Budgeting and Standard Costing – Quiz
1. (TCO 7) Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the snail extraction line of products takes up approximately 50 percent of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering snail extraction tools or focus only on serving pieces. If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided and serving piece sales would increase by 13 percent. Allocated fixed costs are assigned based on relative sales.
|
Snail Extraction |
Serving |
||
|
Tools |
Pieces |
Total |
|
|
Sales |
$1,200,000 |
$800,000 |
$2,000,000 |
|
Less cost of goods sold |
700,000 |
500,000 |
1,200,000 |
|
Contribution margin |
500,000 |
300,000 |
800,000 |
|
Less direct fixed costs: |
|||
|
Salaries |
175,000 |
175,000 |
350,000 |
|
Other |
60,000 |
60,000 |
120,000 |
|
Less allocated fixed costs: |
|||
|
Rent |
14,118 |
9,882 |
24,000 |
|
Insurance |
3,529 |
2,471 |
6,000 |
|
Cleaning |
4,117 |
2,883 |
7,000 |
|
Executive salary |
76,470 |
53,530 |
130,000 |
|
Other |
7,058 |
4,942 |
12,000 |
|
Total costs |
340,292 |
308,708 |
649,000 |
|
Net income |
$159,708 |
($ 8,708) |
$151,000 |
Prepare an incremental analysis in good form to determine the incremental effect on profit of discontinuing the snail extraction tool line.