CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS 14-1

Disagree. Cost accounting data plays a key role in many management planning and control decisions. The division president will be able to make better operating and strategy decisions by being involved in key decisions about cost pools and cost allocation bases. Such an understanding, for example, can help the division president evaluate the profitability of different customers.

14-2 14-3
". &. '. #.

The salary of a plant security guard would be a direct cost when the cost object is the security department of the plant. t would be an indirect cost when the cost object is a product. !xhibit "#$" outlines four purposes for allocating costs% To provide information for economic decisions. To motivate managers and employees. To justify costs or compute reimbursement. To measure income and assets for reporting to external parties.

14-4

!xhibit "#$& lists four criteria used to guide cost allocation decisions% ". Cause and effect. &. (enefits received. '. )airness or e*uity. #. +bility to bear. The cause$and$effect criterion and the benefits$received criterion are the dominant criteria when the purpose of the allocation is related to the economic decision purpose or the motivation purpose. 14-5 ,sing the levels approach introduced in Chapter -, the sales$volume variance is a .evel & variance. (y se*uencing through .evel ' /sales$mix and sales$*uantity variances0 and then .evel # /market$si1e and market$share variances0, managers can gain insight into the causes of a specific sales$volume variance caused by changes in the mix and *uantity of the products sold as well as changes in market si1e and market share. 14-6 The total sales$mix variance arises from differences in the budgeted contribution margin of the actual and budgeted sales mix. The composite unit concept enables the effect of individual product changes to be summari1ed in a single intuitive number by using weights based on the mix of individual units in the actual and budgeted mix of products sold. 14-7 + favorable sales$*uantity variance arises because the actual units of all products sold exceed the budgeted units of all products sold. 14-8 The sales$*uantity variance can be decomposed into /a0 a market$si1e variance /because the actual total market si1e in units is different from the budgeted market si1e in units0, and /b0 a market share variance /because the actual market share of a company is different from the budgeted market share of a company0. (oth variances use the budgeted average contribution margin per unit.

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14-9 Some companies who believe that reliable information on total market si1e is not available, choose not to compute market$si1e and market$share variances. 14-1 Customer profitability analysis highlights to managers how individual customers differentially contribute to total profitability. t helps managers to see whether customers who contribute si1ably to total profitability are receiving a comparable level of attention from the organi1ation. 14-11 Companies that separately record /a0 the list price and /b0 the discount have sufficient information to subse*uently examine the level of discounting by each individual customer and by each individual salesperson. 14-12 2o. + customer$profitability profile highlights differences in current period3s profitability across customers. Dropping customers should be the last resort. +n unprofitable customer in one period may be highly profitable in subse*uent future periods. 4oreover, costs assigned to individual customers need not be purely variable with respect to short$run elimination of sales to those customers. Thus, when customers are dropped, costs assigned to those customers may not disappear in the short run. 14-13 )ive categories in a customer cost hierarchy are identified in the chapter. The examples given relate to the Spring Distributor Company used in the chapter% Customer output-unit-level costs costs of activities to sell each unit /case0 to a customer. +n example is product$handling costs of each case sold. Customer batch- level costs costs of activities that are related to a group of units /cases0 sold to a customer. !xamples are costs incurred to process orders or to make deliveries. Customer-sustaining costs 5 costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer. !xamples are costs of visits to customers or costs of displays at customer sites. Distribution- channel costs 5 costs of activities related to a particular distribution channel rather than to each unit of product, each batch of product, or specific customers. +n example is the salary of the manager of Spring3s retail distribution channel. Corporate- sustaining costs costs of activities that cannot be traced to individual customers or distribution channels. !xamples are top management and general administration costs. 14-14 + process where the inputs are nonsubstitutable leaves workers no discretion as to the inputs /such as, types of materials or labor0 to use. + process where the inputs are substitutable means there is discretion about the exact number and type of inputs to produce output. 14-15 The direct materials efficiency variance is a .evel ' variance. )urther insight into this variance can be gained by moving to a .evel # analysis where the effect of mix and yield changes are *uantified. The mix variance captures the effect of a change in the relative percentage use of each input relative to that budgeted. The yield variance captures the effect of a change in the total number of inputs re*uired to obtain a given output relative to that budgeted.

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14-16 /"6$&7 min.0 C!"# $%%!&$#'!( '( )!"*'#$%", $%#+,($#'-+ $%%!&$#'!( &,'#+,'$.
". Direct costs ndirect costs ;verhead rate 8 9&.#7 8 9"".6& 5 9&.#7 8 9:."& 8 8 '<7=

&. The answers here are less than clear$cut in some cases. O-+,)+$/ C!"# I#+0 A%%!&$#'!( C,'#+,'$ >rocessing of paperwork for purchase Cause and effect Supplies room management fee (enefits received

;perating$room and patient$room handling Cause and effect costs +dministrative hospital costs ,niversity teaching$related costs 4alpractice insurance costs Cost of treating uninsured patients >rofit component (enefits received +bility to bear +bility to bear or benefits received +bility to bear 2one. This is not a cost.

'. +ssuming that 4elt1er3s insurance company is responsible for paying the 9#,<77 bill, 4elt1er probably can only express outrage at the amount of the bill. The point of this *uestion is to note that even if 4elt1er objects strongly to one or more overhead items, it is his insurance company that likely has the greater incentive to challenge the bill. ndividual patients have very little power in the medical arena. n contrast, insurance companies have considerable power and may decide that certain costs are not reimbursable for example, the costs of treating uninsured patients.

14-17 /"6 min.0 C!"# $%%!&$#'!( $(/ 0!#'-$#'!(.

(ecause corporate policy encourages line managers to seek legal counsel on pertinent issues from the .egal Department, any step in the direction of reducing costs of legal department services would be consistent with the corporate policy. Currently a user department is charged a standard fee of 9#77 per hour based on actual usage. t is possible that some managers may not be motivated to seek the legal counsel they need due to the high$allocated cost of the service. t is also possible that those managers whose departments are currently experiencing budgetary cost overruns may be disinclined to make use of the service? it would save them from the .egal Department@s cost allocation. Aowever, it could potentially result in much costlier penalties for !nviron later if the corporation inadvertently engaged in some activities that violated one or more laws.

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14-17 /Cont@d.0 t is *uite likely that the line managers would seek legal counsel, whenever there were any pertinent legal issues, if the service were free. 4aking the service of the .egal Department free, however, might induce some managers to make excessive use of the service. To avoid any potential abuse, !nviron may want to adjust the rate downward considerably, perhaps at a level lower than what it would cost if outside legal services were sought, but not eliminate it altogether. +s long as the managers know that their respective departments would be charged for using the service, they would be disinclined to make use of it unnecessarily. Aowever, they would be motivated to use it when necessary because it would be considered a Bgood valueC if the standard hourly rate was low enough.

14-18 /'7 min.0 C!"# $%%!&$#'!( #! /'-'"'!(".

". Devenue Direct costs Segment margin ndirect costs ncome before taxes Segment margin = &. Direct costs Direct cost = S*uare footage S*uare footage = F of !mployees F of !mployees = H!#+% 9:,<":,&E7 66.""= <7,777 67.77= &77 #7.77= R+"#$1,$(# 9',-#:,"-& &".7#= "E,777 "7.77= 67 "7.77= C$"'(! 9#,&#<,-E< &'.<6= E#,777 #7.77= &67 67.77= R+02,$(/# 9"-,<"-,&77 "77.77= "E7,777 "77.77= 677 "77.77= H!#+% 9"E,#&6,777 :,<":,&E7 9 E,E76,-#7 #7.&&= R+"#$1,$(# 96,&6E,777 ',-#:,"-& 9",67E,<&< &<.E-= C$"'(! 9"&,'#7,777 #,&#<,-E< 9 <,7:",&'& E6.6-= R+02,$(/# 9'#,7&",777 "-,<"-,&77 "E,&7',<77 "#,667,777 9 ",E6',<77

+% Cost allocation based on direct costs% Devenue Direct costs Segment margin +llocated indirect costs Segment pre$tax income Segment pre$tax income = H!#+% R+"#$1,$(# 9"E,#&6,777 9 6,&6E,777 :,<":,&E7 ',-#:,"-& E,E76,-#7 ",67E,<&< <,7"<,676 ',7E",'&7 9/ ",#"&,-E60 9 /",66#,#:&0 $<.E7= $&:.6<= C$"'(! 9"&,'#7,777 #,&#<,-E< <,7:",&'& ',#-7,"-6 9 #,E&",76'-.#6= R+02,$(/# 9'#,7&",777 "-,<"-,&77 "E,&7',<77 "#,667,777 9 ",E6',<77

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14-18 /Cont@d.0 (% Cost allocation based on floor space% +llocated indirect costs Segment pre$tax income Segment pre$tax income = H!#+% 9-,&-6,777 9 /EE:,&E70 $#.7-= R+"#$1,$(# 9",#66,777 9 6",<&< 7.::= C$"'(! 96,<&7,777 9&,&-",&'& "<.#"= R+02,$(/# 9"#,667,777 9 ",E6',<77

C% Cost allocation based on F of employees +llocated indirect costs Segment pre$tax income Segment pre$tax income = H!#+% 96,<&7,777 9 -<6,-#7 #.-<= R+"#$1,$(# 9",#66,777 9 6",<&< 7.::= C$"'(! 9-,&-6,777 9 <"E,&'& E.E"= R+02,$(/# 9"#,667,777 9 ",E6',<77

'. The segment pre$tax income percentages show the dramatic effect of choice of the cost allocation base on reported numbers% D+(!0'($#!, Direct costs )loor space F of employees H!#+% $<.E7= $#.7#.-< R+"#$1,$(# $&:.6<= 7.:: 7.:: C$"'(! '-.#6= "<.#" E.E"

The decision context should guide a. whether costs should be allocated, and b. the preferred cost allocation base. Decisions about, say, performance measurement may be made on a combination of financial and nonfinancial measures. t may well be that Dembrandt may prefer to exclude allocated costs from the financial measures to reduce areas of dispute. Ghere cost allocation is re*uired, the cause$and$effect and benefits$received criteria are recommended in Chapter "#. The 9"#,667,777 is a fixed overhead cost. This means that on a short$run basis, the cause$and$effect criterion is not appropriate but Dembrandt could attempt to identify the cost drivers for these costs in the long run when these costs are likely to be more variable. Dembrandt should look at how the 9"#,667,777 cost benefits the three divisions. This will help guide the choice of an allocation base in the short run. #. The analysis in re*uirement & should not guide the decision on whether to shut down any of the divisions. The overhead costs are fixed costs in the short run. t is not clear how these costs would be affected in the long run if Dembrandt shut down one of the divisions. +lso, each division is not independent of the other two. + decision to shut down, say, the restaurant likely would negatively affect the attendance at the casino and possibly the hotel. Dembrandt should examine the future revenue and future cost implications of different resource investments in the three divisions. This is a future$oriented exercise, whereas the analysis in re*uirement & is an analysis of past costs.

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14-19 /&6 min.0 C!"# $%%!&$#'!( #! /'-'"'!(".

". Segment margin >ercentages +llocation% /9:,777,777 H "E.7=, '6.6=, #<.6=0 P1%* 9',&77,777 "E.7= 9",##7,777 P$*+, 9-,"77,777 '6.6= 9',":6,777 F'2+," 9:,-77,777 #<.6= 9#,'E6,777

&. >ercentages for new bases of allocation P1%* 2umber of employees >ercentages )loor space /s*uare feet0 >ercentages Divisional administrative >ercentages +llocation of indirect costs P1%* Auman resource management /9",<77,777 H '7=, &6=, #6=0 )acility /9&,-77,777 H &6=, &7=, 66=0 Corporate administration /9#,677,777 H &7=, '7=, 67=0 Total 9 6#7,777 E-6,777 :77,777 9&,""6,777 P$*+, 9 #67,777 6#7,777 ",'67,777 9&,'#7,777 F'2+," 9 <"7,777 ",#<6,777 &,&67,777 9#,6#6,777 '77 '7= '7,777 &6= 9",&77,777 &7= 67= P$*+, &67 &6= &#,777 &7= 9",<77,777 '7= F'2+," #67 #6= EE,777 66= 9',777,777

'. The new approach is preferable because it is based on cause$and$effect relationships between costs and their respective cost drivers in the long run. Auman resource management costs are allocated using the number of employees in each division because the costs for recruitment, training, etc., are mostly related to the number of employees in each division. )acility costs are mostly incurred on the basis of space occupied by each division. Corporate administration costs are allocated on the basis of divisional administrative costs because these costs are incurred to provide support to divisional administrations.

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14-2
".

