Acc350 Managerial Accounting: Week 4 Assignment (P20-22A, P20-23A, P20-25A, P20-26A)

Acc350 Managerial Accounting
Week 4 Assignment (P20-22A, P20-23A, P20-25A, P20-26A)

P20-22A Making Special Order and Pricing Decisions
Green Thumb operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Green Thumb has $ 4,800,000 in assets. Its yearly fixed costs are $ 600,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon- size plant total $ 1.35. Green Thumb’s volume is currently 470,000 units. Competitors offer the same plants, at the same quality, to garden centers for $ 3.60 each. Garden centers then mark them up to sell to the public for $ 9 to $ 12, depending on the type of plant.

1. Green Thumb’s owners want to earn a 10% return on investment on the ­company’s assets. What is Green Thumb’s target full product cost?
2. Given Green Thumb’s current costs, will its owners be able to achieve their ­target profit?
3. Assume Green Thumb has identified ways to cut its variable costs to $ 1.20 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?
4. Green Thumb started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Monrovia Plants made this strategy work, so Green Thumb has decided to try it, too. Green Thumb does not expect volume to be affected, but it hopes to gain more control over ­pricing. If Green Thumb has to spend $ 115,000 this year to advertise and its variable costs continue to be $ 1.20 per unit, what will its cost- plus price be? Do you think Green Thumb will be able to sell its plants to garden centers at the ­cost- plus price? Why or why not?

P20-23A Making dropping a product and product-mix decisions
Members of the board of directors of Safe Zone have received the following operating income data for the year ended May 31, 2012:
Income Statement
For the Year Ended May 31, 2012"
Product Line Total
Industrial Household
Systems Systems
Sales revenue 370,000 390,000 760,000
Cost of goods sold:
Variable 36,000 42,000 78,000
Fixed 260,000 65,000 325,000
Total cost of goods sold 296,000 107,000 403,000
Gross profit 74,000 283,000 357,000
Marketing and administrative expenses:
Variable 66,000 75,000 141,000
Fixed 44,000 24,000 68,000
Total marketing and administrative exp. 110,000 99,000 209,000
Operating income (loss) $(36,000) $184,000 $148,000

Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $84,000 and decrease fixed marketing and administrative expenses by $14,000.
1. Prepare an incremental analysis to show whether Safe Zone should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Safe Zone's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives' income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?

P20-25A Making outsourcing decisions
Outdoor Life manufactures snowboards. Its cost of making 2,000 bindings is as follows:
Direct materials 17,550
Direct labor 3,400
Variable overhead 2,040
Fixed overhead 6,300
Total manufacturing costs for 2,100 bindings 29,290
Suppose Lancaster will sell bindings to Outdoor Life for $14 each. Outdoor Life would pay $3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.70 per binding.

1. Outdoor Life's accountants predict that purchasing the bindings from Lancaster will enable the company to avoid $2,100 of fixed overhead. Prepare an analysis to show whether Outdoor Life should make or buy the bindings.
2. The facilities freed by purchasing bindings from Lancaster can be used to manufacture another product that will contribute $2,700 to profit. Total fixed costs will be the same as if Outdoor Life had produced the bindings. Show which alternative makes the best use of Outdoor Life's facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

P20-26A Making sell as is or process further decisions
Smith Petroleum has spent $204,000 to refine 62,000 gallons of petroleum distillate, which can be sold for $6.40 a gallon. Alternatively, Smith can process the distillate further and produce 56,000 gallons of cleaner fluid. The additional processing will cost $1.75 per gallon of distillate. The cleaner fluid can be sold for $9.00 a gallon. To sell the cleaner fluid, Smith must pay a sales commission of $0.13 a gallon and a transportation charge of $0.18 a gallon.

1. Diagram Smith's decision alternatives.
2. Identify the sunk cost. Is the sunk cost relevant to Smith's decision?
3. Should Smith sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
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