Kevin's Transportation provides services in Greater Cincinnati. Management is concerned because the company's profits have been declining, so they are planning to add a delivery service that is expected to increase revenue by $285,000 per year. The total cost to lease additional vehicles from a local dealer is $75,000 per year. The current manager will continue to supervise all daily operations. Labor and utilities costs will increase by 40% and rent and other costs will increase by 15% when the new service is added. Kevin's Transportation Annual Income Statement Before New Service Sales Revenue Costs: Vehicle Leases Labor Utilities Rent Other Costs Manager's Salary Total Costs Operating Profit (Loss) $ 400,000 290,000 50,000 100,000 60,000 120,000 $ 960,000 1,020,000 $ (60,000) a. Prepare a report of the differential costs and revenues if the delivery service is added. b. Should management start up the delivery service? Explain your answer..

Kevin's Transportation provides services in Greater Cincinnati. Management is concerned because the company's profits have been declining, so they are planning to add a delivery service that is expected to increase revenue by $285,000 per year. The total cost to lease additional vehicles from a local dealer is $75,000 per year. The current manager will continue to supervise all daily operations. Labor and utilities costs will increase by 40% and rent and other costs will increase by 15% when the new service is added. Kevin's Transportation Annual Income Statement Before New Service Sales Revenue Costs: Vehicle Leases Labor Utilities Rent Other Costs Manager's Salary Total Costs Operating Profit (Loss) $ 400,000 290,000 50,000 100,000 60,000 120,000 $ 960,000 1,020,000 $ (60,000) a. Prepare a report of the differential costs and revenues if the delivery service is added. b. Should management start up the delivery service? Explain your answer..

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 10EB: Keleher Industries manufactures pet doors and sells them directly to the consumer via their web...