/&7'7 min.0 C1"#!0+, *,!3'#$2'%'#4, "+,-'&+ &!0*$(4. /in thousands0 C1"#!0+, R+-+(1+" 9 &E7 "<7 "E' '&& &'6 <7 "-# -E "''-' C1"#!0+, C!"#" 9"<& "<# "-< &&6 '7< -# "77 "7< ""7 &'" C1"#!0+, O*+,$#'(5 I(&!0+ 9 -< /#0 /"60 :/-'0 E -# /'&0 &"#&

+very Iroup Duran Systems Detail Systems Gi1ard >artners Santa Clara College Irainger Services Software >artners >roblem Solvers (usiness Systems ;kie !nterprises

Solution !xhibits "#$&7+ and "#$&7( present the summary results. The two most profitable customers provide <7= of total operating income. &. a. The options nstant Service should consider include% ncrease the attention paid to ;kie !nterprises and Gi1ard >artners. These are Jkey customers,J and every effort has to be made to ensure they retain S. S may well want to suggest a minor price reduction to signal how important it is in their view to provide a cost$effective service to these customers. Seek ways of reducing the costs or increasing the revenues of the problem accounts55 Santa Clara College and >roblem Solvers. )or example, are the copying machines at Santa Clara outdated and in need of repairK f yes, an increased charge may be appropriate. Can S provide better on$site guidelines to users about ways to reduce breakdownsK +s a last resort, S may want to consider dropping particular accounts. )or example, if Santa Clara College will not agree to a fee increase but has machines continually breaking down, S may well decide that it is time not to bid on any more work for this customer. 4ajor problems in accurately estimating the operating costs of each customer are% (asic underlying records may not be accurate. )or example, some technicians include travel time, break time, etc., in their time records to create an appearance of high work effort. 2ot all costs for individual repair people are easily assignable to individual customers. )or example, how is the cost of a trip to pick up parts for three customers assigned among individual customersK 4any costs of S are not related to specific customers. )or example, advertising by S is aimed at a general market rather than being targeted to a specific potential customer.

b.

c.

'. a. b. c.

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14-2 /Cont@d.0
SOLUTION E6HIBIT 14-2 A >anel +% Customers Danked on Customer$.evel ;perating ncome C1"#!0+, O*+,$#'(5 I(&!0+ D'-'/+/ B4 R+-+(1+ 738 9 718 : 728 '<= '7 '7 #' &7 < /&0 /:0 /#&0 /'"0 C101%$#'-+ C1"#!0+, O*+,$#'(5 I(&!0+ 748 9"#& &': '"':" #"< #&# #&7 #76 '-' '77 O*+,$#'(5 I(&!0+ $" $ ; !3 T!#$% O*+,$#'(5 I(&!0+ 758 9 748 <3 #-= <7 "7E "'7 "': "#" "#7 "'6 "&# "77

;kie !nt. Gi1ard >. +very Iroup Software >. (usiness S. Irainger S. Duran S. Detail S. >roblem S. Santa Clara

C1"#!0+, O*+,$#'(5 I(&!0+ 718 9"#& :-< -# &E /#0 /"60 /'&0 /-'0 9'77

C1"#!0+, R+-+(1+ 728 9 '-' '&& &E7 "-# "'<7 "<7 "E' -E &'6 9&,777

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14-2 /Cont@d.0 SOLUTION E6HIBIT 14-2 B B$, C)$,# !3 C1"#!0+, O*+,$#'(5 I(&!0+

;perating ncome ;L !, 9"#& 9"67 G M+DD, 9:+N!DO, 9-< 9"77 S;)TG+D!, 9-#

(,S 2!SS, 9&967 ID+ 2I!D, 9E

97 D,D+2 /9#0 D!T+ . /9"60 >D;(.!4 /9'&0 $967 S+2T+ /9-'0

$9"77

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14-21 /&7&6 min.0 C1"#!0+, *,!3'#$2'%'#4, /'"#,'21#'!(.

". The activity$based costing for each customer is% C)$,%+"#!( P)$,0$&4 ". &. '. #. 6. ;rder processing, 9#7 H "&? 9#7 H "7 .ine$item ordering, 9' H /"& H "7?"7 H "<0 Store deliveries, 967 H E? 967 H"7 Carton deliveries, 9" H /E H &#? "7 H &70 Shelf$stocking, 9"E H /E H 7? "7 H 7.60 ;perating costs 9 #<7 'E7 '77 "## 7 9",&<# C)$,%+"#!( P)$,0$&4 Devenues, 9&,#77 H E? 9",<77 H "7 Cost of goods sold, 9&,"77 H E? 9",E67 H "7 Iross margin ;perating costs ;perating income 9"#,#77 "&,E77 ",<77 ",&<# 9 6"E C)$*+% H'%% P)$,0$&4 9 #77 6#7 677 &77 <7 9",-&7 C)$*+% H'%% P)$,0$&4 9"<,777 "E,677 ",677 ",-&7 9 /&&70

The operating income of each customer is%

Chapel Aill >harmacy has a lower gross margin percentage than Charleston /<.''= vs. "&.67=0 and consumes more resources to obtain this lower margin. &. Gays )igure )our could use this information include% a. >ay increased attention to the top &7= of the customers. This could entail asking them for ways to improve service. +lternatively, you may want to highlight to your own personnel the importance of these customers? e.g., it could entail stressing to delivery people the importance of never missing delivery dates for these customers. Gork out ways internally at )igure )our to reduce the rate per cost driver? e.g., reduce the cost per order by having better order placement linkages with customers. This cost reduction by )igure )our will improve the profitability of all customers. Gork with customers so that their behavior reduces the total Jsystem$wideJ costs. +t a minimum, this approach could entail having customers make fewer orders and fewer line items. This latter point is controversial with students? the rationale is that a reduction in the number of line items /diversity of products0 carried by 4a and >a stores may reduce the diversity of products )igure )our carries.

b.

c.

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14-21 /Cont3d.0 P P P There are several options here% Simple verbal persuasion by showing customers cost drivers at )igure )our. !xplicitly pricing out activities like cartons delivered and shelf$stocking so that customers pay for the costs they cause. Destricting options available to certain customers, e.g., customers with low revenues could be restricted to one free delivery per week.

+n even more extreme example is working with customers so that deliveries are easier to make and shelf$stocking can be done faster. d. ;ffer salespeople bonuses based on the operating income of each customer rather than the gross margin of each customer.

Some students will argue that the bottom #7= of the customers should be dropped. This action should be only a last resort after all other avenues have been explored. 4oreover, an unprofitable customer today may well be a profitable customer tomorrow, and it is myopic to focus on only a "$month customer$profitability analysis to classify a customer as unprofitable.

14-22 /'75#7 min.0 V$,'$(&+ $($%4"'", 01%#'*%+ *,!/1&#".

".
+ctual sales 8 *uantity in units

(udgeted sales *uantity in units

(udgeted contribution margin per ticket

.ower$tier tickets ,pper$tier tickets +ll tickets &.

8 /','77 5 #,7770 9&7 8 9"#,777 , 8 /-,-77 5 E,7770 9 6 8 <,677 ) 9 6,677 ,

/ #,777 9&70 + /E,777 960 "7,777
9<7,777 + 9'7,777 9""7,777 8 "7,777 "7,777

(udgeted average contribution margin per unit

8 8

8 9"" per unit /seat sold0

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14-22 /Cont3d.0 Sales$mix percentages% B1/5+#+/ .ower$tier ,pper$tier

#,777 8 7.#7 "7,777 E,777 8 7.E7 "7,777

A&#1$%
','77 8 7.'7 "",777 -,-77 8 7.-7 "",777

Solution !xhibit "#$&& presents the sales$volume, sales$*uantity, and sales$mix variances for lower$tier tickets, upper$tier tickets, and in total for Detroit >enguins in &77#. The sales$*uantity variances can also be computed as%
(udgeted (udgeted +ctual units (udgeted units 8 of all tickets of all tickets sales $ mix cont. margin sold sold per ticket percentage

The sales$*uantity variances are% .ower$tier tickets 8 /"",777 5 "7,7770 H 7.#7 H 9&7 8 9<,777 ) ,pper$tier tickets 8 /"",777 5 "7,7770 H 7.E7 H 9 6 8 ',777 ) +ll tickets 9"",777 ) The sales$mix variance can also be computed as%

+ctual units 8 of all tickets H sold

(udgeted (udgeted sales $ +ctual sales $ mix percentage mix percentage cont. margin per ticket

The sales$mix variances are% .ower$tier tickets 8 "",777 H /7.'7 5 7.#70 H 9&7 ,pper$tier tickets 8 "",777 H /7.-7 5 7.E70 H 9 6 +ll tickets

8 9&&,777 , 8 6,677 ) 9"E,677 ,

'. The Detroit >enguins increased average attendance by "7= per game. Aowever, there was a si1able shift from lower$tier seats /budgeted contribution margin of 9&7 per seat0 to the upper$tier seats /budgeted contribution margin of 96 per seat0. The net result% the actual contribution margin was 96,677 below the budgeted contribution margin.

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14-22 /Cont3d.0 SOLUTION E6HIBIT 14-22 Columnar >resentation of Sales$Nolume, Sales$Quantity and Sales$4ix Nariances for Detroit >enguins F%+='2%+ B1/5+#> A&#1$% U('#" !3 A%% P,!/1&#" S!%/ H A&#1$% S$%+" M'= H B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# 718 >anel +% .ower$tier A&#1$% U('#" !3 A%% P,!/1&#" S!%/ H B1/5+#+/ S$%+" M'= H B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# 728 S#$#'& B1/5+#> B1/5+#+/ U('#" !3 A%% P,!/1&#" S!%/ H B1/5+#+/ S$%+" M'= H B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# 738

/"",777 H 7.'7a0 H 9&7 /"",777 H 7.#7b0 H 9&7 /"7,777 H 7.#7b0 H 9&7 ','77 H 9&7 #,#77 H 9&7 #,777 H 9&7 9EE,777 9<<,777 9<7,777 9&&,777, 9<,777 ) Sales$mix variance Sales$*uantity variance 9"#,777 , Sales$volume variance >anel (% ,pper$tier /"",777 H 7.-7c0 H 96 /"",777 H 7.E7d0 H 96 /"7,777 H 7.E7d0 H 96 -,-77 H 96 E,E77 H 96 E,777 H 96
9'<,677 9'',777 9'7,777 96,677 ) Sales$mix variance 9',777 ) Sales$*uantity variance 9<,677 ) Sales$volume variance 9"7#,677e 9"&",777f 9""7,777g 9"E,677 , 9"",777 ) Total sales$mix variance Total sales$*uantity variance 96,677 , Total sales$volume variance

>anel C% +ll Tickets /Sum of .ower$ tier and ,pper$ tier tickets0

) 8 favorable effect on operating income? , 8 unfavorable effect on operating income. +ctual Sales 4ix% a.ower$tier 8 ','77 R "",777 8 '7= c,pper$tier 8 -,-77 R "",777 8 -7= e9EE,777 S '<,677 8 9"7#,677 (udgeted Sales 4ix% b.ower$tier 8 #,777 R "7,777 8 #7= d,pper$tier 8 E,777 R "7,777 8 E7= f 9<<,777 S 9'',777 8 9"&",777 g 9<7,777 S 9'7,777 8 9""7,777

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14-22 /Cont3d.0

14-22 E=&+% A**%'&$#'!(

Revenues, Sales Variances, and Customer Profitability Analysis Detroit Penguins Original Data Selling price Downtown arena fee Reser ation network fee !ontri"#tion $argin per ticket Lower-Tier Tickets $35 10 5 $%0 Upper-Tier Tickets $14 6 3 $ 5

Lower-Tier Upper-Tier Total Problem 1 Sales Volume Variance calculations Lower-tier tickets Upper-tier tickets (ll tickets Problem 2 Sales - $i/ percentages Lower-tier Upper-tier Sales- uantity variance calculations Lower-tier tickets Upper-tier tickets (ll tickets Sales-mi! variance calculations Lower-tier tickets Upper-tier tickets (ll tickets

&#'gete' Seats Sol' 4)000 6)000 10)000

(ct#al Seats Sol' 3)300 *)*00 11)000

$+14)000, $ -)500 $ +5)500,

U . U

&#'gete' 004 006 $ -)000 $ 3)000 $11)000 . . .

(ct#al 003 00*

$+%%)000, $ 5)500 $+16)500,

U . U

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14.23 /'7 min.0 V$,'$(&+ $($%4"'", ?!,@'(5 2$&@?$,/.

", and &. Solution !xhibit "#$&' presents the sales$volume, sales$*uantity, and sales$mix variances for the >lain and Chic wine glasses and in total for Tinwa Corporation in Tune &77'. The steps to fill in the numbers in Solution !xhibit "#$&' follow% S#+* 1% Consider the static budget column /Column '0% Static budget total contribution margin 96,E77 (udgeted units of all glasses to be sold &,777 (udgeted contribution margin per unit of >lain 9& (udgeted contribution margin per unit of Chic 9E Suppose that the budgeted sales$mix percentage of >lain is y. Then the budgeted sales$mix percentage of Chic is /" 5 y0. Aence, /&,777y 9&0 S /&,777 /" 5 y0 9E0 #777y S "&,777 5 "&,777y <,777y y " 5 y 8 " 5 7.< 8 7.& or &7= Tinwa3s budgeted sales mix is <7= of >lain and &7= of Chic. Ge can then fill in all the numbers in Column '. S#+* 2% 2ext, consider Column & of Solution !xhibit "#$&'. The total of Column & in >anel C is 9#,&77 /the static budget total contribution margin of 96,E7755the total sales$*uantity variance of 9",#77 , which was given in the problem0. Ge need to find the actual units sold of all glasses, which we denote by *. )rom Column &, we know that /* 7.< 9&0 S /* 7.& 9E0 9".E* S 9".&* 9&.<* * 8 8 8 8 9#,&77 9#,&77 9#,&77 ",677 units 8 8 8 8 96,E77 6,E77 E,#77 7.< or <7=

Aence, the total *uantity of all glasses sold is ",677 units. This computation allows us to fill in all the numbers in Column &. S#+* 3% 2ext, consider Column " of Solution !xhibit "#$&'. Ge know actual units sold of all glasses /",677 units0, the actual sales$mix percentage /given in the problem information as >lain, E7=? Chic, #7=0, and the budgeted unit contribution margin of each product />lain, 9&? Chic, 9E0. Ge can therefore determine all the numbers in Column ".

