QUESTION 1.
Jane Smith is a division controller and Timothy Dune is a division manager of the Harley Day Sports Wear Company. Smith has line responsibility to Dune, but she also has staff responsibility to the company controller. The company controller abides by the Financial Accounting Standards which state a sale is not booked until the product is shipped to the customer.
Dune is under pressure to achieve budgeted division income for the year. He has asked Smith to book $300,000 of sales on December 31st. While the customer orders are firm, the orders are all still in the production process. They will all be shipped around the first week of January (after year end). In a conversation, Dune said to Smith, "The key event is getting the orders and not shipping the product. You should support me, not obstruct my reaching division goals".
Required:
a) Describe Smith's ethical responsibilities, in particular state which management accounting standards may apply here.
b) What should Smith do if Dune gives her the direct order to book the sales?
QUESTION 2. Contribution Margin Analysis
An investment banker is analyzing two companies that specialize in the production and sale of candied apples. Old-World Apples uses a labour-intensive approach, and Tech-Apple uses a mechanized system. Variable costing income statements for the two companies are shown below:
Old-World Apples Tech-Apple
Sales $400,000 $400,000
Variable Costs 320,000 160,000
Contribution Margin 80,000 240,000
Fixed Costs 30,000 190,000
Operating Income $50,000 $ 50,000
The investment banker wants to acquire one of these companies. However, she is concerned about the impact that each company's cost structure might have on profitability.
Required:
a) Calculate each company's contribution margin ratio and determine which company's cost structure makes it more sensitive to changes in its sales volume.
b) Determine the effect on each company's operating income if
(1) sales decrease by 15%
(2) if sales increase by 10%
Do not prepare income statements.
c) Determine which company the investment banker should acquire. Explain.