Budgeting and Standard Costing – Quiz

(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