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14-23 /Cont@d.0 Solution !xhibit "#$&' displays the following sales$*uantity, sales$mix, and sales$volume variances% S$%+"-V!%10+ V$,'$(&+ >lain 9",#77 , Chic ",&77 ) +ll Ilasses 9 &77 ,

S$%+"-M'= V$,'$(&+" >lain 9 E77 , Chic ",<77 ) +ll Ilasses 9",&77 )

S$%+"-A1$(#'#4 V$,'$(&+" >lain 9 <77 , Chic E77 , +ll Ilasses 9",#77 ,

'. Tinwa Corporation shows an unfavorable sales$*uantity variance because it sold fewer wine glasses in total than was budgeted. This unfavorable sales$*uantity variance is partially offset by a favorable sales$mix variance because the actual mix of wine glasses sold has shifted in favor of the higher contribution margin Chic wine glasses. The problem illustrates how failure to achieve the budgeted market penetration can have negative effects on operating income.

"#$"E

14-23 /Cont@d.0 SOLUTION E6HIBIT 14-23 Columnar >resentation of Sales$Nolume, Sales$Quantity and Sales$4ix Nariances for Tinwa Corporation F%+='2%+ B1/5+#> A&#1$% U('#" S!%/ !3 A%% B%$""+" A&#1$% S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# >anel +% >lain /",677 7.E0 9& :77 9& A&#1$% U('#" S!%/ !3 A%% B%$""+" B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# /",677 7.<0 9& ",&77 9& S#$#'& B1/5+#> B1/5+#+/ U('#" S!%/ !3 A%% B%$""+" B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# /&,777 7.<0 9& ",E77 9&

9",<77 9&,#77 9',&77

9E77 , 9<77 , Sales$mix variance Sales$*uantity variance 9",#77 , Sales$volume variance >anel (% Chic
9',E77

/",677 7.#0 9E E77 9E

9",<779&,#77

/",677 7.&0 9E '77 9E

/&,777 7.&0 9E #77 9E

9",<77 ) 9E77 , Sales$mix variance Sales$*uantity variance 9",&77 ) Sales$volume variance >anel C% +ll Ilasses 96,#77 9#,&77 96,E77 9",&77 ) 9",#77 , Total sales$mix variance Total sales$*uantity variance 9&77 , Total sales$volume variance

) 8 favorable effect on operating income? , 8 unfavorable effect on operating income.

"#$"-

14-24 /E7 min.0 V$,'$(&+ $($%4"'", 01%#'*%+ *,!/1&#".

". B1/5+# 3!, 2 3 V$,'$2%+ C!(#,'2. C!"# M$,5'( U('#" S$%+" C!(#,'21#'!( *+, U('# *+, U('# S!%/ M'= M$,5'( 728 738 9 718 C 728 748 758 768 9 738 D 748 9&.77 #77,777 "E= 9 <77,777 &.<7 ".&7 E77,777 &# -&7,777 #.67 &.67 ",677,777 E7 ',-67,777 &,677,777 "77= 96,&-7,777 V$,'$2%+ C!(#,'2. C!"# M$,5'( U('#" *+, U('# *+, U('# S!%/ 728 738 9 718 C 728 748 9".-7 #<7,777 "E= &.-6 ".67 :77,777 #.E7 &.&7 ",E&7,777 ',777,777

S+%%'(5 P,'&+ 718 Lola 9E.77 9#.77 .imor #.77 ;rlem -.77 Total A&#1$% 3!, 2 3 S+%%'(5 P,'&+ 718 9#.67 #.&6 E.<7

Lola 9E.&7 .imor ",'67,777 ;rlem Total

S$%+" C!(#,'21#'!( M'= M$,5'( 758 768 9 738 D 748 9 <"E,777 '7 6# "77= ',6E#,777 96,-'7,777

Solution !xhibit "#$&# presents the sales$volume, sales$*uantity, and sales$mix variances for each product and in total for &77'. Sales$volume variance Lola .imor ;rlem Total Sales$*uantity variance Lola .imor ;rlem Total 8 8 +ctual sales (udgeted sales *uantity 5 *uantity in units in units H (udgeted contrib. margin per unit 9"E7,777 ) 'E7,777 ) '77,777 ) 9<&7,777 )

/ #<7,777 5 #77,7770 H 9&.77 8 8 / :77,777 5 E77,7770 H 9".&7 8 8 /",E&7,777 5 ",677,7770 H 9&.67 8

+ctual units (udgeted units (udgeted (udgeted 8 of all products 5 of all products H sales$mix H contrib. margin sold sold percentage per unit 8 8 8 /',777,777 5 &,677,7770 H 7."E H 9&.77 /',777,777 5 &,677,7770 H 7.&# H 9".&7 /',777,777 5 &,677,7770 H 7.E7 H 9&.67 8 8 8 9 "E7,777 ) "##,777 ) -67,777 ) 9",76#,777 )

"#$"<

14-24 /Cont@d.0 +ctual Sales$mix+ctual units 8 of all products H sales$mix variance sold percentage Lola .imor ;rlem Total 8 8 8 (udgeted (udgeted 5 sales$mix H contrib. margin percentage per unit 8 8 8 9 7 &"E,777 ) #67,777 , 9&'#,777 ,

',777,777 H /7."E 5 7."E0 H 9&.77 ',777,777 H /7.'75 7.&#0 H 9".&7 ',777,777 H /7.6# 5 7.E70 H 9&.67

&. The breakdown of the favorable sales$volume variance of 9<&7,777 shows that the biggest contributor is the 677,777 unit increase in sales resulting in a favorable sales$*uantity variance of 9",76#,777. There is a partially offsetting unfavorable sales$mix variance of 9&'#,777 in contribution margin. SOLUTION E6HIBIT 14-24 S$%+"-M'= $(/ S$%+"-A1$(#'#4 V$,'$(&+ A($%4"'" !3 S!/$ E'(5 3!, 2
F%+='2%+ B1/5+#> A&#1$% U('#" !3 A%% P,!/1&#" S!%/ A&#1$% S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
Lola ',777,777 7."E 9& 8 9 :E7,777 <77,777 .imor ',777,777 7.'7 9".&7 8 ",7<7,777 -&7,777 ;rlem ',777,777 7.6# 9&.67 8 #,767,777 ',-67,777 9E,7:7,777

3
S#$#'& B1/5+#> B1/5+#+/ U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
&,677,777 7."E 9& 89

A&#1$% U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
',777,777 7."E 9& 8 9 :E7,777 <E#,777

',777,777 7.&# 9".&7 8

&,677,777 7.&# 9".&7 8 &,677,777 7.E7 9&.67 8 96,&-7,777 9",76#,777 ) Sales$*uantity variance

',777,777 7.E7 9&.67 8 #,677,777 9E,'&#,777 9&'#,777 , Sales$mix variance

9<&7,777 ) Sales$volume variance

) 8 favorable effect on operating income? ,8 unfavorable effect on operating income

"#$":

14-25 /&7 min.0 M$,@+#-")$,+ $(/ 0$,@+#-"'F+ -$,'$(&+" /continuation of "#$&#0.

Gestern region Soda Ling 4arket share A&#1$% &# million ' million "&.6= B1/5+#+/ &6 million &.6 million "7=

+verage budgeted contribution margin per unit 8 9&."7< /96,&-7,777 R &,677,7770 Solution !xhibit "#$&6 presents the sales$*uantity variance, market$si1e variance, and market$ share variance for &77'. 4arket$share variance 8 +ctual market si1e in units H +ctual market share (udgeted 5 market share (udgeted contribution H margin per composite unit for budgeted mix

8 &#,777,777 H /7."&6 5 7."70 H 9&."7< 8 &#,777,777 H .7&6 H 9&."7< 8 9",&E#,<77 ) 4arket$si1e variance 8 +ctual market si1e in units 5 (udgeted market si1e in units H (udgeted market share H (udgeted contribution margin per composite unit for budgeted mix

8 /&#,777,777 5 &6,777,7770 H 7."7 H 9&."7< 8 5 ",777,777 H 7."7 H 9&."7< 8 &"7,<77 , The market share variance is favorable because the actual "&.6= market share was higher than the budgeted "7= market share. The market si1e variance is unfavorable because the market si1e decreased #= U/&6,777,777 5 &#,777,7770 R &6,777,777V. Ghile the overall total market si1e declined /from &6 million to &# million0, the increase in market share meant a favorable sales$*uantity variance. Sales$Quantity Nariance 9",76#,777 )

4arket$share variance 9",&E#,<77 )

4arket$si1e variance 9&"7,<77 ,

"#$&7

14-25 /Cont@d.0 SOLUTION E6HIBIT 14-25 M$,@+#-S)$,+ $(/ M$,@+#-S'F+ V$,'$(&+ A($%4"'" !3 S!/$ E'(5 3!, 2
A&#1$% M$,@+# S'F+ A&#1$% M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# &#,777,777 7."&6a 9&."7<b 9E,'&#,777 A&#1$% M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# &#,777,777 7."7c 9&."7< b 96,76:,&77

S#$#'& B1/5+#> B1/5+#+/ M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# &6,777,777 7."7c 9&."7<b 96,&-7,777

9",&E#,<77 ) 4arket$share variance 9",76#,777 ) Sales$*uantity variance

9&"7,<77 , 4arket$si1e variance

) 8 favorable effect on operating income? , 8 unfavorable effect on operating income a +ctual market share% ',777,777 units R &#,777,777 units 8 7."&6, or "&.6= b (udgeted average contribution margin per unit 96,&-7,777 R &,677,777 units 8 9&."7< per unit c (udgeted market share% &,677,777 units R &6,777,777 units 8 7."7, or "7=

14-26 /#7 min.0 A%%!&$#'!( !3 &+(#,$% &!,*!,$#+ &!"#" #! /'-'"'!(".

". a. The purposes for allocating central corporate costs to each division include% T! *,!-'/+ '(3!,0$#'!( 3!, +&!(!0'& /+&'"'!(". +llocations can signal to division managers that decisions to expand /contract0 activities will likely re*uire increases /decreases0 in corporate costs that should be considered in the initial decision about expansion /contraction0. Ghen top management is allocating resources to divisions, analysis of relative division profitability should consider differential use of corporate services by divisions. Some allocation schemes can encourage the use of central services that would otherwise be underutili1ed. + common rationale related to this purpose is Jto remind profit center managers that central corporate costs exist and that division earnings must be ade*uate to cover some share of those costs.J M!#'-$#'!(. Creates an incentive for division managers to control costs? for example, by reducing the number of employees at a division, a manager will save direct labor costs as well as central personnel and payroll costs allocated on the basis of number of employees. +llocation also creates incentives for division managers to monitor the effectiveness and efficiency with which central corporate costs are spent. C!"# G1"#'3'&$#'!( !, ,+'021,"+0+(#. Some lines of business of Dichfield ;il may be regulated with cost data used in determining Jfair pricesJ? allocations of central corporate costs will result in higher prices being set by a regulator. I(&!0+ 0+$"1,+0+(# 3!, +=#+,($% *$,#'+". Dichfield ;il may include allocations of central corporate costs in its external line$of$business reporting.

b.

c. d.

nstructors may wish to discuss the JSurveys of Company >racticeJ evidence from the ,nited States, Canada, +ustralia, and the ,nited Lingdom in Chapter "# /p. #<<0. &. Total costs in single pool 8 9',777 +llocation base 8 9'7,777 revenue +llocation rate 8 9',777 R 9'7,777 8 97."7 per 9" of revenue See Solution !xhibit "#$&E for additional answers. "#$&"

14-26 /Cont@d.0 '. See Solution !xhibit "#$&E for answer.

SOLUTION E6HIBIT 14-26 /in millions0 Devenues ;perating costs +llocated costs, 97."7 per 9" revenue Division income O'% H B$" O'% H B$" U*"#,+$0 D!?("#,+$0 9-,777 9"E,777 ',777 "6,777 -77 9','77 ",E77 9 /E770 C)+0'&$% P,!/1&#" 9#,777 ',<77 #77 9 /&770 C)+0'&$% P,!/1&#" 'W&6 9&#7 #W'7 9 <7 C!**+, M'('(5 9',777 ',&77 '77 9 /6770 C!**+, M'('(5 &W&6 9"E7 'W'7 9 E7 T!#$% 9'7,777 &6,777 ',777 9 &,777

+llocation (ase ". +llocated on basis of identifiable assets Total costs 8 9&,777 &. +llocated on basis of revenues Total costs 8 9E77 +llocated on basis of operating income /if positive0 Total costs 8 9&7< +llocated on basis of number of employees Total costs 8 9":&

O'% H B$" O'% H B$" U*"#,+$0 D!?("#,+$0 "#W&6 9","&7 -W'7 9"#7 EW&6 9#<7 "EW'7 9'&7

'.

