1. If Jason accepts the special order, by how much will his income increase or d
ID: 2574120 • Letter: 1
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1. If Jason accepts the special order, by how much will his income increase or decrease 2. What are some of the qualitative reasons why Jason might want to accept or decline the spe cial order? OBJECTIVE eep-or-Drop, Services, Qualitative Aspects does Jem Dawson owns Jem's Special Event Planning Service, a full-service event planner. Jem much of the work herself and hires additional help as needed. She plans corporate events, wed- dings, and special occasion parties. Each of these is considered a separate line of business due to the specialized aspects of each type of event. Last year, Jem's accountant provided the following segmented income statement: Special Corporate Wedding Occasion Total 55,300 $195,000 $168,000 $418,300 $33,180 97,500 SI17,600 $248,280 Revenue Less variable costs (50,400) (170,020) ) Contribution margin Less common fixed expenses: Fixed operating expense Fixed selling (175,000) 55,000) S 18.280 Operating income Jem was not pleased with last year's results; corporate events were down considerably from the previous few years. In addition, she thinks that dealing with the corporate party-throwers may be more work than it is worth. Two important aspects of event planning are negotiating with vendors (e.g., caterers, florists, bands and orchestras, and venues) on price and setting up for and being present at the event itself. The corporate negotiating seemed to consume extra time, and their restrictions on the price they would pay made the negotiations particularly difficult. She decided to gather some data on the negotiation and setting-up activities Corporate Wedding Special Occasion 1,200 400 Negotiating hours Setting-up hours Total cost of negotiating Total cost of setting up 400 500 400 100 $40,000 $60,000 Required: 1. Prepare a segmented income statement using the activity data for negotiating and setting up. The total cost of these two activities can be subtracted from the fixed operating expense. The remaining fixed operating expense will be the common fixed operating expense. What does this income statement suggest about the relative profitability of the three product lines? Jem believes that next year will be even worse. Her hunch is that corporate business will be down and that these clients will be especially intent on saving money by reducing the rate paid to Jem. She believes total corporate revenue may decrease by 25 percent overall, while the variable costs associated with those events will only decrease by 20 percent. On the other hand, Jem expects weddings to increase. Her reputation is growing and she thinks she can raise ber revenues in this area by 15 percent even if the number of weddings does not increase. As a result, she expects variable costs of weddings to remain static. The special occasions (wedding anniversary parties, bar and bat mitzvahs, and so on) line is also expected to increase with revenue and variable costs expected to increase by 10 percent. 2. Jem does not know quite what to expect with respect to the negotiating and setting-up activ- ities, so she thinks she'll just keep those constant for planning purposes. Prepare a seg- mented income statement using the activity data and these assumptions. What does this income statement suggest about dropping the corporate segment?Explanation / Answer
Answer 1. Activity Overhead Cost Driver Quantity Activity Rate Negotiating Costs 40,000 2,000 Negotiating hrs 20.00 per negotiating hr Setting up 60,000 1,000 Setting-up Hrs 60.00 per setting-up hr Total 100,000 Assigning Overhead Cost to Product Using ABC Method Activity Based Overhead Rate Corporate Wedding Special Occasion Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Negotiating Costs 20 per negotiating hr 400 Negotiating hrs 8,000 1,200 Negotiating hrs 24,000 400 Negotiating hrs 8,000 Setting up 60 per setting-up hr 100 Setting-up Hrs 6,000 400 Setting-up Hrs 24,000 500 Setting-up Hrs 30,000 Total Overhead Cost 14,000 48,000 38,000 Segmented Income Statement Corporate Wedding Special Occasion Total Revenue 55,300 195,000 168,000 418,300 Less: Variable Costs 22,120 97,500 50,400 170,020 Contribution Margin 33,180 97,500 117,600 248,280 Fixed Operating Expense 14,000 48,000 38,000 100,000 Segmented Net Operating Income 19,180 49,500 79,600 148,280 Common Fixed Expenses Operating Expenses 75,000 Selling Expenses 55,000 Net Operating Income 18,280 Answer 2. Segmented Income Statement Corporate Wedding Special Occasion Total Revenue 41,475 224,250 184,800 450,525 Less: Variable Costs 17,696 97,500 55,440 170,636 Contribution Margin 23,779 126,750 129,360 279,889 Fixed Operating Expense 14,000 48,000 38,000 100,000 Segmented Net Operating Income 9,779 78,750 91,360 179,889 Common Fixed Expenses Operating Expenses 75,000 Selling Expenses 55,000 Net Operating Income 49,889 Revenue: Corporate - $55,300 X 75% 41,475 Wedding - $195,000 X 115% 224,250 Special Occasion - $168,000 X 110% 184,800 Variable Costs Corporate - $22,120 X 80% 17,696 Special Occasion - $50,400 X 110% 55,440 The Income Statement suggest when we drop Corporate Segment, we Lose Income of $9,779.
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