ACCT 210 1st Edition Lecture 11Outline of Last Lecture I. 8.3 ContinuedII. 8.4: Allocating constrained resourcesOutline of Current Lecture I. Review of in-class activityII. Chapter 10.1: Centralized versus decentralized organizationsIII. Chapter 10.2: Segment evaluationCurrent Lecture1. Review of in-class activitya. #2: Byways Production has an annual capacity of 80,800 units per year. Currently,the company is making and selling 79,000 units a year. The normal sales price is $101 per unit; variable costs are $65 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 5,200 units at $75 per unit. Byways’ cost structure should not change as a result of this special order. Byhow much will Byways’ income increase or decrease?i. Contribution margin of old price = $101 - $65 = $36CM of special price = $75 - $65 = $10ii. Existing capacity = 80,800Available capacity = 80,800 – 79,000 = 1,800Units loss of existing sales = 5,200 – 1,800 = 3,400iii. Gain from special price sale = 5200 units x $10 = $52,000Loss from special price sale = 3,400 units x $36 = $122,400iv. Income change = $52,000 - $122,400Byways’ income will decrease $117,200b. #5: Kuskela Company makes hats in three sizes: small, medium and large. Medium hats have shown a loss for several years, similar to the operating loss shown in the following table:Small Medium Large TotalSales $125,000 $175,000 $250,000 $550,000Variable costs 50,000 100,000 150,000 300,000Contribution margin 75,000 75,000 100,000 250,000Fixed costs 70,000 80,000 85,000 235,000Operating income $ 5,000 $ (5,000) $ 15,000 $ 15,000Of the total $235,000 in fixed costs, $180,000 is common costs that have been allocated equally to each product line. What will total operating income/(loss) be if medium hats are dropped?i. Operating income of small hats: $5000OI of large hats = $15,000Total OI of small & large = $20,000ii. Fixed cost allocated to each division = $180,000 ÷ 3 = $60,000iii. Total OI = Total OI of small & large – fixed cost of mediumTotal OI = $20,000 - $60,000The operating loss will be $40,000 (or operating income is -$40,000)2. Chapter 10.1: Centralized versus decentralized organizationsa. Decentralizationi. Pushes responsibility to lower levelsii. No “right” degree of descent; is based on organization philosophy of headof companyiii. Is a continuumb. Responsibility accountingi. Organization divided into operating units where managers have decision making authorityii. Unit managers evaluated only on measures that they can control1. Costs2. Profits3. Investments (assets)3. 10.2: Segment evaluationa. Segmenti. The part of an organization that management wants to evaluationii. No “correct” way to divide
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