#7W6& 9"E7 :W'7 9 6-.E

"7W6& 9 #7 "&W'7 9 -E.<

&W6& 9 < EW'7 9 '<.#

$$ 7

#.

'W'7 9 ":.&

Devenues ;perating costs Cost >ool " +llocation Cost >ool & +llocation Cost >ool ' +llocation Cost >ool # +llocation Division income

O'% H B$" U*"#,+$0 9-,777 ',777 ","&7 "#7 "E7 6-.E 9&,6&&.#

O'% H B$" D!?("#,+$0 9"E,777 "6,777 #<7 '&7 #7 -E.< 9 <'.&

C)+0'&$% C!**+, P,!/1&#" M'('(5 T!#$% 9#,777 9',777 9'7,777 ',<77 ',&77 &6,777 &#7 "E7 &,777 <7 E7 E77 < 7 &7< '<.# ":.& ":& 9 /"EE.#0 9 /#':.&0 9 &,777

"#$&&

14-26 /Cont@d0 #. Strengths of Dhodes3 proposal relative to existing single$cost pool method% a. (etter able to capture cause$and$effect relationships. nterest on debt is more likely caused by the financing of assets than by revenues. >ersonnel and payroll costs are more likely caused by the number of employees than by revenues. b. Delatively simple. 2o extra information need be collected beyond that already available. /Some students will list the extra costs of Dhodes3 proposal as a weakness. Aowever, for a company with 9'7 billion in revenues, those extra costs are minimal.0 Geaknesses of Dhodes3 proposal relative to existing single$cost pool method% a. 4ay promote dysfunctional decision making. 4ay encourage division managers to lease or rent assets rather than to purchase assets, even where it is economical for Dichfield ;il to purchase them. This off$balance sheet financing will reduce the Jidentifiable assetsJ of the division and thus will reduce the interest on debt costs allocated to the division. /Dichfield ;il could counteract this problem by incorporating leased and rented assets in the Jidentifiable assetsJ base.0 Note: Some students critici1ed Dhodes3 proposal, even though agreeing that it is preferable to the existing single$cost pool method. These criticisms include% a. >roposal does not ade*uately capture cause$and$effect relationships for the legal and research and development cost pools. )or these cost pools, specific identification of individual projects with an individual division can better capture cause$and$effect relationships. b. >roposal may give rise to disputes over the definition and valuation of Jidentifiable assets.J

c. ,se of actual rather than budgeted amounts in the allocation bases creates interdependencies between divisions. 4oreover, use of actual amounts means that division managers do not know cost allocation conse*uences of their decisions until the end of each reporting period. d. Separate allocation of fixed and variable costs would result in more refined cost allocations. e. Questionable that "77= of central corporate costs should be allocated. 4any students argue that public affairs should not be allocated to any division, based on the notion that division managers may not control many of the individual expenditures in this cost pool.

"#$&'

14-27 /&6$'7 min.0 A%%!&$#'!( !3 &+(#,$% &!,*!,$#+ &!"#" #! /'-'"'!(".

T!#$% M1%#'0+/'$ B,!$/&$"#'(5 9 Print M+/'$ $7$ Book P12%'")'(5 9 $7$

nterest on debt 9 "7,777,777 9 ',677,777 9 E,677,777 Desearch and development /#7=, '7=, 7=, '7=0 "77,777,777 #7,777,777 '7,777,777 +dvertising /",#77% #,677% &,677% ",E770 &77,777,777 Auman resource management /",777% ',777% &,677% ",6770 Corporate adminis$ tration /"67% #77% &67% &770 Total

$7$

'7,777,777

&<,777,777

:7,777,777

67,777,777

'&,777,777

"67,777,777

"<,-67,777

6E,&67,777

#E,<-6,777

&<,"&6,777

67,777,777

-,677,777

&7,777,777

"&,677,777

"7,777,777

96"7,777,777 9 :-,-67,777 9&7&,-67,777 9"7:,'-6,777 9"77,"&6,777

"#$&#

14-28 /E7 min.0 C1"#!0+,-*,!3'#$2'%'#4 $($%4"'", &1"#!0+, &!"# )'+,$,&)4.

". I#+0 A*,'% Devenues at list prices "-,E77a H 9&77? "&,#77b H 9&77? E,'E7c H 9&77? E,&67d H 9&77 Discount "-,E77 H 9E7e? "&,#77 H 9#7f? E,'E7 H 9'7g? E,&67 H 9&7h Devenues /at actual prices0 Cost of goods sold "-,E77 H 9""7? "&,#77 H 9""7? E,'E7 H 9""7? E,&67 H 9""7 Iross 4argin Customer$level operating costs ;rder processing ##, E&, &"&, &67 H 9&#6 Sales visits <, "&, &&, &7 H 9",#'7 Delivery 5 regular #", #<, "EE, ":7 H 9'77 Delivery 5 rushed ', "#, #E, E7 H 9<67 Total customer$level operating costs Customer$level operating income
a

M$/'"!(

S1'#!,"

D+"'5( 9",&-&,777 ":7,<77 ",7<",&77 E::,E77 '<",E77 6",:#7 '",#E7 #:,<77 ':,"77 "-&,'77 9 &7:,'77 9",&67,777 "&6,777 ","&6,777 E<-,677 #'-,677 E",&67 &<,E77 6-,777 6",777 ":-,<67 9 &':,E67

9',6&7,777 9&,#<7,777 ",76E,777 &,#E#,777 ",:'E,777 6&<,777 "7,-<7 "",##7 "&,'77 &,667 #:E,777 ",:<#,777 ",'E#,777 E&7,777 "6,":7 "-,"E7 "#,#77 "",:77

'-,7-7 6<,E67 9 #:7,:'7 9 6E",'67

## H #77 8 "-,E77 E& H &77 8 "&,#77 c &"& H '7 8 E,'E7 d &67 H &6 8 E,&67 e 9&77 5 9"#7 8 9E7 f 9&77 5 9"E7 8 9#7 g 9&77 5 9"-7 8 9'7 h 9&77 5 9"<7 8 9&7
b

&. Ley challenges facing Sims are% a. Deduce level of price discounting, especially by +pril b. Deduce level of customer$level costs, especially by Suitors and Design The +(C cost system highlights areas where the Suitors and Design accounts are troublesome. They have% + high number of orders,

+ high number of customer visits, and + high number of rushed deliveries.

Sims needs to consider whether this high level of activity can be reduced without reducing customer revenues.

"#$&6

'. Solution !xhibit "#$&< presents a customer cost hierarchy report for Moot@s Suits,

"#$&E

SOLUTION E6HIBIT 14-28 I(&!0+ S#$#+0+(# !3 I!!#J" S1'#" 3!, 2

3
C1"#!0+, D'"#,'21#'!( C)$((+%" K)!%+"$%+ C1"#!0+," R+#$'% C1"#!0+," T!#$% 758 9&,&7E,&77 ",-6-,&67 ##<,:67 &"7,777 9 &'<,:67 S1'#!," 768 9",7<",&77 <-",:77 9 &7:,'77 D+"'5( 778 9","&6,777 <<6,'67 9 &':,E67

T!#$% 718 Devenues /at actual prices0 Customer$level optg. costs Customer$level operating income Distribution$channel costs Distribution$channel$level operating income Corporate$sustaining costs ;perating income 9 :#",&'7 &67,777 E:",&'7 ",67",&'7 6E7,777 9E,E6#,&77 6,"6&,:-7

T!#$% 728 9#,##<,777 ',':6,-&7 ",76&,&<7 '67,777 9 -7&,&<7 9

A*,'% 738 9&,#E#,777 ",:-',7-7 #:7,:'7

M$/'"!( 748 9",:<#,7777 ",#&&,E67 9 6E",'67

"#$&-

14-29 /#7 min.0

".

C1"#!0+, *,!3'#$2'%'#4, /'"#,'21#'!(.

Customer

Devenues at list pricesa Discountb Devenues /at actual prices0 Cost of goods soldc Iross margin Customer$level operating costs ;rder takingd Customer visitse Delivery vehiclesf >roduct handlingg !xpedited runsh Total Customer$level operating income

P 9&:,:6& 7 &:,:6& &#,:E7 #,::& ",677 "E7 &<7 ",7#7 7 &,:<7 9 &,7"&

A 9"&E,777 &,"77 "&',:77 "76,777 "<,:77 &,677 &#7 &#7 #,'-6 7 -,'66 9 "",6#6

R 9<-6,6&7 -&,:E7 <7&,6E7 -&:,E77 -&,:E7 ',777 #<7 'E7 '7,#77 7 '#,&#7 9 '<,-&7

S 9#6-,:&7 "6,&E# ##&,E6E '<",E77 E",76E &,677 "E7 E#7 "6,:77 7 ":,&77 9 #",<6E

T 96E,"E7 6,E"E 67,6## #E,<77 ',-## ',777 &#7 ",E77 ",:67 '77 -,7:7 9 /','#E0

a 9"#.#7 &,7<7? <,-67? E7,<77? '",<77? ',:77 b /97.77 67,7770? /97.&# <,-670? /9".&7 E7,<770? /97.#< '",<77? 9".## ',:770 c 9"& &,7<7? <,-67? E7,<77, '",<77? ',:77 d 9"77 "6? &6? '7? &6? '7 e 9<7 &? '? E? &? ' f 9& /"7 "#0? /'7 #0? /E7 '0? /#7 <0? /&7 #70 g 97.67 &,7<7? <,-67? E7,<77? '",<77? ',:77 h 9'77 7? 7? 7? 7? "

Customer S is the most profitable customer, despite having only 6&= of the unit volume of Customer D. + major explanation is that Customer D receives a 9".&7 discount per case while Customer S receives only a 97.#< discount per case. Customer T is unprofitable, despite the smaller customer > being profitable. Customer T receives a 9".## discount per case, makes more fre*uent orders, re*uires more customer visits, and re*uires more delivery miles than Customer >. &. Separate reporting of both the list selling price and the actual selling price enables Spring Distribution to examine which customers receive different discounts and how salespeople may differ in the discounts they grant. There is a si1e pattern in the discounts across the 6 customers, except for Customer T% S$%+" V!%10+ D /E7,<77 cases0 S /'",<77 cases0 Q /<,-67 cases0 T /',:77 cases0 D'"&!1(# *+, &$"+ 9".&7 97.#< 97.&# 9".##

"#$&<

> /&,7<7 cases0

97.77

"#$&:

14-29 /Cont3d.0 The reasons for the 9".## discount for T should be explored. '. Dropping customers should be the last resort taken by Spring Distribution. )actors to consider include% a. Ghat is the expected future profitability of each customerK +re the currently unprofitable /T0 or low$profit />0 customers likely to be highly profitable in the futureK b. +re there externalities from having some customers, even if they are unprofitable in the short runK )or example, some customers have a mar*ue$value that is Jin effectJ advertising that benefits the business. c. Ghat costs are avoidable if one or more customers are droppedK

d. Can the relationship with the JproblemJ customers be restructured so that there is a Jwin$ winJ situationK )or example, could Customer T get by with fewer deliveries per monthK

14-3
".

/#7 min.0 C1"#!0+, %!4$%#4 &%12" $(/ *,!3'#$2'%'#4 $($%4"'". B!%/ P,!5,$0 Devenues &,#'7 H &7 H /9&77 7.:70 &,#'7 H '7 H /9&77 7.<70 &,#'7 H "7 H /9&77 7.-70 Total revenues Nariable Costs Aotel variable costs, &,#'7 E7 9E6 Gine Costs &,#'7 67 96 &,#'7 "7 9&7 Destaurant costs &,#'7 &7 9"7 &,#'7 '7 9"6 &,#'7 "7 9&7 Total variable costs Contribution margin

9 <,-#<,777 "",EE#,777 ',#7&,777 &',<"#,777 :,#--,777 E7-,677 #<E,777 #<E,777 ",7:',677 #<E,777 "&,E'E,777 9"","-<,777

"#$'7

14-3 /Cont@d.0 S'%-+, P,!5,$0 Devenues <,'#7 &7 /9&77 7.:70 <,'#7 "6 /9&77 7.<70 Total revenues Nariable Costs Aotel variable costs, <,'#7 H '6 H 9E6 Gine costs, <,'#7 H '6 H 96 Destaurant Costs <,'#7 &7 9"7 <,'#7 "6 9"6 Total variable costs Contribution margin B,!(F+ P,!5,$0 Devenues, <7,'77 "7 /9&77 7.:70 Nariable costs Aotel variable costs, <7,'77 "7 9E6 Gine costs <7,'77 "7 96 Destaurant costs <7,'77 "7 9"7 Total variable costs Contribution margin N! P,!5,$0 Devenues, &":,777 H " H 9&77 Nariable costs, &":,777 H " H 9E6 Contribution margin L!4$%#4 P,!5,$0 Iold Silver (ron1e 2o program Total T!#$% R+-+(1+" 9 &',<"#,777 67,7#7,777 "##,6#7,777 #',<77,777 9&E&,":#,777 V$,'$2%+ C!"#" 9 "&,E'E,777 &',:--,677 E#,&#7,777 "#,&'6,777 9""6,7<<,677

