PROBLEM 22.6A
Evaluating an Unprofitable Business Center
FlyWiz, Inc., is a small manufacturer of professional fishing equipment. The company has two divisions—the rod division and the reel division. Data for the month of January are shown.
Instructions
a. The company plans to initiate an advertising campaign for one of the two products in Division 1. The campaign would cost $10,000 per month and is expected to increase the sales of whichever product is advertised by $30,000 per month. Compute the expected increase in the responsibility margin of Division 1 assuming that (1) product A is advertised and (2) product B is advertised.
b. Assume that the sales of both products by Division 1 are equal to total manufacturing capacity. To increase sales of either product, the company must increase manufacturing facilities, which means an increase in traceable fixed costs in approximate proportion to the expected increase in sales. In this case, which product line would you recommend expanding? Explain.
c. The income statement for Division 1 includes $21,000 in common fixed costs. What happens to these fixed costs in the income statement for Butterfield, Inc.?
d. Assume that in April the monthly sales in Division 2 increase to $200,000. Compute the expected effect of this change on the operating income of the company (assume no other changes in revenue or cost behavior).
e. Prepare an income statement for Butterfield, Inc., by division, under the assumption stated in part d. Organize this income statement in the format illustrated, including columns for percentages.
Investment Centers
Butterfield, Inc.
Division 1 Dollars %
Division 2 Dollars %
$450,000 100% $300,000 100%
$150,000 100% $225,000 50% 180,000 60%
$45,000 30% $225,000 50% $120,000 40%
$105,000 70% $135,000 30% 63,000 21%
$72,000 48% $ 90,000 20% 57,000 19%
$ 33,000 22% 45,000 10% 45,000 10%
Profit Centers
Sales
Variable costs
Contribution margin
Fixed costs traceable to divisions
Division responsibility margin
Common fixed costs
Income from operations
Division 1
Product A
Product B
Dollars %
Dollars %
Dollars %
Sales
Variable costs
$300,000 100% $100,000 100%
$200,000 100% 180,000 60 52,000 52
128,000 64 $120,000 40% $48,000 48%
$ 72,000 36% 42,000 14 26,000 26
16,000 8 $ 78,000 26% 22,000 22%
$ 56,000 28% 21,000 7 $ 57,000 19%
Contribution margin
Fixed costs traceable to products
Product responsibility margin
Common fixed costs
Responsibility margin for division
Instructions
a. The company plans to initiate an advertising campaign for one of the two products in Division 1. The campaign would cost $10,000 per month and is expected to increase the sales of whichever product is advertised by $30,000 per month. Compute the expected increase in the responsibility margin of Division 1 assuming that (1) product A is advertised and (2) product B is advertised.
Assume that the sales of both products by Division 1 are equal to total manufacturing capacity. To increase sales of either product, the company must increase manufacturing facilities, which means an increase in traceable fixed costs in approximate proportion to the expected increase in sales. In this case, which product line would you recommend expanding? Explain.
c. The income statement for Division 1 includes $21,000 in common fixed costs. What happens to these fixed costs in the income statement for Butterfield, Inc.?
Assume that in April the monthly sales in Division 2 increase to $200,000. Compute the expected effect of this change on the operating income of the company (assume no other changes in revenue or cost behavior).
e. Prepare an income statement for Butterfield, Inc., by division, under the assumption stated in part d. Organize this income statement in the format illustrated, including columns for percentages.