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Keleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:
Bienestar, Inc., has two plants that manufacture a line of wheelchairs. One is located in Kansas City, and the other in Tulsa. Each plant is set up as a profit center. During the past year, both plants sold their tilt wheelchair model for 1,620. Sales volume averages 20,000 units per year in each plant. Recently, the Kansas City plant reduced the price of the tilt model to 1,440. Discussion with the Kansas City manager revealed that the price reduction was possible because the plant had reduced its manufacturing and selling costs by reducing what was called non-value-added costs. The Kansas City manufacturing and selling costs for the tilt model were 1,260 per unit. The Kansas City manager offered to loan the Tulsa plant his cost accounting manager to help it achieve similar results. The Tulsa plant manager readily agreed, knowing that his plant must keep pacenot only with the Kansas City plant but also with competitors. A local competitor had also reduced its price on a similar model, and Tulsas marketing manager had indicated that the price must be matched or sales would drop dramatically. In fact, the marketing manager suggested that if the price were dropped to 1,404 by the end of the year, the plant could expand its share of the market by 20 percent. The plant manager agreed but insisted that the current profit per unit must be maintained. He also wants to know if the plant can at least match the 1,260 per-unit cost of the Kansas City plant and if the plant can achieve the cost reduction using the approach of the Kansas City plant. The plant controller and the Kansas City cost accounting manager have assembled the following data for the most recent year. The actual cost of inputs, their value-added (ideal) quantity levels, and the actual quantity levels are provided (for production of 20,000 units). Assume there is no difference between actual prices of activity units and standard prices. Required: 1. Calculate the target cost for expanding the Tulsa plants market share by 20 percent, assuming that the per-unit profitability is maintained as requested by the plant manager. 2. Calculate the non-value-added cost per unit. Assuming that non-value-added costs can be reduced to zero, can the Tulsa plant match the Kansas City per-unit cost? Can the target cost for expanding market share be achieved? What actions would you take if you were the plant manager? 3. Describe the role that benchmarking played in the effort of the Tulsa plant to protect and improve its competitive position.
The Rapid Delivery Service is considering the expansion of its business into an afternoon retail delivery service. This would require an additional $34,000 in labor costs per month. Company-owned vehicles now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail deliveries. However, it is estimated that an additional $10,900 would be required per month for gas, oil, and maintenance. It is further estimated that the retail delivery use of the trucks would be allocated 40% of the existing $13,900 fixed vehicle costs. What is the differential delivery cost per month for expanding into the retail delivery market?
A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software?
Artisan Metalworks has a bottleneck in their production that occurs within the engraving department. Jamal Moore, the COO, is considering hiring an extra worker, whose salary will be $54,000 per year, to solve the problem. With this extra worker, the company could produce and sell 2,900 more units per year. Currently, the selling price per unit is $25.00 and the cost per unit is $7.50. $3.40 1.00 0.40 2.70 $7.50 Direct materials Direct labor Variable overhead Fixed overhead (primarily depreciation of equipment) Total Using the Information provided, calculate the annual financial Impact of hiring the extra worker. Profit $ Increase ✔
The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.6 million. The cost of goods sold is estimated to be 40 percent of sales, and corporate overhead would increase by $306,500, not including the cost of either acquiring or leasing office space. The corporation will have to invest $2.6 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space. A small office building could be purchased for sole use by the corporation at a total price of $5.8 million, of which $900,000 of the purchase price would represent land value, and $4.9 million would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in a 21 percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $645,000 per year for a term of…
The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.5 million. The cost of goods sold is estimated to be 40 percent of sales, and corporate overhead would increase by $303,500, not including the cost of either acquiring or leasing office space. The corporation will have to invest $2.5 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space. A small office building could be purchased for sole use by the corporation at a total price of $5.2 million, of which $900,000 of the purchase price would represent land value, and $4.3 million would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in a 21 percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $555,000 per year for a term of…
A moped company produces 200,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside producer. The manager believes that the chains can be made in house at an additional cost of $0.40 per chain. However, the manager believes that the quality of the product is slightly better and she’ll be able to add $1.0 to the selling price per unit without reducing the 200,000 units sold per year. The new machinery would cost $260,000 and the entire cost would be depreciated straight line over 10 years. The inhouse production would require $26,000 of inventory and other working capital upfront (year 0), which can be recovered at the end of the 10th year. The proceeds from selling the machine after 10 years would be $20,000. The company pays a tax rate of 20%. a. What are the incremental annual cash flows associated with changing the production of the chains from outsourcing to in-house? b. What is the IRR of the option to switch to an inhouse…
Jayzene Griffiths is the newly appointed manager for a fashionable shoe store. Her marketing ideas include the installation of a new lighting system and increased display space that will add $30,000 in fixed costs to the $18,000 currently being spent. In addition, Jayzene is proposing that a 10% decrease ($30.00 to $27.00) will produce a 30% increase in sales volume (5,000 to 6,500). Variable costs will remain at $15 per pair of shoes. Management is impressed with Jayzene’s ideas, but concerned about the effects these changes will have on the breakeven point and margin of safety. Required: Compute the current breakeven point in units and dollar value and compare it to the breakeven point (units and $) if Jayzene’s ideas are used. Prepare two (2) conventional breakeven charts (using excel spread sheets) for the current and proposed situations. The chart must indicate the BEP and margin of safety.
Jayzene Griffiths is the newly appointed manager for a fashionable shoe store. Her marketing ideas include the installation of a new lighting system and increased display space that will add $30,000 in fixed costs to the $18,000 currently being spent. In addition, Jayzene is proposing that a 10% decrease ($30.00 to $27.00) will produce a 30% increase in sales volume (5,000 to 6,500). Variable costs will remain at $15 per pair of shoes. Management is impressed with Jayzene’s ideas, but concerned about the effects these changes will have on the breakeven point and margin of safety. Required: Compute the margin of safety ratio for both situations. Prepare CVP income statements for both the current and proposed situations. Would you make changes suggested by Jayzene? Give reasons for your answer.
The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.6 million. The cost of goods sold is estimated to be 40 percent of sales, and corporate overhead would increase by $304,000, not including the cost of either acquiring or leasing office space. The corporation will have to invest $2.6 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space A small office building could be purchased for sole use by the corporation at a total price of $5.3 million, of which $900,000 of the purchase price would represent land value, and $4,4 million would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in a 21 percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $570,000 per year for a term of 15…
The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.7 million. The cost of goods sold is estimated to be 40 percent of sales, and corporate overhead would increase by $310,000, not including the cost of either acquiring or leasing office space. The corporation will have to invest $2.7 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space. A small office building could be purchased for sole use by the corporation at a total price of $6.5 million, of which $900,000 of the purchase price would represent land value, and $5.6 million would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in a 21 percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $750,000 per year for a term of…