9'7,7&#,777 &7,7"E,777 67,7#7,777 "<,:-',677 ",#6:,677 ",EE<,777 ",<-E,677 &',:--,677 9&E,7E&,677

9"##,6#7,777 6&,":6,777 #,7"6,777 <,7'7,777 E#,&#7,777 9 <7,'77,777

9#',<77,777 "#,&'6,777 9&:,6E6,777 C!(#,'21#'!( M$,5'( 9 "","-<,777 &E,7E&,677 <7,'77,777 &:,6E6,777 9"#-,"76,677 C!(#,'2. M$,5'( T!#$% R+-+(1+" #E.:#= 6&.7< 66.6E E-.67

The no$program group of customers has the highest contribution margin per revenue dollar. Aowever, it comprises only "E.-"= /9#',<77,777 9&E&,":#,7770 of total revenues. The gold program has the lowest contribution margin per revenue dollar. Aowever, it is misleading to evaluate each program in isolation. + key aim of loyalty programs is to promote a high fre*uency of return business. The contribution margin to total revenue ratio of each program in isolation does not address this issue. "#$'"

14-3 /Cont3d.0 &. Devenues Nariable costs Contribution margin )ixed costs ;perating income '. 2umber of room nights Iold, &,#'7 H E7 Silver, <,'#7 H '6 (ron1e, <7,'77 H "7 2o program, &":,777 H " 9&E&,":#,777 ""6,7<<,677 "#-,"76,677 "#7,6<7,777 9 E,6&6,677 "#6,<77 &:",:77 <7',777 &":,777 ",#6:,-77

+verage room rate per night% +verage variable cost per night%

9&E&,":#,777 = 9"-:.E& ",#6:,-77 9""6,7<<,677 = 9-<.<# ",#6:,-77

#. Sherriton Aotels has fixed costs of 9"#7,6<7,777. + key challenge is to attract a high number of repeat business customers. .oyalty programs aim to have customers return to Sherriton multiple times. Their aim is increasing the revenues beyond what they would be without the program. t is to be expected that the higher the level of nights stayed, the greater the inducements necessary to keep attracting the customer to return. Aowever, given the low level of variable costs to room rates, there is considerable cushion available for Sherriton to offer high inducements for fre*uent stayers. Sherriton could adopt a net present value analysis of customers who are in the different loyalty clubs. t would be informative for Sherriton to have information on how much of each customer@s total lodging industry expenditures it captures. t may well want to give higher levels of inducements to fre*uent stayers if the current program attracts only, say, '7= of each of its fre*uent customer@s total business in cities where it has lodging properties available.

"#$'&

14-31 /'7 min.0 C1"#!0+, *,!3'#$2'%'#4, &1"#!0+, &!"# )'+,$,&)4.

". 7A%% $0!1(#" '( #)!1"$(/" !3 U.S. /!%%$,"8 K)!%+"$%+ R+#$'% N!,#) A0+,'&$ S!1#) A0+,'&$ B'5 S$0 K!,%/ K)!%+"$%+, K)!%+"$%+, S#+,+! M$,@+# 9E77,777 67,777 667,777 #:7,777 E7,777 E,777 ",777 #67 &77 667 <,&77 9 6",<77 9 9"'7,777 -,777 "&',777 ""&,777 "",777 <77 &77 "67 "7 &#7 ",#77 :,E77 9 9"77,777 7 "77,777 :&,777 <,777 :77 "'7 <7 6 "E6 ",&<7 E,-&7

Devenues at list prices 9#77,777 Discount '7,777 Devenues /at actual prices0 '-7,777 Cost of goods sold '&6,777 Iross margin #6,777 Customer$level operating costs >roduct handling 6,777 ;rder processing <77 Delivery% Degular '77 !xpedited "&7 Sales visit #<7 Total cust.$level optg.costs E,-77 Customer$level operating income 9 '<,'77

"#$''

14-31 /Cont@d.0 &. C1"#!0+, D'"#,'21#'!( C)$((+%" 7A%% $0!1(#" '( #)!1"$(/" !3 U.S. /!%%$,"8 K)!%+"$%+ C1"#!0+," R+#$'% C1"#!0+," N!,#) A0+,'&$ S!1#) A0+,'&$ B'5 S$0 K)!%+"$%+, K)!%+"$%+, T!#$% S#+,+! 9'-7,777 ''",-77 9 '<,'77 9667,777 #:<,&77 9 6",<77 9&&',777 &7E,E<7 "E,'&7 "7,777 9 E,'&7 9 9"&',777 ""',#77 :,E77 9

T!#$% Devenues /at actual prices0 9","#',777 Customer$level costs ",7'E,6<7 Customer$level operating income "7E,#&7 Distribution$ channel costs #7,777 Distribution$ channel$ level operating income EE,#&7 Corporate$ sustaining costs E7,777 ;perating income 9 E,#&7

T!#$% 9:&7,777 <&:,:77 :7,"77 '7,777 9 E7,"77

K!,%/ M$,@+# 9"77,777 :',&<7 E,-&7

"#$'#

14-32 /E7 min.0V$,'$(&+ $($%4"'", "$%+"-0'=, $(/ "$%+"-L1$(#'#4 -$,'$(&+".

". +ctual Contribution 4argins A&#1$% S$%+" A&#1$% A&#1$% V!%10+ '( C!(#,'21#'!( C!(#,'21#'!( P,!/1&# U('#" D!%%$," P+,&+(# "",777 9 ",<<",777 "E= >alm >ro >alm C! ##,777 <,#:&,777 -"= >almLid 66,777 ",6:6,777 "'= ""7,777 9"",:E<,777 "77= The actual average contribution margin per unit is 9"7<.<7 /9"",:E<,777 ""7,777 units0. A&#1$% S+%%'(5 P,'&+ 9'#: &<6 "7& (udgeted Contribution 4argins B1/5+#+/ B1/5+#+/ V$,'$2%+ S+%%'(5 C!"#" *+, P,!/1&# P,'&+ U('# 9'-: 9"<& >alm >ro >alm C! &E: :< >alm Lid "#: E6 B1/5+#+/ S$%+" B1/5+#+/ B1/5+#+/ V!%10+ '( C!(#,'21#'!( C!(#,'21#'!( U('#" D!%%$," P+,&+(# "&,677 9 &,#E&,677 ":= '-,677 E,#"&,677 #:= 67,777 #,&77,777 '&= "77,777 9"',7-6,777 "77= The budgeted average contribution margin per unit is 9"'7.-6 /9"',7-6,777 "77,777 units0. &. +ctual Sales 4ix A&#1$% S$%+" V!%10+ '( U('#" "",777 ##,777 66,777 ""7,777 B1/5+#+/ S$%+" V!%10+ '( U('#" "&,677 '-,677 67,777 "77,777 A&#1$% S$%+" M'= 10.0% (11,000 110,000) #7.7= /##,777 R ""7,7770 67.7= /66,777 R ""7,7770 "77.7= B1/5+#+/ C!(#,'21#'!( M$,5'( *+, U('# 9":"-" <# A&#1$% V$,'$2%+ C!"#" *+, U('# 9"-< :& -' A&#1$% C!(#,'21#'!( M$,5'( *+, U('# 9"-" ":' &:

P,!/1&# >alm >ro >alm C! >alm Lid (udgeted Sales 4ix

P,!/1&# >alm >ro >alm C! >alm Lid

B1/5+#+/ S$%+" M'= "&.6= /"&,677 R "77,7770 '-.6= (37,500 100,000) 67.7= /67,777 R "77,7770 "77.7=

"#$'6

14-32 /Cont3d.0 '. Sales$volume variance%

(udgeted +ctual sales (udgeted sales *uantity contrib. margin *uantity 8 H in units per unit in units

>alm>ro >almC! >almLid

/"",777 /##,777 /66,777

"&,6770 '-,6770 67,7770

H H H

9":9"-" 9 <#

9 &:6,677 , ",""",677 ) #&7,777 ) 9",&'E,777 )

Total sales$volume variance Sales$mix variance% 8

(udgeted +ctual units (udgeted +ctual of all H sales mix sales mix H contrib. margin products sold per unit percentage percentage
""7,777 ""7,777 ""7,777 H /7."7 H /7.#7 H /7.67 7."&60 7.'-60 7.670 H H H 9":9"-" 9 <# 96#",-67 , #-7,&67 ) 7) 9 -",677 ,

>alm>ro >almC!

8 8

>almLid 8

Total sales$mix variance Sales$*uantity variance%

(udgeted units (udgeted (udgeted +ctual units H sales mix H contrib. margin of all of all 8 products sold per unit products sold percentage
>alm>ro >almC! >almLid /""7,777 /""7,777 /""7,777 "77,7770 "77,777 "77,7770 H H H 7."&6 7.'-6 7.67 H H H 9":9"-" 9 <# 9 &#E,&67 ) E#",&67 ) #&7,777 ) 9",'7-,677 )

Total sales$*uantity variance

"#$'E

14-32 /Cont@d.0 Solution !xhibit "#$'& presents the sales$volume variance, the sales$mix variance, and the sales$ *uantity variance for >alm >ro, >alm C!, and >almLid and in total for Third Quarter &77# SOLUTION E6HIBIT 14-32 S$%+"-M'= $(/ S$%+"-A1$(#'#4 V$,'$(&+ A($%4"'" !3 A1""'+ I(3!($1#'&" 3!, T)',/ A1$,#+, 2 4
F%+='2%+ B1/5+#> A&#1$% U('#" !3 A%% P,!/1&#" S!%/ A&#1$% S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
>alm >ro ""7,777 7."7 9":- 89 &,"E-,777 >almC! ""7,777 7.#7 9"-" 8 -,6&#,777 >almLid ""7,777 7.67 9 <# 8 #,E&7,777 9"#,'"",777

A&#1$% U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
""7,777 7."&6 9":- 89 &,-7<,-67 ""7,777 7.'-6 9"-" 8 -,76',-67 ""7,777 7.67 9 <# 8 #,E&7,777 9"#,'<&,677 9-",677 , Sales$mix variance 9",&'E,777 ) Sales$volume variance

S#$#'& B1/5+#> B1/5+#+/ U('#" !3 A%% P,!/1&#" S!%/ B1/5+#+/ S$%+" M'= B1/5+#+/ C!(#,'21#'!( M$,5'( P+, U('#
"77,777 7."&6 9":- 89 &,#E&,677 "77,777 7.'-6 9"-" 8 E,#"&,677 "77,777 7.67 9 <# 8 #,&77,777 9"',7-6,777 9",'7-,677 ) Sales$*uantity variance

) 8 favorable effect on operating income? ,8 unfavorable effect on operating income

#.

The following factors help us understand the differences between actual and budgeted amounts. The difference in actual versus budgeted contribution margins was 9","7-,777 unfavorable /9"",:E<,777 9"',7-6,7770. Aowever, the contribution margin from the >almC! exceeded budget by 9&,7-:,677 while the contributions from the >alm>ro and the >almLid were lower than expected and offset this gain. This is attributable to lower unit sales in the case of >alm>ro and lower contribution margins in the case of >almLid. n percentage terms, the >almC! accounted for -"= of actual contribution margin versus a planned #:= contribution margin. Aowever, the >alm>ro accounted for "E= versus planned ":= and the >almLid accounted for only "'= versus a planned '&=. n unit terms /rather than in contribution terms0, the >almLid accounted for 67= of the sales mix as planned. Aowever, the >alm>ro accounted for only "7= versus a budgeted "&.6= and the >almC! accounted for #7= versus a planned '-.6=. Nariance analysis for the >alm>ro shows an unfavorable sales$mix variance outweighing a favorable sales$*uantity variance and producing an unfavorable sales$ volume variance. The drop in sales$mix share was far larger than the gain from an overall greater *uantity sold. The >almC! gained both from an increase in share of the sales mix as well as from the increase in the overall number of units sold.

"#$'-

The >almLid maintained sales$mix share at 67= as a result, the sales$mix variance is 1ero. Aowever, >almLid sales did gain from the overall increase in units sold.

"#$'<

14-32 /Cont3d.0 ;verall, there was a favorable total sales-volume variance. Aowever, the large drop in >almLid@s contribution margin per unit combined with a decrease in the actual number of >alm>ro units sold as well as a drop in the actual contribution margin per unit below budget, led to the total contribution margin being much lower than budgeted.

;ther factors could be discussed herefor example, it seems that the >almLid did not achieve much success with a three digit price pointselling price was budgeted at 9"#: but dropped to 9"7&. +t the same time, variable costs increased. This could have been due to a marketing push that did not succeed.

14-33 /&7 min.0

".

