Agnew Manufacturing produces and sells three models of a single product, Standard, Superior, and DeLuxe, in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared:
Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year, no noticeable improvement can be seen from the results as reported in the preceding quarterly statement.
In attempting to decide whether to eliminate the regional market, the following information has been gathered:
All administrative costs and fixed
Required
- a. Assuming there are no alternative uses for Agnew’s present capacity, would you recommend dropping the regional market? Why or why not?
- b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs to products.
- c. It is believed that a new model can be ready for sale next year if Agnew decides to go ahead with continued research. The new product would replace DeLuxe and can be produced by simply converting equipment presently used in producing the DeLuxe model. This conversion will increase fixed costs by $60,000 per quarter. What must be the minimum contribution margin per quarter for the new model to make the changeover financially feasible?
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Fundamentals Of Cost Accounting (6th Edition)
- In 20x5, Major Company initiated a full-scale, quality improvement program. At the end of the year, Jack Aldredge, the president, noted with some satisfaction that the defects per unit of product had dropped significantly compared to the prior year. He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well accepted by employees. Of most interest to the president, however, was the impact of the quality improvements on profitability. To help assess the dollar impact of the quality improvements, the actual sales and the actual quality costs for 20x4 and 20x5 are as follows by quality category: All prevention costs are fixed (by discretion). Assume all other quality costs are unit-level variable. Required: 1. Compute the relative distribution of quality costs for each year and prepare a pie chart. Do you believe that the company is moving in the right direction in terms of the balance among the quality cost categories? Explain. 2. Prepare a one-year trend performance report for 20x5 (compare the actual costs of 20x5 with those of 20x4, adjusted for differences in sales volume). How much have profits increased because of the quality improvements made by Major Company? 3. Estimate the additional improvement in profits if Major Company ultimately reduces its quality costs to 2.5 percent of sales revenues (assume sales of 10 million).arrow_forwardGagnon Company reported the following sales and quality costs for the past four years. Assume that all quality costs are variable and that all changes in the quality cost ratios are due to a quality improvement program. Required: 1. Compute the quality costs for all four years. By how much did net income increase from Year 1 to Year 2 because of quality improvements? From Year 2 to Year 3? From Year 3 to Year 4? 2. The management of Gagnon Company believes it is possible to reduce quality costs to 2.5 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon. Is the expectation of improving quality and reducing costs to 2.5 percent of sales realistic? Explain. 3. Assume that Gagnon produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was 400. In Year 1, total variable costs were 250 per unit. In Year 3, competition forced the bid to drop to 380. Compute the total contribution margin in Year 3 assuming the same quality costs as in Year 1. Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3. What is the increase in profitability resulting from the quality improvements made from Year 1 to Year 3?arrow_forwardSuppose that Kicker had the following sales and cost experience (in thousands of dollars) for May of the current year and for May of the prior year: In May of the prior year, Kicker started an intensive quality program designed to enable it to build original equipment manufacture (OEM) speaker systems for a major automobile company. The program was housed in research and development. In the beginning of the current year, Kickers accounting department exercised tighter control over sales commissions, ensuring that no dubious (e.g., double) payments were made. The increased sales in the current year required additional warehouse space that Kicker rented in town. (Round ratios to four decimal places. Round sales dollars computations to the nearest dollar.) Required: 1. Calculate the contribution margin ratio for May of both years. 2. Calculate the break-even point in sales dollars for both years. 3. Calculate the margin of safety in sales dollars for both years. 4. CONCEPTUAL CONNECTION Analyze the differences shown by your calculations in Requirements 1, 2, and 3.arrow_forward
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