Woodley Furniture is a small boutique manufacturer of high quality contemporary wood tables. They make two models:
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a. Calculate total firm wide profits and product- line profits for the end tables and coffee tables after allocating the fixed costs to the two product lines using sales revenues as the allocation base.
b. Which of the two products is the most profitable based on total profits ( after allocating fixed costs)? Is Woodley making an adequate profit?
c. Woodley management decides to add a dining table to its product offerings. The plant currently has excess capacity, so no additional fixed costs are required to produce the dining tables. The new dining table will not affect the number of units sold or prices of the existing coffee and end tables. They expect to sell 4,000 dining tables at a price of $ 620 each, and variable cost per table is $ 500. Calculate total firm wide profits and product- line profits for the end tables, coffee tables, and dining tables after allocating the fixed costs to the three product lines using sales revenues as the allocation base.
d. Analyze the profitability of the three products and firmwide profits calculated in part ( c ) compared to the profitability of the two products alone and firmwide profits in part ( a ).
e. Recalculate your answers to parts ( a ) and ( c ), but, instead of allocating the $ 2.4 million of fixed costs using sales revenues as in parts ( a ) and ( c ), allocate the $ 2.4 million of fixed costs using the total contribution margin of each product ( total sales revenue less total variable cost).
f. Discuss the relative advantages and disadvantages of using total contribution margin to allocate the fixed costs in part ( e ) relative to using sales revenues to allocate the fixed costs, as in parts ( a ) and ( c ).
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Related Book For
Accounting for Decision Making and Control
ISBN: 978-0078025747
8th edition
Authors: Jerold Zimmerman
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