. PART A CASE STUDY 1 Panda Corporation has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $129,000 and the divisional results shown below. Division I Division II Division III Division IV Sales $510,000 $400,000 $310,000 $170,000 Cost of sales $300,000 $250,000 $270,000 $156,000 Selling and admin expenses $60,000 $80,000 $75,000 $70,000 Total profit $150,000 $70,000 ($35,000) ($56,000) Analysis reveals the following percentages of variable costs in each division. Division I Division II Division III Division IV Cost of sales 70% 80% 70% 90% Selling and admin expenses 40% 50% 60% 70% Discontinuance of any division would save 50% of the fixed costs and expenses for that division. Top management is very concerned about the unprofitable divisions (III and IV). Consensus is that one or both of the divisions should be discontinued. Required: A. Prepare an incremental analysis concerning the possible discontinuance of i. Division III and ii. Division IV. B. Based on your analysis in above, what course of action do you recommend for each division? Justify your recommendation. C. Prepare a columnar condensed income statement for Panda Corporation, assuming Division IV is eliminated. Division IV’s unavoidable fixed costs are allocated equally to the continuing divisions. D. Reconcile the total income from operations ($129,000) with the total income from operations without Division IV. Assessment Information COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969 This material has been reproduced and communicated to you by or on behalf of Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (‘Act’). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Kaplan Business School is a part of Kaplan Inc., a leading global provider of educational services. Kaplan Business School Pty Ltd ABN 86 098 181 947 is a registered higher education provider CRICOS Provider Code 02426B. CASE STUDY 2 McCree Corporation had a bad year in 2013, operating at a loss for the first time in its history. The company’s income statement showed the following results from selling 200,000 units of product: net sales $2,400,000; total costs and expenses $2,472,000; and net loss $72,000. Costs and expenses consisted of the following. Variable Fixed Cost of sales $1,070,000 $416,000 Selling expenses $356,000 $325,000 Admin expenses $110,000 $195,000 Total $1,536,000 $936,000 Management is considering the following independent alternatives for 2014. 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totalling $170,000 to total salaries of $50,000 plus a 6% commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 40:60. Required: A. Compute the break-even point in dollars for 2014. B. Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend? C. “Break-even analysis is of limited use to management because a company cannot survive by just breaking even.” Do you agree? Explain. Assessment Information COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969 This material has been reproduced and communicated to you by or on behalf of Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (‘Act’). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Kaplan Business School is a part of Kaplan Inc., a leading global provider of educational services. Kaplan Business School Pty Ltd ABN 86 098 181 947 is a registered higher education provider CRICOS Provider Code 02426B. CASE STUDY 3 Easton Corporation makes two different boat anchors—a traditional fishing anchor and a highend yacht anchor—using the same production machinery. The contribution margin of the yacht anchor is three times as high as that of the other product. The company is currently operating at full capacity and has been doing so for nearly two years. Bjorn Borg, the company’s CEO, wants to cut back on production of the fishing anchor so that the company can make more yacht anchors. He says that this is a “no-brainer” because the contribution margin of the yacht anchor is so much higher. Required: Write a short memo to Bjorn Borg describing the analysis that the company should do before it makes this decision and any other considerations that would affect the decision. PART B – 10 Marks You had to practically apply the decision making models and tools you have learned about throughout the subject. Reflect on your experience in completing the various assessments in this course. What major learning on measurement and decision making can you apply in practice as a manager in your organisation? The list below provides some questions you may wish to consider in your critical reflection. These are suggestions only. You may address issues that are not on this list. 1. Has what you have learned in this subject created an increased awareness of the importance of decision making as a management activity? Why or why not? 2. Which model or tool most influenced you as you worked your way through the subject? Why? 3. How critical do you believe the quality of decision making is to an organisation? Why? 4. Which of the models and tools would you use as a manager? Why?
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