Chapter 18: Accounting Analysis

Here's a structured outline to address each problem and question provided for company analysis, comparative analysis, extended analysis, and other concepts: Company Analysis Problem AA 18-1: Apple Repair Division 1. Compute the Degree of Operating Leverage (DOL): o Formula: DOL=Contribution MarginNet Operating Income =Net Operating IncomeContribution Margin o Contribution Margin = Sales - Variable Costs. o DOL indicates how sensitive the operating income is to a change in sales volume. 2. Calculate Income with 8% Increase in Unit Sales: o Multiply the original net operating income by 1+(DOL×0.08)1 + to estimate the new income after the increase. Comparative Analysis Problem AA 18-2: Apple and Google Comparison 1. Calculate Income for Each Company: o Use the income statement data provided to compute net income. 2. Degree of Operating Leverage (DOL): o Compute for both companies using the same method as in Problem AA 18-1. 3. Effect of Decline in Unit Sales: o Higher DOL means higher sensitivity to sales changes. The company with the higher DOL would experience a more significant income decline if unit sales decrease. Extended Analysis Problem AA 18-3: Samsung and Apple 1. Degree of Operating Leverage Calculation: o Compute DOL for each company based on given data. 2. Income Sensitivity to Sales Increase: o The company with the higher DOL will see a larger increase in income from the same percentage increase in sales volume. Discussion Questions These questions cover fundamental accounting concepts related to costs, CVP (cost-volume-profit) analysis, and income statements. 1. Variable Cost: Costs that vary directly with production volume, like materials and direct labor. 2. Behavior of Variable and Fixed Costs with Increased Volume: o Variable Costs stay the same per unit but increase in total. o Fixed Costs stay the same in total but decrease per unit as production volume increases. 3. Inputs Needed for CVP Analysis: o Selling price per unit, variable cost per unit, fixed costs, and sales volume. 4. Mixed Cost Example: o A cost that has both fixed and variable components, like utility costs (fixed monthly fee plus usage-based costs). 5. Contribution Margin: Revenue per unit minus variable cost per unit. 6. Contribution Margin Ratio: o Formula: Contribution Margin Ratio=Contribution Margin per Unit Selling Price per Unit 7. Differences Between Contribution Margin and Traditional Income Statements: o Contribution margin format separates variable and fixed costs, while the traditional format focuses on cost of goods sold and operating expenses. 8. Additional CVP Analysis Concepts: o Margin of Safety: Sales volume beyond break-even. o Relevant Range: The production or sales volume range where fixed and variable costs remain constant per unit. Beyond the Numbers Ethics Challenge BTN 18-1: Write a memorandum addressing how you would objectively approach the labor cost survey, ensuring accurate representation of time estimates. Communicating in Practice BTN 18-2: Create a job-search CVP analysis with assumptions on expected revenue (salary) and costs. Teamwork in Action BTN 18-3: Develop questions for CVP analysis for a school-based movie theater program to understand costs and pricing per student. Entrepreneurial Decision BTN 18-4: SmartSweets 1. Fixed Costs: Rent and salaries are examples of fixed costs that remain constant. 2. Risk of Overestimating Sales: o Overly optimistic projections could lead to excess production costs and inventory storage without corresponding revenue. 3. CVP Analysis Utility: o Helps manage cost structures, set pricing, and establish sales goals to reach break-even and profitability. This framework will guide each calculation, analysis, and answer to the discussion and extended questions. Let me know if you'd like specific calculations or a more detailed explanation for any of these sections.