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ACCT 386 - Week 4 - Homework - Question 6

ACCT 386 - Week 4 - Homework - Question 6
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ACCT 386 - Week 4 - Homework - Question 6

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Question 6

Vega Foods, Inc., has recently purchased a small mill that it intends to operate as one of its subsidiaries. The newly acquired mill has three products that it offers for sale—wheat cereal, pancake mix, and flour. Each product sells for $10 per package. Materials, labor, and other variable production costs are $4.90 per bag of wheat cereal, $6.10 per bag of pancake mix, and $3.10 per bag of flour. Sales commissions are 10% of sales for any product. All other costs are fixed.

The mill’s income statement for the most recent month is given below:

 

 

 

 

Product Line

 

Total
Company

Wheat
Cereal

Pancake
Mix

Flour

  Sales

$

1,170,000

 

$

390,000

 

$

490,000

 

$

290,000

 

 













  Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

       Materials, labor, and other

 

579,900

 

 

191,100

 

 

298,900

 

 

89,900

 

       Sales commissions

 

117,000

 

 

39,000

 

 

49,000

 

 

29,000

 

       Advertising

 

156,050

 

 

73,000

 

 

50,000

 

 

33,050

 

       Salaries

 

98,500

 

 

43,300

 

 

10,200

 

 

45,000

 

       Equipment depreciation

 

58,500

 

 

19,500

 

 

24,500

 

 

14,500

 

       Warehouse rent

 

23,400

 

 

7,800

 

 

9,800

 

 

5,800

 

       General administration

 

84,000

 

 

28,000

 

 

28,000

 

 

28,000

 

 













  Total expenses

 

1,117,350

 

 

401,700

 

 

470,400

 

 

245,250

 

 













  Net operating income (loss)

$

52,650

 

$

(11,700)

 

$

19,600

 

$

44,750

 

 


























The following additional information is available about the company:

a.

The same equipment is used to mill and package all three products. In the above income statement, equipment depreciation has been allocated on the basis of sales dollars. An analysis of equipment usage indicates that it is used 40% of the time to make wheat cereal, 50% of the time to make pancake mix, and 10% of the time to make flour.

b.

All three products are stored in the same warehouse. In the above income statement, the warehouse rent has been allocated on the basis of sales dollars. The warehouse contains 46,800 square feet of space, of which 8,000 square feet are used for wheat cereal, 14,000 square feet are used for pancake mix, and 24,800 square feet are used for flour. The warehouse space costs the company $.50 per square foot per month to rent.

c.

The general administration costs relate to the administration of the company as a whole. In the above income statement, these costs have been divided equally among the three product lines.

d.

All other costs are traceable to the product lines.

Vega Foods’ management is anxious to improve the mill’s 4.50% margin on sales.