The Project:

Develop a report on ‘short-run decision making’ and present it in the class. Your report to be submitted to the instructor should also include solutions for the following problems. 

Problem 1

Consider the following details of the income statement of KDF Company for the year just ended December 31, 20 x x.

                        Sales (1,000,000 units)                                                                               Br. 20,000,000

                        Manufacturing cost of goods sold                                                                 15,000,000 

                        Gross margin                                                                                               Br. 5,000,000

                        Selling and administrative expenses                                                               4,000,000 

                        Operating income                                                                                       Br . 1,000,000 

The company’s fixed manufacturing costs were Br.3 million and its fixed selling and administrative costs were Br.2.9 million. 

Near the end of the year, Ethio Company offered KDF Br.13 per unit for 100,000 unit special order.  The special order would not affect KDF’s regular business in any way.  Furthermore, the special sales order would not affect total fixed costs and would not require any additional variable selling and administrative expenses.

Instruction:  Assume that the company would utilize its idle manufacturing capacity to accept the special order. And use contribution margin approach. a) Should KDF accept or reject the special order?  

b) By what percentage the operating income decreases or increases if the order had been accepted?

  

 

 

 

 

 

 

 

 

 

 

Problem 2

FG Department Store has three major departments:  groceries, general merchandise, and drugs.  Management is considering dropping groceries, which have consistently shown a net loss.  The following table reports the present annual net income (in thousands).

Sales		DEPARTMENTS
	Groceries	General merchandise	Drugs	Total
	Br. 1,000	Br. 800	Br. 100	1,900
Variable COGS* & Expenses	800	560	60	1,420
Contribution margin	Br. 200	Br. 240	Br. 40	Br. 480
Fixed expenses:    Avoidable	Br. 150	Br. 100	Br. 15	Br. 265
Unavoidable	60	100	20	180
Total fixed expenses	Br. 210	Br. 200	Br. 35	Br. 445
Operating income (loss)	Br. (10)	Br. 40	Br. 5	Br. 35

*COGS denote cost of goods sold.

Instructions:  

Which alternative would you recommend if the only alternatives to be considered are dropping or continuing the grocery department?  Assume that the total assets would be unaffected by the decision and the space made available by dropping groceries would remain idle.