| The headquarters of a national restaurant chain is trying to
better understand the profitability of the Savannah location. Savannah’s
total assets are $365,250, consisting of $175,000 land, $115,000 buildings
and equipment, and $45,000 intangibles. The net profit is $23,000, and the
required rate of return is 10.0%. Savannah’s return on investment (ROI) is: |
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| Federal Parcel Service, an international delivery service, is
considering eliminating operations in Canada. If the company dropped the
Canadian market, it would lose revenues of $975,000 annually. Management
assigns costs of $1,050,000 ($625,000 variable and $425,000 fixed) to the
Canadian market. Therefore, the Canadian market has an apparent annual loss
of -$75,000 per year ($975,000 revenue minus $1,050,000 costs). Careful cost
analysis reveals that if Canadian operations were dropped, the reduction in
costs would be only $625,000 of variable and $50,000 of fixed costs. The
remaining $375,000 of fixed costs were general fixed costs the company
allocated to the Canadian market. These costs would continue to be incurred
and would not be saved by shutting down the Canadian market. |
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| Complete a
differential analysis for the Canadian market operations. | |
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| Keep | Eliminate | Differential | | |
| Revenue | | | | | |
| Fixed
Costs | | | | | |
| Variable
Costs | | | | | |
| Net
advantage | | | | | |
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| Which
is more profitable, eliminating or keeping the business? |
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| Keep/eliminate: | | | | |
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| Fact pattern: Gemini Inc., has two service departments (the
Systems Department and the Facilities Department) that provide support to the
company’s three production departments (Machining Department, Assembly
Department, and Finishing Department). The overhead costs of the Systems
Department are allocated to other departments on the basis of computer usage
hours. The overhead costs of the Facilities Department are allocated based on
square feet occupied (in thousands). Other information pertaining to Logo is
as follows: |
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| | | Computer | Square Feet | | | |
| Department | Overhead | Usage Hours | Occupied | | | |
| Systems | $
175,000 | 108 | 540 | | | |
| Facilities | 35,000 | 324 | 324 | | | |
| Machining | 350,000 | 1,296 | 1,080 | | | |
| Assembly | 481,250 | 648 | 1,620 | | | |
| Finishing | 542,500 | 972 | 2,700 | | | |
| Total | | 3,348 | 6,264 | | | |
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| Logo employs the direct method of allocating service department
costs. The overhead of the Systems Department would be allocated by dividing
the overhead amount by |
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| From the following budgeted data, calculate the budgeted
indirect cost rate that would be used in a normal costing system. |
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| Actual results for
the year were the following: |
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| Total direct labor hours | 95,000 | | | | |
| Total indirect
labor hours | 32,000 | | | | |
| Direct costs | $875,000 | | | | |
| Total indirect
labor related costs | $345,000 | | | | |
| Total indirect
nonlabor related costs | $115,000 | | | | |
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| The budgeted indirect cost rate is: | | | |
| | Answer: | | | |
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