M$,@+#-")$,+ $(/ 0$,@+#-"'F+ -$,'$(&+"

7&!(#'(1$#'!( !3 14-328. A&#1$% 677,777 ""7,777 &&= B1/5+#+/ #77,777 "77,777 &6=

Gorldwide +ussie nfo. 4arket share

+verage contribution margin per unit% +ctual 8 9"7<.<7 /9"",:E<,777 ""7,7770 (udgeted 8 9"'7.-6 /9"',7-6,777 "77,7770
+ctual market si1e in units
+ctual (udgeted market market share share (udgeted contribution margin per composite unit for budgeted mix

4arket $ share variance

8 677,777 /7.&& 5 7.&60 9"'7.-6 8 677,777 /57.7'0 9"'7.-6 8 9",:E",&67 ,

+ctual (udgeted market si1e market si1e in units in units

(udgeted

(udgeted

4arket $ si1e variance

contribution margin market per composite unit share for budgeted mix

8 /677,777 5 #77,7770 7.&6 9"'7.-6 8 "77,777 7.&6 9"'7.-6 8 9',&E<,-67 )

"#$':

14-33 /Cont@d.0 Solution !xhibit "#$'' presents the market$share variance, the market$si1e variance, and the sales$*uantity variance for Third Quarter &77#. SOLUTION E6HIBIT 14-33 M$,@+#-S)$,+ $(/ M$,@+#-S'F+ V$,'$(&+ A($%4"'" !3 A1""'+ I(3!($1#'&" 3!, T)',/ A1$,#+, 2 4
S#$#'& B1/5+#> B1/5+#+/ M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# #77,777 7.&6c 9"'7.-6b 9"',7-6,777

A&#1$% M$,@+# S'F+ A&#1$% M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# 677,777 7.&&a 9"'7.-6b 9"#,'<&,677

A&#1$% M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# 677,777 7.&6c 9"'7.-6 b 9"E,'#',-67

9",:E",&67 , 4arket$share variance 9",'7-,677 ) Sales$*uantity variance

9',&E<,-67 ) 4arket$si1e variance

) 8 favorable effect on operating income? , 8 unfavorable effect on operating income

a

+ctual market share% ""7,777 units R 677,777 units 8 7.&&, or &&= (udgeted average contribution margin per unit 9"',7-6,777 R "77,777 units 8 9"'7.-6 per unit (udgeted market share% "77,777 units R #77,777 units 8 7.&6, or &6=

b c

&. Ghile the market share declined /from &6= to &&=0, the overall increase in the total market si1e meant a favorable sales$*uantity variance% S$%+"-A1$(#'#4 V$,'$(&+ 9",'7-,677 )

M$,@+#-S)$,+ V$,'$(&+ 9",:E",&67 ,

M$,@+# S'F+ V$,'$(&+ 9',&E<,-67 )

"#$#7

14-33 /Cont@d.0 '. The re*uired actual market si1e is the budgeted market si1e, i.e., #77,777 units. This can easily be seen by setting up the following e*uation%
(udgeted (udgeted (udgeted +ctual contributi on margin 4arket $ si1e = market si1e market si1e market variance per composite unit in units in units share for budgeted mix

8 /4 #77,7770 H 7.&6 H 9"'7.-6 Ghen 4 8 #77,777, the market$si1e variance is 97. +ctual 4arket$Share Calculation +gain, the answer is the budgeted market share, &6=. (y definition, this will hold irrespective of the actual market si1e. This can be seen by setting up the appropriate e*uation% +ctual 4arket Si1e H /4 &6=0 H 9"'7.-6 8 97 Ghen 4 8 &6=, the market$share variance is 97.

"#$#"

14-34 /#7 min.0 V$,'$(&+ $($%4"'", 01%#'*%+ *,!/1&#".

", &, and '. Solution !xhibit "#$'# presents the sales$volume, sales$*uantity, and sales$mix variances for each type of cookie and in total for Debbie3s Delight nc. in +ugust &77'. The sales$volume variances can also be computed as% 8 H The sales$volume variances are% Chocolate chip 8 /6-,E77 5 #6,7770 9&.77 ;atmeal raisin 8 /"<,777 5 &6,7770 9&.'7 Coconut 8 /:,E77 5 "7,7770 9&.E7 Ghite chocolate 8 /"',&77 5 6,7770 9'.77 4acadamia nut 8 /&",E77 5 "6,7770 9'."7 +ll cookies The sales$*uantity variance can also be computed as % 8 The sales$*uantity variances are% Chocolate chip 8 /"&7,777 5 "77,7770 7.#6 9&.77 ;atmeal raisin 8 /"&7,777 5 "77,7770 7.&6 9&.'7 Coconut 8 /"&7,777 5 "77,7770 7."7 9&.E7 Ghite chocolate 8 /"&7,777 5 "77,7770 7.76 9'.77 4acadamia nut 8 /"&7,777 5 "77,7770 7."6 9'."7 +ll cookies The sales$mix variance can also be computed as% 8 The sales$mix variances are% Chocolate chip 8 /7.#< 5 7.#60 "&7,777 9&.77 ;atmeal raisin 8 /7."6 5 7.&60 "&7,777 9&.'7 Coconut 8 /7.7< 5 7."70 "&7,777 9&.E7 Ghite chocolate 8 /7."" 5 7.760 "&7,777 9'.77 4acadamia nut 8 /7."< 5 7."60 "&7,777 9'."7 +ll cookies 8 8 8 8 8 9 -,&77 ) &-,E77 , E,&#7 , &",E77 ) "","E7 ) 9 E,"&7 ) 8 8 8 8 8 9"<,777 ) "",677 ) 6,&77 ) ',777 ) :,'77 ) 9#-,777 ) 8 8 8 8 8 9&6,&77 ) "E,"77 , ",7#7 , &#,E77 ) &7,#E7 ) 96',"&7 )

"#$#&

14-34

/Cont@d.0

+ summary of the variances is% S$%+"-V!%10+ V$,'$(&+ Chocolate chip 9&6,&77 ) ;atmeal raisin "E,"77 , Coconut ",7#7 , Ghite chocolate &#,E77 ) 4acadamia nut &7,#E7 ) +ll cookies 96',"&7 ) S$%+"-M'= V$,'$(&+ Chocolate chip 9 -,&77 ) ;atmeal raisin &-,E77 , Coconut E,&#7 , Ghite chocolate &",E77 ) 4acadamia nut "","E7 ) +ll cookies 9 E,"&7 ) S$%+"-A1$(#'#4 V$,'$(&+ Chocolate chip 9"<,777 ) ;atmeal raisin "",677 ) Coconut 6,&77 ) Ghite chocolate ',777 ) 4acadamia nut :,'77 ) +ll cookies 9#-,777 )

#. Debbie3s Delight shows a favorable sales$*uantity variance because it sold more cookies in total than was budgeted. Together with the higher *uantities, Debbie3s also sold more of the high$contribution margin white chocolate and macadamia nut cookies relative to the budgeted mix55hence, Debbie3s also showed a favorable total sales$mix variance.

"#$#'

14-34 /Cont@d.0 SOLUTION E6HIBIT 14-34 Columnar >resentation of Sales$Nolume, Sales$Quantity, and Sales$4ix Nariances for Debbie3s Delight nc.
F%+='2%+ B1/5+#> A&#1$% P!1(/" !3 A%% C!!@'+" S!%/ D A&#1$% S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 718 >anel +% Chocolate Chip /"&7,777 H 7.#<a0 H 9& 6-,E77 H 9& A&#1$% P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 728 /"&7,777 H 7.#6b0 H 9& 6#,777 H 9& S#$#'& B1/5+#> B1/5+#+/ P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 738 /"77,777 H 7.#6b0 H 9& #6,777 H 9&

9""6,&77

9"7<,777

9:7,777
9-,&77 ) Sales$mix variance 9"<,777 ) Sales$*uantity variance

9&6,&77 ) Sales$volume variance >anel (% ;atmeal Daisin

/"&7,777 H 7."6c0 H 9&.'7 "<,777 H 9&.'7

/"&7,777 H 7.&6d0 H 9&.'7 '7,777 H 9&.'7

/"77,777 H 7.&6d0 H 9&.'7 &6,777 H 9&.'7

9#",#77

9E:,777

96-,677
9&-,E77 , Sales$mix variance 9"",677 ) Sales$*uantity variance

9"E,"77 , Sales$volume variance >anel C% Coconut

/"&7,777 H 7.7<e0 H 9&.E7 :,E77 H 9&.E7 9&#,:E7

/"&7,777 H 7."7f0 H 9&.E7 "&,777 H 9&.E7 9'",&77

/"77,777 H 7."7f0 H 9&.E7 "7,777 H 9&.E7 9&E,777

9E,&#7 , Sales$mix variance

96,&77 ) Sales$*uantity variance

9",7#7 , Sales$volume variance

) 8 favorable effect on operating income? , 8 unfavorable effect on operating income.

+ctual Sales 4ix% aChocolate Chip c;atmeal Daisin eCoconut 8 6-,E77 R "&7,777 8 #<= 8 "<,777 R "&7,777 8 "6= 8 :,E77 R "&7,777 8 <= (udgeted Sales 4ix% bChocolate Chip d;atmeal Daisin f Coconut 8 8 8 #6,777 R "77,777 8 #6= &6,777 R "77,777 8 &6= "7,777 R "77,777 8 "7=

"#$##

14-34 /Cont@d.0 SOLUTION E6HIBIT 14-34 /Cont@d.0 Columnar >resentation of Sales$Nolume, Sales$Quantity, and Sales$4ix Nariances for Debbie3s Delight nc.
F%+='2%+ B1/5+#> A&#1$% P!1(/" !3 A%% C!!@'+" S!%/ D A&#1$% S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 718 >anel D% Ghite Chocolate /"&7,777 H 7.""g0 H 9'.77 "',&77 H 9'.77 9':,E77 9"<,777 9"6,777 A&#1$% P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 728 /"&7,777 H 7.76h0 H 9'.77 E,777 H 9'.77 S#$#'& B1/5+#> B1/5+#+/ P!1(/" !3 A%% C!!@'+" S!%/ D B1/5+#+/ S$%+" M'= D B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 738 /"77,777 H 7.76h0 H 9'.77 6,777 H 9'.77

9&",E77 ) Sales$mix variance

9',777 ) Sales$*uantity variance

9&#,E77 ) Sales$volume variance >anel !% 4acadamia 2ut /"&7,777 H 7."6k0 H 9'."7 /"77,777 H 7."6k0 H 9'."7 /"&7,777 H 7."<j0 H 9'."7 "<,777 H 9'."7 "6,777 H 9'."7 &",E77 H 9'."7 9EE,:E7 966,<77 9#E,677 9:,'77 ) 9"","E7 ) Sales$*uantity variance Sales$mix variance 9&7,#E7 ) Sales$volume variance 9&<<,"&7l 9&<&,777m 9&'6,777n

>anel )% +ll Cookies

9E,"&7 ) Total sales$mix variance

9#-,777 ) Total sales$*uantity variance

96',"&7 ) Total sales$volume variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income. +ctual Sales 4ix% gGhite Chocolate j4acadamia 2ut (udgeted Sales 4ix% hGhite Chocolate k4acadamia 2ut

8 "',&77 R "&7,777 8 ""= 8 &",E77 R "&7,777 8 "<=

8 6,777 R "77,777 8 6= 8 "6,777 R "77,777 8 "6=

l9""6,&77 S 9#",#77 S 9&#,:E7 S 9':,E77 S 9EE,:E7 8 9&<<,"&7

m9"7<,777 S 9E:,777 S 9'",&77 S 9"<,777 S 966,<77 8 9&<&,777 n9:7,777 S 96-,677 S 9&E,777 S 9"6,777 S 9#E,677 8 9&'6,777

"#$#6

14-35 /"6 min.0 M$,@+#-")$,+ $(/ 0$,@+#-"'F+ -$,'$(&+"

7&!(#'(1$#'!( !3 14-348. ". Chicago 4arket Debbie3s Delight 4arket share A&#1$% :E7,777 "&7,777 7."&6 B1/5+#+/ ",777,777 "77,777 7."77

The budgeted average contribution margin per unit /also called budgeted contribution margin per composite unit for budgeted mix0 is 9&.'6% B1/5+#+/ C!(#,'21#'!( M$,5'( *+, P!1(/ 9&.77 &.'7 &.E7 '.77 '."7 B1/5+#+/ S$%+" V!%10+ '( P!1(/" #6,777 &6,777 "7,777 6,777 "6,777 "77,777 B1/5+#+/ C!(#,'21#'!( M$,5'( 9 :7,777 6-,677 &E,777 "6,777 #E,677 9&'6,777

Chocolate chip ;atmeal raisin Coconut Ghite chocolate 4acadamia nut +ll cookies 8

9&'6,777 8 9&.'6 "77,777

8 HH 8 /:E7,777 5 ",777,7770 H 7."77 H 9&.'6 8 9:,#77 , 8 HH 8 :E7,777 H /7."&6 5 7."770 H 9&.'6 8 96E,#77 ) (y increasing its actual market share from the "7= budgeted to the actual "&.67=, Debbie3s Delight has a favorable market$share variance of 96E,#77. There is a smaller offsetting unfavorable market$si1e variance of 9:,#77 due to the #7,777 unit decline in the Chicago market /from ",777,777 budgeted to an actual of :E7,7770. 14-35 /Cont@d.0 Solution !xhibit "#$'6 presents the sales$*uantity, market$share, and market$si1e variances for Debbie@s Delight nc. in +ugust &77'.

