QUESTION: 116 Topic 3: Part 3 Sec Three (106 to 176)

When a multiproduct plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the highest

Sales price per unit.
Individual unit contribution margin.
Sales volume potential.
Contribution margin per unit of the constraining resource.

Answer(s): D

Explanation:

In the short run, many costs are fixed. Hence, contribution margin (revenues -- all variable costs) becomes the best measure of profitability. Moreover, certain resources are also fixed. Accordingly, when deciding which products to produce at full capacity, the criterion should be the contribution margin per unit of the most constrained resource.
This approach maximizes total contribution margin.

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QUESTION: 117 Topic 3: Part 3 Sec Three (106 to 176)

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Condensed monthly operating income data for Korbin, Inc. for May follows

Additional information regarding Korbin's operations follows:
· One-fourth of each store's direct fixed costs would continue if either store is closed. · Korbin allocates common fixed costs to each store on the basis of sales dollars. · Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
· The operating results for May are representative of all months. A decision by Korbin to close the Suburban Store would result in a monthly increase (decrease) in Korbin's operating income of

$(10,800)
$(6,000)
$(1,200)
$4,000

Answer(s): A

Explanation:

If the Suburban Store is closed, one-forth of its direct fixed costs will continue. Thus, the segment margin that should be used to calculate the effect of its closing on Korbin's operating income is $6,000 {$36,000 contribution margin- [$40,000 direct fixed costs x(1.0-.25)]}. In addition, the sales ( and contribution margin) of the Urban Store will decline by 10% if the Suburban store closes. A 10% reduction in Urban's $48,000 contribution margin will reduce income by $4,800. Accordingly, the effect of closing the Suburban Store is to decrease operating income by $10,800 ($6,000 + $4,800).

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QUESTION: 118 Topic 3: Part 3 Sec Three (106 to 176)

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Condensed monthly operating income data for Korbin, Inc for May follows:

Additional information regarding Korbin's operations follows:
· One-fourth of each store's direct fixed costs would continue if either store is closed. · Korbin allocates common fixed costs to each store on the basis of sales dollars.
· Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
· The operating results for May are representative of all months. Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban Store. Increasing annual promotional expense at the Suburban Store by $60,000 in order to increase this store's sales by 10% would result in a monthly increase (decrease) in Korbin's operating income during the year (rounded) of

$(5000)
$(1400)
$487
$7,000

Answer(s): B

Explanation:

The $60,000 advertising campaign will increase direct fixed costs by $5,000 per month ($60,000 / 12). Sales and contribution margin will also increase by 10%. Hence, the contribution margin for the Suburban Sore will increase by $3,600 ($36,000 x 10%), and income will decline by $1,400 ($5,000-$3,600).

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QUESTION: 119 Topic 3: Part 3 Sec Three (106 to 176)

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Condensed monthly operating income data for Korbin, Inc. for May follows:

Additional information regarding Korbin's operations follows:
· One-fourth of each store's direct fixed costs would continue if either store is closed. · Korbin allocates common fixed costs to each store on the basis of sales dollars. · Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
· The operating results for May are representative of all months.
One-half of the Suburban Store's dollar sales are from items sold at variable cost to attract customers to the store. Korbin is considering the deletion of these items, a move that would reduce the Suburban Store's direct fixed expenses by 15% and result in a 20% loss of Suburban Store's remaining sales volume. This change would not affect the Urban Store. A decision by Korbin to eliminate the items sold at cost would result in a monthly increase (decrease) in Korbin's operating income of

$(5,200)
$(1,200)
$(7,200)
$2,000

Answer(s): B

Explanation:

If 50% of the Suburban Store's sales are at variable cost, its contribution margin (sales- variable costs) must derive wholly form sales of other items. However, eliminating sales at variable cost reduces other sales by 20%. Thus, the effect is to reduce the contribution margin to $28,800 ($36,000x.8). Moreover, fixed costs will be reduced by 15% to $ 34,000 ($40,000x.85). Consequently, the new segment margin is $(5,200) ($34,000 direct fixed costs-$28,800 contribution margin), a decrease of $1,200[$(5,200)-$(4,000)].

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QUESTION: 116 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 117 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 118 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 119 Topic 3: Part 3 Sec Three (106 to 176)

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