrease in the sales of the Bath division. Determine the financial advantage or disadvantage of discontinuing the Kitchen division.
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