"#$#E

SOLUTION E6HIBIT 14-35 M$,@+#-S)$,+ $(/ M$,@+#-S'F+ V$,'$(&+ A($%4"'" !3 D+22'+J" D+%'5)# 3!, A151"# 2

A&#1$% M$,@+# S'F+ A&#1$% M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# :E7,777 7."&6a 9&.'6b 9&<&,777
96E,#77 )

A&#1$% M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# :E7,777 7."7c 9&.'6b 9&&6,E77

S#$#'& B1/5+#> B1/5+#+/ M$,@+# S'F+ B1/5+#+/ M$,@+# S)$,+ B1/5+#+/ A-+,$5+ C!(#,'21#'!( M$,5'( P+, U('# ",777,777 7."7c 9&.'6b 9&'6,777

9:,#77 , 4arket$si1e variance 9#-,777 ) Sales$*uantity variance

4arket$share variance

) 8 favorable effect on operating income? , 8 unfavorable effect on operating income

a

+ctual market share% "&7,777 units R :E7,777 units 8 7."&6, or "&.6= (udgeted average contribution margin per unit% 9&'6,777 R ",777,777 units 8 9&.'6 per unit (udgeted market share% "77,777 units R ",777,777 units 8 7."7, or "7=

b c

+n overview of >roblems "#$'# and "#$'6 is%

Sales$Nolume Nariance 96',"&7 )

Sales$4ix Nariance 9E,"&7 )

Sales$Quantity Nariance 9#-,777 )

4arket$Share Nariance 96E,#77 )

4arket$Si1e Nariance 9:,#77 ,

"#$#-

14-36 /&75&6 min.0D',+&# 0$#+,'$%" +33'&'+(&4, 0'= $(/ 4'+%/ -$,'$(&+" /Chapter +ppendix0.
" X &. +ctual total *uantity of all inputs used and actual input mix percentages for each input are as follows% C)+0'&$% !chol >rotex (en1 CT$#7 Total A&#1$% A1$(#'#4 &#,7<7 "6,#<7 'E,"&7 "7,'&7 <E,777 A&#1$% M'= P+,&+(#$5+ &#,7<7 R <E,777 8 "6,#<7 R <E,777 8 'E,"&7 R <E,777 8 "7,'&7 R <E,777 8 7.&< 7."< 7.#& 7."& ".77

(udgeted total *uantity of all inputs allowed and budgeted input mix percentages for each input are as follows% C)+0'&$% B1/5+#+/ A1$(#'#4 B1/5+#+/ M'= P+,&+(#$5+ !chol &6,&77 &6,&77 R <#,777 8 7.'7 >rotex "E,<77 "E,<77 R <#,777 8 7.&7 (en1 '',E77 '',E77 R <#,777 8 7.#7 CT$#7 <,#77 <,#77 R <#,777 8 7."7 Total <#,777 ".77 Solution !xhibit "#$'E presents the total direct materials efficiency, yield, and mix variances for +ugust &77'. Total direct materials efficiency variance can also be computed as% 8 H !chol 8 /&#,7<7 5 &6,&770 H 97.&7 8 9&&# ) >rotex 8 /"6,#<7 5 "E,<770 H 97.#6 8 6:# ) (en1 8 /'E,"&7 5 '',E770 H 97."6 8 '-< , CT#7 8 /"7,'&7 5 <,#770 H 97.'7 8 6-E , Total direct materials efficiency variance 9"'E , The total direct materials yield variance can also be computed as the sum of the direct materials yield variances for each input% 8 !chol 8 /<E,777 5 <#,7770 >rotex 8 /<E,777 5 <#,7770 (en1 8 /<E,777 5 <#,7770 CT#7 8 /<E,777 5 <#,7770 Total direct materials yield variance H H H H 7.'7 H 97.&7 7.&7 H 97.#6 7.#7 H 97."6 7."7 H 97.'7 8 8 8 8 H &,777 H 7.'7 H 97.&7 &,777 H 7.&7 H 97.#6 &,777 H 7.#7 H 97."6 &,777 H 7."7 H 97.'7 H 8 8 8 8 9"&7 , "<7 , "&7 , E7 , 9#<7 ,

"#$#<

14-36 /Cont3d.0 The total direct materials mix variance can also be computed as the sum of the direct materials mix variances for each input%
+ctual total *uantity of all inputs used (udgeted price of inputs

8 H direct materials H direct materials !chol 8 /7.&< 5 7.'70 H <E,777 H 97.&7 >rotex 8 /7."< 5 7.&70 H <E,777 H 97.#6 (en1 8 /7.#& 5 7.#70 H <E,777 H 97."6 CT#7 8 /7."& 5 7."70 H <E,777 H 97.'7 Total direct materials mix variance 8 5 7.7& H <E,777 H 97.&7 8 5 7.7& H <E,777 H 97.#6 8 7.7& H <E,777 H 97."6 8 7.7& H <E,777 H 97.'7 8 8 8 8 9'## ) --# ) &6< , 6"E , 9'## )

'. !nergy >roducts used a larger total *uantity of direct materials inputs than budgeted, and so showed an unfavorable yield variance. The mix variance was favorable because the actual mix contained more of the cheapest input, (en1, and less of the most costly input, >rotex, than the budgeted mix. The favorable mix variance offset some, but not all, of the unfavorable yield variance55the overall efficiency variance was unfavorable. !nergy >roducts will find it profitable to shift to the cheaper mix only if the yield from this cheaper mix can be improved. !nergy >roducts must also consider the effect on output *uality of using the cheaper mix, and the potential conse*uences for future revenues. SOLUTION E6HIBIT 14-36 Columnar >resentation of Direct 4aterials !fficiency,Oield and 4ix Nariances for The !nergy >roducts Company for +ugust &77'
F%+='2%+ B1/5+#> B1/5+#+/ T!#$% A1$(#'#4 !3 A%% I(*1#" A%%!?+/ 3!, A&#1$% O1#*1# A&)'+-+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+ 738 <#,777 H 7.'7 H97.&7 8 9 6,7#7 <#,777 H 7.&7 H 97.#6 8 -,6E7 <#,777 H 7.#7 H 97."6 8 6,7#7 <#,777 H 7."7 H 97.'7 8 &,6&7
9&7,"E7

!chol >rotex (en1 CT#7

A&#1$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H A&#1$% I(*1# M'= H B1/5+#+/ P,'&+ 718 <E,777 H 7.&< H 97.&7 8 9 #,<"E <E,777 H 7."< H 97.#6 8 E,:EE <E,777 H 7.#& H 97."6 8 6,#"< <E,777 H 7."& H 97.'7 8 ',7:E
9&7,&:E

A&#1$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+ 728 <E,777 H 7.'7 H 97.&7 8 9 6,"E7 <E,777 H 7.&7 H 97.#6 8 -,-#7 <E,777 H 7.#7 H 97."6 8 6,"E7 <E,777 H 7."7 H 97.'7 8 &,6<7
9&7,E#7

9'## ) Total mix variance

9#<7 , Total yield variance

9"'E , Total efficiency variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income

"#$#:

14-37 /'6 min.0 D',+&# 0$#+,'$%" *,'&+, +33'&'+(&4, 0'= $(/ 4'+%/ -$,'$(&+"
/Chapter +ppendix0. ". Solution !xhibit "#$'-+ presents the total price variance /9',"77)0, the total efficiency variance /9&,6E7,0, and the total flexible$budget variance /96#7)0. Total direct materials price variance can also be computed as% 8 H Tolman 8 /97.&< 5 97.'70 H E&,777 Iolden Delicious 8 /97.&E 5 97.&E0 H "66,777 Dibston 8 /97.&7 5 97.&&0 H :',777 Total direct materials price variance Total direct materials efficiency variance can also be computed as% 8 H Tolman 8 / E&,777 5 #6,7770 H 97.'7 Iolden Delicious 8 /"66,777 5 "<7,7770 H 97.&E Dibston 8 / :',777 5 -6,7770 H 97.&& Total direct materials efficiency variance 8 8 8 96,"77 , E,677 ) ',:E7 , 9&,6E7 , 8 8 8 9",&#7 ) 7 ",<E7 ) 9',"77 )

SOLUTION E6HIBIT 14-37A Columnar >resentation of Direct 4aterials >rice and !fficiency Nariances for Ireenwood nc. for 2ovember &77'
A&#1$% C!"#" I(&1,,+/ 7A&#1$% I(*1#" D A&#1$% P,'&+"8 718 E&,777 H 97.&< 8 9"-,'E7 "66,777 H 97.&E 8 #7,'77 :',777 H 97.&7 8 "<,E77 9-E,&E7 F%+='2%+ B1/5+# 7B1/5+#+/ I(*1#" A%%!?+/ 3!, A&#1$% O1#*1#" A&)'+-+/ D B1/5+#+/ P,'&+"8 738 #6,777 H 97.'7 8 9"',677 "<7,777 H 97.&E 8 #E,<77 -6,777 H 97.&& 8 "E,677 9-E,<77 9&,6E7 , 96#7 ) Total flexible$budget variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income

Tolman Iolden Delicious Dibston

A&#1$% I(*1# D B1/5+#+/ P,'&+" 728 E&,777 H 97.'7 8 9"<,E77 "66,777 H 97.&E 8 #7,'77 :',777 H 97.&& 8 &7,#E7 9-:,'E7 9',"77 ) Total price variance

"#$67

14-37 /Cont3d.0 &. Solution !xhibit "#$'-( presents the total direct materials yield and mix variances for Ireenwood nc. for 2ovember &77'. The total direct materials yield variance can also be computed as the sum of the direct materials yield variances for each input%
8 H H

Tolman 8 /'"7,777 5 '77,7770 H 7."6 H 97.'7 8 "7,777 H 7."6 H 97.'7 8 Iolden Delicious 8 /'"7,777 5 '77,7770 H 7.E7 H 97.&E 8 "7,777 H 7.E7 H 97.&E 8 Dibston 8 /'"7,777 5 '77,7770 H 7.&6 H 97.&& 8 "7,777 H 7.&6 H 97.&& 8 Total direct materials yield variance

9 #67 , ",6E7 , 667 , 9&,6E7 ,

The total direct materials mix variance can also be computed as the sum of the direct materials mix variances for each input%
8HH

Tolman 8 /7.&7 5 7."60 H '"7,777 H 97.'7 8 7.76 H '"7,777 H 97.'7 8 9#,E67 , Iolden Delicious 8 /7.67 5 7.E70 H '"7,777 H 97.&E 8 5 7."7 H '"7,777 H 97.&E 8 <,7E7 ) Dibston 8 /7.'7 5 7.&60 H '"7,777 H 97.&& 8 7.76 H '"7,777 H 97.&& 8 ',#"7 , Total direct materials mix variance 9 7, '. Ireenwood paid less for Tolman and Dibston apples and, so, had a favorable direct materials price variance of 9',"77. t also had an unfavorable efficiency variance of 9&,6E7. Ireenwood would need to evaluate if these were unrelated events or if the lower price resulted from the purchase of apples of poorer *uality that affected efficiency. The net effect in this case from a cost standpoint was favorable55the savings in price being greater than the loss in efficiency. ;f course, if the applesauce is of poorer *uality, Ireenwood must also evaluate the potential effects on current and future revenues that have not been considered in the variances described in re*uirements " and &. The unfavorable efficiency variance is entirely attributable to an unfavorable yield. The actual mix does deviate from the budgeted mix but at the budgeted prices, the greater *uantity of Tolman and Dibston apples used in the actual mix exactly offsets the fewer Iolden Delicious apples used. +gain, management should evaluate the reasons for the unfavorable yield variance. s it due to poor *uality Tolman and Dibston apples /recall from re*uirement " that these apples were ac*uired at a price lower than the standard price0K s it due to the change in mix /recall that the mix used is different from the budgeted mix, even though the mix variance is 970K solating the reasons can lead management to take the necessary corrective actions.

"#$6"

14-37 /Cont3d.0 SOLUTION E6HIBIT 14-37B Columnar >resentation of Direct 4aterials Oield and 4ix Nariances for Ireenwood nc. for 2ovember &77'
F%+='2%+ B1/5+#> B1/5+#+/ T!#$% A1$(#'#4 !3 A%% I(*1#" A%%!?+/ 3!, A&#1$% O1#*1# A&)'+-+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+" 738
'77,777 H 7."6 H 97.'7 8 '77,777 H 7.E7 H 97.&E 8 '77,777 H 7.&6 H 97.&& 8 9"',677 #E,<77 "E,677 9-E,<77

A&#1$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H A&#1$% I(*1# M'= H B1/5+#+/ P,'&+" 718
Tolman Delicious Dibston '"7,777 H 7.&7 H 97.'78 '"7,777 H 7.67 H 97.&E 8 '"7,777 H 7.'7 H 97.&& 8 9"<,E77 #7,'77 &7,#E7 9-:,'E7

A&#1$% T!#$% A1$(#'#4 !3 A%% I(*1#" U"+/ H B1/5+#+/ I(*1# M'= H B1/5+#+/ P,'&+" 728
'"7,777 H 7."6 H 97.'7 8 9"',:67 '"7,777 H 7.E7 H 97.&E 8 #<,'E7 '"7,777 H 7.&6 H 97.&& 8 "-,767 9-:,'E7

7 Total mix variance 9&,6E7 , Total efficiency variance ) 8 favorable effect on operating income? , 8 unfavorable effect on operating income.

