The Children’s Store is on Fifth Avenue in Chicago It has a magic department near
the main door Management is considering dropping the magic department, which
has consistently shown an operating loss The predicted income statements, in
thousands of dollars, are shown below
The $300,000 of magic department fixed expenses include the compensation of
employees of $120,000 These employees will be terminated if the magic
department is abandoned All of the magic department’s equipment is fully
depreciated, so none of the $300,000 pertains to such items Furthermore,
disposal values of equipment will be exactly offset by the costs of removal and
remodeling
If the magic department is dropped, the manager will use the vacated space for
either more general merchandise or more electronic products The expansion of
general merchandise would not entail hiring any additional salaried help, but
more electronic products would require an additional person at an annual cost of
$30,000 The manager thinks that sales of general merchandise would increase by
$250,000; electronic products by $200,000 The manager’s modest predictions are
partially based on the fact that she thinks the magic department has helped lure
customers to the store and, thus, improved overall sales If the magic department
is closed, that lure would be gone Sales
Variable expenses
Contribution margin
Fixed expenses*
Operating income (loss) General Electronic Magic
Total MerchandiseProductsDepartment
$6,000
$5,000
$400
$600
4,090
3,500
200
390
$1,910
$1,500
$200
$210
1,100
750
50
300
$810
$750
$150
($90) * Includes compensation, depreciation, property taxes, insurance, etc
REQUIRED: Should the magic department be closed? Explain, showing
computations Clean and Brite manufactures three different models of swimming pool cleaners (AR1, AR2,
and BR1) These are sophisticated computer-controlled, programmed cleaners that scrub and
vacuum the pool’s bottom, and steps and provide supplemental filtration of pool water The
three models differ in their capacity and programmability
Clean and Brite uses an absorption costing system that absorbs manufacturing overhead to
the three models based on direct labor hours The single plantwide manufacturing overhead
rate is predetermined before the beginning of the fiscal year using a flexible manufacturing
overhead budget Variable manufacturing overhead is budgeted to be $300 per direct
labor hour, and fixed manufacturing overhead is budgeted to be $1,397,500 Direct labor
is budgeted at $25 per DLH The following table summarizes the budgeted and actual
results of operation for the year:
Models
AR1
AR2
BR1
Actual number of units produced
5,100
3,900
2,200
Actual DL hours per unit
31
42
59
Budgeted wholesale price
$550
$750
$1,050
Budgeted DL hours per scrubber
3
4
6
Budgeted direct materials
$95
$125
$175
Budgeted production (units)
5,000
4,000
2,000
Budgeted DL cost (@$25 per DL hour)
$75
$100
$150
REQUIRED:
1 Calculate the firmwide overhead rate at the beginning of the year (round to two decimals)
2 A batch of 100 units of model AR2 is produced using 405 direct labor hours How much
overhead is absorbed by this batch of 100 model AR2s?
3 Actual overhead incurred during the year was $1,520,500 Calculate the amount of over- or
underabsorbed overhead for the year
4 Clean and Brite writes off any over/underabsorbed to cost of good sold What is the effect
of writing off the over/underabsorbed overhead calculated in (3) on net income? In other
words, does net income increase or decrease after the writeoff? aners (AR1, AR2,
ners that scrub and
pool water The ing overhead to
acturing overhead
e manufacturing
0 per direct
0 Direct labor d to two decimals)
urs How much
amount of over- or What is the effect
ome? In other
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