Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Chapter 11, Problem 11.47P
Dropping a product line, selling more tours. Nelson River Tours, a division of Old World Travel, offers two types of guided fishing tours, Beginner and Advanced. Operating income for each tour type in 2017 is as follows:
| Beginner | Advanced | |
| Revenues (1,000 × $900; 800 × $1,650) | $900,000 | $1,320,000 |
| Operating costs | ||
| Administrative salaries | 240,000 | 200,000 |
| Guide wages | 260,000 | 760,000 |
| Supplies | 100,000 | 200,000 |
| Depreciation of equipment | 50,000 | 120,000 |
| Vehicle fuel | 60,000 | 48,000 |
| Allocated corporate |
90,000 | 132,000 |
| Total operating costs | 800,000 | 1,460,000 |
| Operating income (loss) | $100,000 | $ (140,000) |
The equipment has a zero disposal value. Guide wages, supplies, and vehicle fuel are variable costs with respect to the number of tours. Administrative salaries are fixed costs with respect to the number of tours. Dennis Baldwin, Nelson River Tours’ president, is concerned about the losses incurred on the Advanced tours. He is considering dropping the Advanced tour and offering only the Beginner tour.
- 1. If the Advanced tours are discontinued, one administrative position could be eliminated, saving the company $100,000. Assuming no change in the sales of Beginner tours, what effect would dropping the Advanced tour have on the company’s operating income?
Required
- 2. Refer back to the original data. If Nelson River Tours drops the Advanced tours, Baldwin estimates that sales of Beginner tours would increase by 50%. He believes that he could still eliminate the $100,000 administrative position. Equipment currently used for the Advanced tours would be used by the additional Beginner tours. Should Baldwin drop the Advanced tour? Explain.
- 3. What additional factors should Baldwin consider before dropping the Advanced tours?
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Chapter 11 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 11 - Prob. 11.1QCh. 11 - Define relevant costs. Why are historical costs...Ch. 11 - All future costs are relevant. Do you agree? Why?Ch. 11 - Distinguish between quantitative and qualitative...Ch. 11 - Describe two potential problems that should be...Ch. 11 - Variable costs are always relevant, and fixed...Ch. 11 - A component part should be purchased whenever the...Ch. 11 - Prob. 11.8QCh. 11 - Managers should always buy inventory in quantities...Ch. 11 - Management should always maximize sales of the...
Ch. 11 - Prob. 11.11QCh. 11 - Cost written off as depreciation on equipment...Ch. 11 - Managers will always choose the alternative that...Ch. 11 - Prob. 11.14QCh. 11 - Prob. 11.15QCh. 11 - Qualitative and quantitative factors. Which of the...Ch. 11 - Special order, opportunity cost. Chade Corp. is...Ch. 11 - Prob. 11.18MCQCh. 11 - Keep or drop a business segment. Lees Corp. is...Ch. 11 - Relevant costs. Ace Cleaning Service is...Ch. 11 - Disposal of assets. Answer the following...Ch. 11 - Relevant and irrelevant costs. Answer the...Ch. 11 - Multiple choice. (CPA) Choose the best answer. 1....Ch. 11 - Special order, activity-based costing. (CMA,...Ch. 11 - Make versus buy, activity-based costing. The...Ch. 11 - Inventory decision, opportunity costs. Best Trim,...Ch. 11 - Relevant costs, contribution margin, product...Ch. 11 - Selection of most profitable product. Body Image,...Ch. 11 - Theory of constraints, throughput margin, relevant...Ch. 11 - Closing and opening stores. Sanchez Corporation...Ch. 11 - Prob. 11.31ECh. 11 - Relevance of equipment costs. Janets Bakery is...Ch. 11 - Equipment upgrade versus replacement. (A. Spero,...Ch. 11 - Special order, short-run pricing. Diamond...Ch. 11 - Short-run pricing, capacity constraints. Fashion...Ch. 11 - International outsourcing. Riverside Clippers Corp...Ch. 11 - Relevant costs, opportunity costs. Gavin Martin,...Ch. 11 - Opportunity costs and relevant costs. Jason Wu...Ch. 11 - Opportunity costs. (H. Schaefer, adapted) The Wild...Ch. 11 - Make or buy, unknown level of volume. (A....Ch. 11 - Make versus buy, activity-based costing,...Ch. 11 - Prob. 11.42PCh. 11 - Product mix, special order. (N. Melumad, adapted)...Ch. 11 - Theory of constraints, throughput margin, and...Ch. 11 - Theory of constraints, contribution margin,...Ch. 11 - Closing down divisions. Ainsley Corporation has...Ch. 11 - Dropping a product line, selling more tours....Ch. 11 - Prob. 11.48PCh. 11 - Dropping a customer, activity-based costing,...Ch. 11 - Equipment replacement decisions and performance...
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