Cost Accounting (14th Edition)

ASSIGNMENT MATERIAL 423
Connecticut Store Rhode Island Store
Revenues $1,070,000 $860,000
Operating costs
Cost of goods sold 750,000 660,000
Lease rent (renewable each year) 90,000 75,000
Labor costs (paid on an hourly basis) 42,000 42,000
Depreciation of equipment 25,000 22,000
Utilities (electricity, heating) 43,000 46,000
Allocated corporate overhead ƒƒƒƒ50,000 ƒƒ40,000
Total operating costs ƒ1,000,000 ƒ885,000
Operating income (loss) $ƒƒƒ70,000 $ƒ(25,000)
The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management
accountant at Sanchez Corporation, makes the following comment, “Sanchez can increase its profitability
by closing down the Rhode Island store or by adding another store like it.”
1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by
$44,000. Calculate Sanchez’s operating income if it closes the Rhode Island store. Is Maria Lopez’s
statement about the effect of closing the Rhode Island store correct? Explain.
2. Calculate Sanchez’s operating income if it keeps the Rhode Island store open and opens another store
with revenues and costs identical to the Rhode Island store (including a cost of $22,000 to acquire
equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate
overhead costs by $4,000. Is Maria Lopez’s statement about the effect of adding another store like
the Rhode Island store correct? Explain.
11-26 Choosing customers. Broadway Printers operates a printing press with a monthly capacity of
2,000 machine-hours. Broadway has two main customers: Taylor Corporation and Kelly Corporation. Data on
each customer for January follows:
Required
Taylor Corporation Kelly Corporation Total
Revenues $120,000 $80,000 $200,000
Variable costs ƒƒ42,000 ƒ48,000 ƒƒ90,000
Contribution margin 78,000 32,000 110,000
Fixed costs (allocated) ƒƒ60,000 ƒ40,000 ƒ100,000
Operating income $ƒ18,000 $ƒ(8,000) $ƒ10,000
Machine-hours required 1,500 hours 500 hours 2,000 hours
Kelly Corporation indicates that it wants Broadway to do an additional $80,000 worth of printing jobs during
February. These jobs are identical to the existing business Broadway did for Kelly in January in terms of
variable costs and machine-hours required. Broadway anticipates that the business from Taylor
Corporation in February will be the same as that in January. Broadway can choose to accept as much of the
Taylor and Kelly business for February as its capacity allows. Assume that total machine-hours and fixed
costs for February will be the same as in January.
What action should Broadway take to maximize its operating income? Show your calculations.
11-27 Relevance of equipment costs. The Auto Wash Company has just today paid for and installed a
special machine for polishing cars at one of its several outlets. It is the first day of the company’s fiscal year.
The machine costs $20,000. Its annual cash operating costs total $15,000. The machine will have a four-year
useful life and a zero terminal disposal value.
After the machine has been used for only one day, a salesperson offers a different machine that promises
to do the same job at annual cash operating costs of $9,000. The new machine will cost $24,000 cash,
installed. The “old” machine is unique and can be sold outright for only $10,000, minus $2,000 removal cost.
The new machine, like the old one, will have a four-year useful life and zero terminal disposal value.
Revenues, all in cash, will be $150,000 annually, and other cash costs will be $110,000 annually, regardless
of this decision.
For simplicity, ignore income taxes and the time value of money.
1. a. Prepare a statement of cash receipts and disbursements for each of the four years under each alternative.
What is the cumulative difference in cash flow for the four years taken together?
Required
Required