# Performance Analysis and Decision Making

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Chapter ; 12Performance Analysis and Decision Making
Complete Problem 12-18. Submit your responses as an Excel spreadsheet. A template is provided on the textbook website. Go to the textbook website, choose “Chapter 12” from the dropdown menu on the left, click on “Excel Templates,” “Chapter 12 Excel Templates.” Save the file to your desktop using the following naming convention:
Add a tab to your spreadsheet for Problem 12-18 and label it Exercise 11-7. Prepare and submit your responses as that tab in the Excel spreadsheet. Proper formatting and professional presentation are expected.

ll applicable problems are available with McGraw-Hillâ€™s Connectâ„¢ Accounting .
PROBLEM 12â€“18 Dropping or Retaining a Tour [LO2]
Blueline Tours, Inc., operates tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours to improve the companyâ€™s overall operating performance.
One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from a typical Historic Mansions tour is given below:

Ticket revenue (100 seat capacity Ã— 40% occupancy Ã—
\$75 ticket price per person) . . . . . . . . . . . . . . . . . . . . . . . . \$3,000 100%
Variable expenses (\$22.50 per person) . . . . . . . . . . . . . . . . . 900 30
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 70%

Tour expenses:
Tour promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$600
Salary of bus driver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
Fee, tour guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
Fuel for bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Depreciation of bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
Liability insurance, bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Overnight parking fee, bus . . . . . . . . . . . . . . . . . . . . . . . . . 50
Room and meals, bus driver and tour guide . . . . . . . . . . . 175
Bus maintenance and preparation . . . . . . . . . . . . . . . . . . . 300
Total tour expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ (850)

a. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
b. The â€œBus maintenance and preparationâ€ cost on the previous page is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the companyâ€™s fleet of buses in good operating condition.

c. Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible.

d. Liability insurance premiums are based on the number of buses in the companyâ€™s fleet.

e. Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.

Required:
1. Prepare an analysis showing what the impact will be on the companyâ€™s profits if this tour is discontinued.
2. The companyâ€™s tour director has been criticized because only about 50% of the seats on Bluelineâ€™s tours are being filled as compared to an industry average of 60%. The tour director has explained that Bluelineâ€™s average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.
and the second question is
All applicable cases are available with McGraw-Hillâ€™s Connectâ„¢ Accounting .

CASE 11Aâ€“7 Transfer Pricing; Divisional Performance [LO5]
Stanco, Inc., is a decentralized organization with five divisions. The companyâ€™s Electronics Division produces a variety of electronics items, including an XL5 circuit board. The division (which is operating at capacity) sells the XL5 circuit board to regular customers for \$12.50 each. The circuit boards have a variable production cost of \$8.25 each.
The companyâ€™s Clock Division has asked the Electronics Division to supply it with a large
quantity of XL5 circuit boards for only \$9 each. The Clock Division, which is operating at only 60% of capacity, will put the circuit boards into a timing device that it will produce and sell to a large oven manufacturer. The cost of the timing device being manufactured by the Clock Division follows:
Performance Analysis and Decision Making

XL5 circuit board (desired cost) . . . . . . . . . . . . . . . . . \$ 9.00
Other purchased parts (from outside vendors) . . . . . 30.00
Other variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . 20.75
Fixed overhead and administrative costs . . . . . . . . . . 10.00
Total cost per timing device . . . . . . . . . . . . . . . . . . . . \$69.75

The manager of the Clock Division feels that she canâ€™t quote a price greater than \$70 per timing
device to the oven manufacturer if her division is to get the job. As shown above, in order to keep the price at \$70 or less, she canâ€™t pay more than \$9 per unit to the Electronics Division for the XL5 circuit boards. Although the \$9 price for the XL5 circuit boards represents a substantial discount from the normal \$12.50 price, she feels that the price concession is necessary for her division to get the oven manufacturer contract and thereby keep its core of highly trained people.
The company uses return on investment (ROI) to measure divisional performance.

Required:
1. Assume that you are the manager of the Electronics Division. Would you recommend that your division supply the XL5 circuit boards to the Clock Division for \$9 each as requested?
Why or why not? Show all computations.
2. Would it be profitable for the company as a whole for the Electronics Division to supply the
Clock Division with the circuit boards for \$9 each? Explain your answer.
3. In principle, should it be possible for the two managers to agree to a transfer price in this particular situation? If so, within what range would that transfer price lie?
4. Discuss the organizational and manager behavior problems, if any, inherent in this situation.
What would you advise the companyâ€™s president to do in this situation?

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