26 Feb The Children’s Store is on Fifth Avenue in Chicago
The Children’s Store is on Fifth Avenue in Chicago It has a magic department nearthe main door Management is considering dropping the magic department, whichhas consistently shown an operating loss The predicted income statements, inthousands of dollars, are shown belowThe $300,000 of magic department fixed expenses include the compensation ofemployees of $120,000 These employees will be terminated if the magicdepartment is abandoned All of the magic department’s equipment is fullydepreciated, so none of the $300,000 pertains to such items Furthermore,disposal values of equipment will be exactly offset by the costs of removal andremodelingIf the magic department is dropped, the manager will use the vacated space foreither more general merchandise or more electronic products The expansion ofgeneral merchandise would not entail hiring any additional salaried help, butmore electronic products would require an additional person at an annual cost of$30,000 The manager thinks that sales of general merchandise would increase by$250,000; electronic products by $200,000 The manager’s modest predictions arepartially based on the fact that she thinks the magic department has helped lurecustomers to the store and, thus, improved overall sales If the magic departmentis closed, that lure would be gone SalesVariable expensesContribution marginFixed expenses*Operating income (loss) General Electronic MagicTotal MerchandiseProductsDepartment$6,000$5,000$400$6004,0903,500200390$1,910$1,500$200$2101,10075050300$810$750$150($90) * Includes compensation, depreciation, property taxes, insurance, etcREQUIRED: Should the magic department be closed? Explain, showingcomputations Clean and Brite manufactures three different models of swimming pool cleaners (AR1, AR2,and BR1) These are sophisticated computer-controlled, programmed cleaners that scrub andvacuum the pool’s bottom, and steps and provide supplemental filtration of pool water Thethree models differ in their capacity and programmabilityClean and Brite uses an absorption costing system that absorbs manufacturing overhead tothe three models based on direct labor hours The single plantwide manufacturing overheadrate is predetermined before the beginning of the fiscal year using a flexible manufacturingoverhead budget Variable manufacturing overhead is budgeted to be $300 per directlabor hour, and fixed manufacturing overhead is budgeted to be $1,397,500 Direct laboris budgeted at $25 per DLH The following table summarizes the budgeted and actualresults of operation for the year:ModelsAR1AR2BR1Actual number of units produced5,1003,9002,200Actual DL hours per unit314259Budgeted wholesale price$550$750$1,050Budgeted DL hours per scrubber346Budgeted direct materials$95$125$175Budgeted production (units)5,0004,0002,000Budgeted DL cost (@$25 per DL hour)$75$100$150REQUIRED:1 Calculate the firmwide overhead rate at the beginning of the year (round to two decimals)2 A batch of 100 units of model AR2 is produced using 405 direct labor hours How muchoverhead is absorbed by this batch of 100 model AR2s?3 Actual overhead incurred during the year was $1,520,500 Calculate the amount of over- orunderabsorbed overhead for the year4 Clean and Brite writes off any over/underabsorbed to cost of good sold What is the effectof writing off the over/underabsorbed overhead calculated in (3) on net income? In otherwords, does net income increase or decrease after the writeoff? aners (AR1, AR2,ners that scrub andpool water The ing overhead toacturing overheade manufacturing0 per direct0 Direct labor d to two decimals)urs How muchamount of over- or What is the effectome? In other
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