9&,6E7 , Total yield variance

14-38 /"65&7 min.0 C1"#!0+, *,!3'#$2'%'#4, ,+"*!("'2'%'#4 3!, +(-',!(0+(#$% &%+$(-1*, +#)'&".
". Customer$profitability analysis examines how individual customers differ in their profitability. The revenues and costs of each customer can be estimated with varying degrees of accuracy. Devenues of ) typically would be known at the time of sale. 4any costs also would be known, e.g., the cost of materials used to manufacture the fluids sold to each customer. + major area of uncertainty is future costs associated with obligations arising from the sale. There are several issues here% a. ,ncertainty as to the existence and extent of legal liability. !ach customer has primary responsibility to dispose of its own toxic waste. Aowever, under some ,.S. laws /such as the JSuperfundJ laws0, suppliers to a company may be partially liable for disposal of toxic material. >apandopolis needs to determine the extent of )3s liability. t would be necessary to seek legal guidance on this issue. b. ,ncertainty as to when the liability will occur. The further in the future, the lower the amount of the liability /assuming discounting for the time$value of money occurs.0 c. ,ncertainty as to the amount of the liability, given that the liability exists and the date of the liability can be identified. >apandopolis faces major difficulties here55see the answer to re*uirement &.

"#$6&

14-38 /Cont3d.0 4any companies argue that uncertainties related to /a0, /b0, and /c0 make the inclusion of Jhard$dollar estimates meaningless.J Aowever, at a minimum, a contingent liability should be recogni1ed and included in the internal customer$profitability reports. &. >apandopolis3 controller may believe that if estimates of future possible legal exposure are sufficiently uncertain, then they should not be recorded. Ais concern about Jsmoking gunsJ may have a very genuine basis55that is, if litigation arises, third parties may misrepresent >apandopolis3 concerns to the detriment of ). +ny written comments that she makes may surface 6 or "7 years later and be interpreted as Jwidespread knowledgeJ within ) that they have responsibility for large amounts of environmental clean$up. Iiven this background, >apandopolis still has the responsibility to prepare a report in an objective and competent way. 4oreover, she has visited "7 customer sites and has details as to their toxic$waste handling procedures. f +cme goes bankrupt and has no liability insurance, one of the Jdeep pocketsJ available to meet toxic waste handling costs is likely to be ). +t a minimum, she should report the likely bankruptcy and the existence of )3s contingent liability for toxic$waste clean$up in her report. Ghether she *uantifies this contingent liability is a more difficult *uestion. >apandopolis has limited information available to make a meaningful *uantification. She is not an employee of +cme 4etal and has no information about +cme3s liability insurance. 4oreover, she does not know what other parties /such as other suppliers0 are also jointly liable to pay +cme3s clean$up costs. The appropriate course appears to highlight the contingent liability but to not attempt to *uantify it.

"#$6'

14-39 /#75E7 min.0 C1"#!0+, *,!3'#$2'%'#4, &,+/'# &$,/ !*+,$#'!(".

". A Customer revenues +nnual fee 9 67 4erchant paymentsa ",E77 nterest spreadb 6#7 Total &,":7 Customer costs +nnual maintenance costs "7< (ad debt provisionc #77 d Transaction costs #77 e Customer in*uiries '7 Card replacementsf 7 Total :'< Customer operating income 9",&6& a &= H 9<7,777? 9&E,777? 9'#,777? 9<,777 b := H 9E,777? 97? 9&,777? 9"77 c 7.6= H 9<7,777? 9&E,777? 9'#,777? 9<,777 d 97.67 H <77? 6&7? &-&? &77 e 96 H E? "&? <? & f 9"&7 H 7? &? "? 7 9 B 7 6&7 7 6&7 C1"#!0+, C 9 67 E<7 "<7 :"7 "7< "-7 "'E #7 "&7 6-# 9''E 9 D 7 "E7 : "E:

"7< "'7 &E7 E7 &#7 -:< 9/&-<0

"7< #7 "77 "7 7 &6< 9 /<:0

Note% The above analysis uses the average 7.6= bad debt provision. (ay (ank may want to adjust individual customer$profitability reports at a subse*uent date to reflect actual bad debt experience. &. Revenues )ees 4erchant payments nterest spread Costs (ad debt JprovisionJ Transaction costs Customer in*uiries Card replacement P,!3'#$2%+ C1"#!0+," U(*,!3'#$2%+ C1"#!0+,"

>ays fee )ee waived Aigh billings and high billings .ow billings and low billings per transaction per transaction Aigh outstanding balance >ays on time and has no outstanding balance >ays account Defaults on account .ow number of transactions X Aigh number of transactions X high billings per low billings per transaction transaction Mero or few in*uiries 4any in*uiries 2o replacements 4ultiple replacements

"#$6#

14-39 /Cont3d.0 '. The pros of charging for individual services include% a. +dditional source of revenues. f (ay (ank is able to charge more than the cost of each service, it may prefer that customers be prolific users of its services. b. f (ay (ank is not able to charge the Jfull costJ for each service, the charge may reduce customer usage /thus reducing the losses associated with providing services at below cost0. )or example, Customer ( may make fewer in*uiries about his or her balance. The cons of charging for individual services include% a. 4ay cause customers to drop card or decrease its usage vis$Y$vis competitors@ cards that have 1ero or minimal charges. b. 4ay attract much negative publicity from consumer groups who target companies such as banks and credit card companies. #. )actors to consider include% a. The growth potential of individual customers. Some low$volume credit customers /such as students0 may be high$volume users in the medium run. b. The costs saved by discontinuing low$volume credit card customers. 4any costs may be relatively JfixedJ and may not be eliminated by dropping customers. c. The publicity (ay (ank may attract from discontinuing these customers. There is the potential for much negative publicity from such decisions. d. +lternatives available to discontinuance, e.g., adopt individual service charges. 6. The pros of providing the service at .ucky Doller include% a. >otential increased profitability due to higher usage by )reedom Card holders at .ucky Doller. b. >otential increased attraction to current and future )reedom Card holders. +s a general rule, the more services available, the more attractive the card. >ossible cons include% a. >otential bad debts. Ghile money advances in general may have been profitable, it is possible that some specific money advance outlets may be unprofitable. Nerdolini should examine this issue in more detail to determine if (ay (ank has made money advances at other gambling venues. b >otential negative publicity from media stories arguing that the (ay (ank is helping gamblers to lose money. These stories often focus on individuals with gambling addictions. c. !thical position of the (ay (ank regarding gambling. >roviding a money advance service at the casino may conflict with the ethical beliefs of senior management or the (oard of Directors.

"#$66

C)$*#+, 14 I(#+,(+# E=+,&'"+

The Internet exercise is available to students only on the Prentice all Companion !ebsite """#prenhall#com$horngren# %tudents can clic& on Cost 'ccounting( ))th ed#( and access the Internet *xercise +or the chapter( "hich lin&s to the !eb site o+ a compan, or organi-ation# The Internet *xercise on the !eb "ill be updated periodicall, so that it is current "ith the latest in+ormation available on the sub.ect organi-ation/s !eb site# ' printout cop, o+ the Internet exercise +or this chapter as o+ earl, 0110 appears belo"# The solution to the Internet exercise( "hich "ill also be updated periodicall,( is available to instructors +rom the Companion !ebsite/s +acult, vie"# To access the solution( clic& on Cost 'ccounting( ))th ed#( 2acult, lin&( and then register once to obtain ,our pass"ord through the online +orm# '+ter the initial registration( ,ou "ill have a personal login ID and pass"ord to use to log in# ' printout o+ the solution to the Internet exercise +or this chapter as o+ earl, 0110 +ollo"s# The exercise and solution provide instructors "ith an idea o+ the content o+ the Internet exercise +or this chapter# I(#+,(+# E=+,&'"+ n an effort to refocus its business and improve revenue growth Aewlett$>ackard /A>0 spun off its test and measurement business through a stock dividend to its shareholders. The newly formed company, +gilent Technologies, reported 9-6- million in earnings on revenues of 9:.# billion in its first year of operations. >rior to the spinoff, A> accounted for +gilent as a separate business segment. "a. Io to Aewlett$>ackard@s investor relations Geb page, www.hp.comWhpinfoWinvestorW, click on the JS!C filingsJ link, and open the "7$L report filed on "W&-W77. This is A>3s "::: annual report. Scroll down to the segment information on page #:. Ghat types of services and expense are shared between A>3s four business segmentsK Ghat is A>3s rationale for sharing expenses and services between business segmentsK Aow does A> allocate the cost of shared expenses and servicesK Ghy might A> face problems if it bases management compensation on the profitability of individual business segmentsK Io to +gilent Technologies@ nvestor Delations Geb page, www.investor.agilent.comW, click on the J+nnual DeportJ link, and open the &777 annual report. Scroll down to footnote "#, JTransactions with Aewlett$>ackard,J on page #7. Ghat were +gilent3s sales to A> for the period from 2ovember ", "::: to Tune &, &777K Ghat were +gilent3s purchases from A> in the period from 2ovember ", "::: through Tune &, &777K >rior to the spin$off, shared expenses were allocated between A>3s business segments. Aow have +gilent and A> handled shared expenses since the spin$offK Ghat was the value of shared services for 2ovember ", ":::, to Tune &, &777K

"b. "c. &. '.

'a. 'b. #a. #b.

"#$6E

I(#+,(+# E=+,&'"+ /Cont@d.0 #c. #d. Ghat is the additional implication of shared expenses between +gilent and A> now that they are independent companiesK Scroll down the JTransactions with Aewlett$>ackardJ footnote. Ghat other separation agreements have +gilent and A> entered intoK

S!%1#'!( #! I(#+,(+# E=+,&'"+ "a. + significant portion of the segments3 expenses arise from shared services and infrastructure that A> has historically provided to the segments in order to reali1e economies of scale and to use resources efficiently. These expenses include costs of centrali1ed research and development, legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs. A> has historically provided services to the segments in order to reali1e economies of scale and to use resources efficiently. These allocations have been determined on bases that A> considers to be a reasonable reflection of the utili1ation of services provided to or benefits received by the segments. f costs were specifically identified to each segment, amounts could vary from the allocated cost. A> may face problems if it bases compensation on the profitability of individual business segments. Since the cost of shared expenses are not bargained for in an arms length transaction, managers may argue about their reasonableness. 4anagers should be evaluated on the basis of controllable costs and revenues or perhaps the performance of the entire organi1ation. +gilent3s sales to A> for the period 2ovember ", ":::, to Tune &, &777, were 9'#" million, >urchases from A> were approximately 9"&& million. +gilent and A> entered into interim service level agreements, for various services, including information technology, financial, accounting, building, and legal services. These services are generally being provided for fees e*ual to the actual direct and indirect costs of providing the services plus 6=. +gilent received 9&E- million from A> and A> received 9:6 million in services from +gilent. n addition to tax implications, there will be tax implications for the shareholder of each company. +ny misallocation of expenses will affect each company3s cash flow, earnings, and share price.

"b. "c.

&.

'a. 'b. #a.

#b. #c.

"#$6-

I(#+,(+# E=+,&'"+ /Cont@d.0 6. +gilent and A> have entered into separation agreements covering% Ieneral +ssignment and +ssumption of +ssets and .iabilities ndemnification and nsurance 4atters !mployee 4atters Tax Sharing Deal !state 4atters nformation Technology Sharing ntellectual >roperty !nvironmental 4atters

C)$*#+, 14 V'/+! C$"+

The video case can be discussed using onl, the case "riteup in the chapter# 'lternativel,( instructors can have students vie" the videotape o+ the compan, that is the sub.ect o+ the case# The videotape can be obtained b, contacting ,our Prentice all representative# The case 3uestions challenge students to appl, the concepts learned in the chapter to a speci+ic business situation# NANTUCEET NECTARS> COST ALLOCATION VIDEO CASE ". The types of economic decisions faced by 2antucket 2ectars might include deciding which new juice flavors to introduce to the market, which to discontinue, and how many new flavors the market can absorb. n determining which flavors are most profitable, 2antucket 2ectars would need to allocate the costs of the 4obile Tuice Iuy Team to the different flavors, based perhaps on the time the 4obile Team spends promoting the different flavors and the samples and coupons it distributes. The company may also be interested in determining the profitability of its different regions. To calculate this profitability, the costs of the 4obile Tuice Iuy Team would need to be allocated to the different regions. The costs of the 4obile Team are% van depreciation, insurance, full$time employee salaries, depreciation of display tables and banners, travel costs /lodging, meals, vehicle gas, and maintenance0, coupons, juice beverages, and sample cups. The costs that would go into the fixed$ cost subpool are% depreciation on the full$si1e van, depreciation on the banners and display tables, insurance on the van and e*uipment, and salaries for the four 4obile Team members. The variable subpool costs would include coupons, bottled juice flavors dispensed, sample cups, and travel expenses for the team. The most appropriate activity base used for allocating the subpool costs would be the time spent in each region, including travel days to the region.
&. 2antucket 2ectars could motivate regional sales managers to use more of the 4obile Tuice Iuy Team by not allocating the full cost of the Team to regional managers. Such a system may, however, lead regional managers to overuse the 4obile Team. 2antucket 2ectars would need to cost$justify the 4obile Team@s operations to be sure the company is getting the necessary sales and profitability boost expected for this set of expenditures. This re*uires the company to estimate the sales and profitability attributable to the 4obile Team.

'.

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+lthough the company is privately held, it still must produce internal financial reports for use by management and external reports for tax purposes. The company also has a majority shareholder, ;cean Spray, for whom reports must be generated. Cost allocation can help with appropriately valuing inventory and assets associated with operations.

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