ACCT 210 1st Edition Lecture 11 Outline of Last Lecture I 8 3 Continued II 8 4 Allocating constrained resources Outline of Current Lecture I Review of in class activity II Chapter 10 1 Centralized versus decentralized organizations III Chapter 10 2 Segment evaluation Current Lecture 1 Review of in class activity a 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 By how much will Byways income increase or decrease i Contribution margin of old price 101 65 36 CM of special price 75 65 10 ii Existing capacity 80 800 Available capacity 80 800 79 000 1 800 Units loss of existing sales 5 200 1 800 3 400 iii Gain from special price sale 5200 units x 10 52 000 Loss from special price sale 3 400 units x 36 122 400 iv Income change 52 000 122 400 Byways income will decrease 117 200 b 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 Sales Variable costs Small Medium Large Total 125 000 175 000 250 000 550 000 50 000 100 000 150 000 300 000 Contribution margin Fixed costs 75 000 70 000 75 000 100 000 250 000 80 000 85 000 235 000 Operating income 5 000 5 000 15 000 15 000 Of 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 5000 OI of large hats 15 000 Total OI of small large 20 000 ii Fixed cost allocated to each division 180 000 3 60 000 iii Total OI Total OI of small large fixed cost of medium Total OI 20 000 60 000 The operating loss will be 40 000 or operating income is 40 000 2 Chapter 10 1 Centralized versus decentralized organizations a Decentralization i Pushes responsibility to lower levels ii No right degree of descent is based on organization philosophy of head of company iii Is a continuum b Responsibility accounting i Organization divided into operating units where managers have decision making authority ii Unit managers evaluated only on measures that they can control 1 Costs 2 Profits 3 Investments assets 3 10 2 Segment evaluation a Segment i The part of an organization that management wants to evaluation ii No correct way to divide organization
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