University:
Widener University
Course:
ACCT-205 | Managerial Acc
Academic year:

2024
Views:

294

Pages:

31
Author:

vrredneck1346hb

RELEVANT COSTS FOR DECISION MAKING P13-12 Dropping a Flight: Analysis of Operating Policy Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement for one such flight (flight 482) is given below (per flight): Ticket revenue (175 seats x 40% occupancy x $200 ticket price) $14,000 100.0% Less variable expenses ($15 per person) 1,050 7.5 Contribution margin 12,950 92.5% Less flight expenses: Salaries, flight crew 1,000 Flight promotion 750 Depreciation of aircraft 1,550 Fuel for aircraft 6,800 Liability insurance 4,200 Salaries, flight assistants 500 Baggage loading and flight preparation 1,700 Overnight costs for flight crew and assistants at destination 300 Total flight expenses 17,600 Net operating loss $(4,650) P 13-13 (Parts 5 & 6) Della Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per year is: Direct materials $5.10 Direct labor 3.80 Variable manufacturing overhead 1.00 Fixed manufacturing overhead 4.20 Variable selling and administrative expenses 1.50 Fixed selling and administrative expenses 2.40 The normal selling price is $21 per unit. The company's capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $14 per unit. This order would not affect regular sales. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company's total fixed costs.) Refer to the data in (5) above. Assume the company has 1,000 units of this product left over from last year that are vastly inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost figure is relevant for establishing a minimum selling price for these units? Explain. Problem 13-13 (continued) Annual profits will be increased by $39,000. Per Unit 15,000 Units Incremental sales $14.00 $210,000 Incremental costs: Direct materials 5.10 76,500 Direct labor 3.80 57,000 Variable manufacturing overhead 1.00 15,000 Variable selling and administrative 1.50 22,500 Total 11.40 171,000 Incremental profits $2.60 $39,000 The fixed costs are not relevant to the decision, since they will not change in total amount regardless of whether the special order is accepted or rejected. The relevant cost figure is $1.50 (the variable selling and administrative expenses). All other variable costs are sunk, since the units have already been produced. The fixed costs would not be relevant, since they will not change in total regardless of the price charged for the left-over units.