Concept explainers
Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products follow:
aPractical capacity less expected usage (all unused capacity is permanent).
bIn some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity.
Annual
aCosts associated with practical activity capacity. The machine fixed costs are all
bThese costs are for the actual levels of the cost driver.
Required:
- 1. Prepare a traditional segmented income statement, using a unit-level overhead rate based on direct labor hours. Using this approach, determine whether the cashew butter product line should be kept or dropped.
- 2. Prepare an activity-based segmented income statement. Repeat the keep-or-drop analysis using an ABC approach.
1.
Prepare a traditional segmented income statement of company N, under a unit-level overhead rate and state whether the cashew butter product line should be kept or dropped.
Explanation of Solution
Tactical decision making: Tactical decision making is a process in which the company can choose the correct alternative based on the profitability. In tactical decision making, offer price of a product is compared with the normal selling price and offer price less than the normal selling price of product is considered as the idle capacity for decision making.
Particulars | Peanut Butter (A) (1) | Cashew Butter (2) (B) |
Total |
Revenues | $5,000,000 | $800,000 | $5,800,000 |
Less: variable expenses | |||
Direct materials | 2,500,000 | 480,000 | 2,980,000 |
Direct labor | 500,000 | 80,000 | 580,000 |
Variable overhead | 360,000 | 90,000 | 450,000 |
Contribution margin | $1,640,000 | $150,000 | $1,790,000 |
Less: Direct fixed expenses | $200,000 | $60,000 | $260,000 |
Product margin | $1,440,000 | $90,000 | $1,530,000 |
Less: Common fixed expenses | 567,500 (4) | ||
Segment margin | $962,500 |
Table (1)
Working note (1):
Compute the amounts of revenues and expenses of Peanut Butter:
Particulars | Costs per cases for Peanut butter (A) | Sales units (B) | Peanut Butter |
Revenues | $100 | 50,000 | $5,000,000 |
Less: variable expenses | |||
Direct materials | $50 | 50,000 | $2,500,000 |
Direct labor | $10 | 50,000 | 500,000 |
Variable overhead | $9 (2) | 40,000 | 360,000 |
Table (2)
Working note (2):
Compute the variable overhead rate:
Working note (3):
Compute the amounts of revenues and expenses of Peanut Butter:
Particulars | Costs per cases for cashew butter (A) | Sales units (B) | Cashew Butter |
Revenues | $80 | 10,000 | $800,000 |
Less: variable expenses | |||
Direct materials | $48 | 10,000 | $480,000 |
Direct labor | $8 | 10,000 | 80,000 |
Variable overhead | $9 (2) | 10,000 | 90,000 |
Table (3)
Working note (4):
Compute the common fixed expenses:
Therefore, the company should not drop the cashew butter because the segment margin is positive.
2.
Prepare an activity-based segmented income statement of company N, under ABC approach and state whether the cashew butter product line should be kept or dropped.
Explanation of Solution
Prepare an activity-based segmented income statement of company N, under ABC approach and state whether the cashew butter product line should be kept or dropped as follows:
Particulars | Peanut Butter (A) (1) | Cashew Butter (2) (B) | Total |
Revenues | $5,000,000 | $800,000 | $5,800,000 |
Less: variable expenses | |||
Direct materials | 2,500,000 | 480,000 | 2,980,000 |
Direct labor | 500,000 | 80,000 | 580,000 |
Variable overhead | 360,000 | 90,000 | 450,000 |
Contribution margin | $1,640,000 | $150,000 | $1,790,000 |
Less: Traceable expenses | |||
Advertising | $200,000 | $60,000 | $260,000 |
Receiving | 115,000 (7) | 57,500 (8) | 172,500 |
Packing | 80,000 (11) | 40,000 (12) | 120,000 |
Product margin | $1, 245,000 | $(7,500) | $1,237,500 |
Less: Unused activity expenses | 567,500 | ||
Receiving (13) | 50,000 | ||
Packing (14) | 25,000 | ||
Less: Machine depreciation expenses | (200,000) | ||
Segment margin | $962,500 |
Table (4)
From the above calculation it is clear that dropping the cashew butter line is better because the product margin of the cashew butter is showing a negative margin of $7,500.
Working note (5):
Compute the fixed receiving rate:
Working note (6):
Compute the variable receiving rate:
Working note (7):
Compute the receiving expenses of peanut butter:
Working note (8):
Compute the receiving expenses of cashew butter:
Working note (9):
Compute the fixed packaging rate:
Working note (10):
Compute the variable packaging rate:
Working note (11):
Compute the packaging expenses of peanut butter:
Working note (12):
Compute the packaging expenses of cashew butter:
Working note (13):
Compute the unused receiving expenses:
Working note (14):
Compute the unused packing expenses:
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Chapter 17 Solutions
Cornerstones of Cost Management (Cornerstones Series)
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