Data For December Concerning Dinnocenzo Corporations Two Ma

Data For December Concerning Dinnocenzo Corporations Two Ma

1. Prepare a segmented income statement in the contribution format for Dinnocenzo Corporation, showing only dollar amounts, based on provided sales revenues, variable expenses, traceable fixed expenses, and common fixed expenses allocated to the Fibers and Feedstocks segments.

2. For Eber Wares division, calculate the margin, turnover, ROI, and residual income based on sales, net operating income, and average operating assets, considering the company's minimum required rate of return.

3. Analyze whether to drop product E28I by calculating the net operating income from the company's accounting system and determine the effect of dropping this product on overall net income.

4. Decide whether to make or buy a part made by Fouch Company by evaluating relevant costs, net advantage of purchasing, and the maximum price willing to pay an outside supplier based on costs and potential savings.

5. Assess the financial impact of accepting a special order from a customer by calculating variable costs, additional costs, and contribution margin to determine profit effect.

Paper For Above instruction

Segmentation Analysis and Financial Decision-Making: An In-Depth Overview

Introduction

Segmented financial analysis enables organizations to evaluate the profitability and efficiency of different divisions or products, facilitating targeted decision-making. This paper explores the process of creating segmented income statements, analyzing division performance, and making strategic decisions regarding product discontinuation and procurement choices. Specific focus is placed on the case of Dinnocenzo Corporation's fibers and feedstocks segments, Eber Wares division, and Fouch Company's make-or-buy scenarios.

Segmented Income Statement Preparation

The foundation of effective managerial control is the segmented income statement, especially when delineating the profitability contributions of individual segments. Based on the provided data, the Fibers segment generated sales of $870,000, variable expenses of $426,000, and traceable fixed expenses of $148,000. Conversely, the Feedstocks segment recorded sales of $820,000, variable expenses of $344,000, and traceable fixed expenses of $156,000. Additionally, common fixed expenses totaled $314,000, allocated at $129,000 to Fibers and $185,000 to Feedstocks.

The contribution margin for each segment is computed as sales minus variable expenses. For Fibers, this is $870,000 - $426,000 = $444,000. For Feedstocks, it is $820,000 - $344,000 = $476,000. Deducting traceable fixed expenses yields segment margin: Fibers $444,000 - $148,000 = $296,000; Feedstocks $476,000 - $156,000 = $320,000. Subtracting the allocated common fixed expenses results in segment operating income: Fibers $296,000 - $129,000 = $167,000; Feedstocks $320,000 - $185,000 = $135,000. The resulting segmented income statement highlights the contribution of each business segment, facilitating strategic evaluations and resource allocation decisions.

Eber Wares Division Analysis

The analysis of Eber Wares division involves calculating key performance metrics. With sales of $30 million, net operating income of $1.17 million, and average operating assets of $8 million, the division's margin is obtained by dividing net operating income by sales: $1.17 million / $30 million = 3.9%. The turnover, indicating asset efficiency, is sales divided by average operating assets: $30 million / $8 million = 3.75 times. The ROI, reflecting overall return on assets, is margin multiplied by turnover: 3.9% x 3.75 = 14.63%.

The residual income, accounting for the minimum required rate of return (18%), is computed as net operating income minus the product of average operating assets and the required rate of return: $1.17 million - ($8 million x 18%) = $1.17 million - $1.44 million = -$270,000. A negative residual income implies the division is not meeting corporate expectations against the benchmark return, indicating potential areas for improvement or strategic realignment.

Product Drop Decision for E28I

The potential discontinuation of product E28I is analyzed by determining its contribution to net operating income. The product’s sales of $480,000, variable expenses of $202,000, and avoidable fixed manufacturing expenses of $86,000 and fixed selling and administrative expenses of $67,000 suggest a contribution margin of ($480,000 - $202,000) = $278,000. Subtracting the avoidable fixed expenses ($86,000 + $67,000 = $153,000) reveals a net contribution of $125,000. Since this is a positive contribution, discontinuing the product would decrease total net operating income, indicating that the product should be retained unless strategic considerations suggest otherwise.

Make-or-Buy Decision for Fouch Company

The relevant costs for deciding whether to make or buy the part include direct materials, direct labor, variable manufacturing overhead, and avoidable fixed costs. The unit cost to produce is $52.30, including direct materials ($15.70), direct labor ($17.50), variable overhead ($4.50), and fixed overhead ($14.60). The outside supplier’s price is $51.90, which is marginally lower than the manufacturing cost.

However, accepting the supplier’s offer would enable the company to avoid $6.20 of fixed manufacturing overhead per unit, but $14.60 per unit of fixed overhead would continue as an unavoidable cost, representing a selection of relevant versus Irrelevant costs. The relevant cost per unit becomes ($15.70 + $17.50 + $4.50 + $6.20) = $43.90, which is less than the supplier's $51.90 price, implying cost savings. The net advantage includes the increase in contribution margin from exploring high-demand products, amounting to $219,000 annually. Accepting the purchase offer leads to cost savings and additional profit, making it a financially favorable decision.

Special Order Analysis

The evaluation of accepting a special order involves calculating incremental revenues and costs. The order’s price is $40.10 per unit for 4,000 units, with a normal selling price of $48.00. Variable costs for each unit are $32.00, but modifications increase variable costs by $5.70, making the new variable cost per unit $37.70. The order incurs a one-time investment in molds costing $31,000.

The total contribution margin per unit for the order is ($40.10 - $37.70) = $2.40. Total contribution from the order is $2.40 x 4,000 = $9,600. After subtracting the initial mold investment ($31,000), the total net impact is negative, indicating that accepting this order would decrease overall profitability unless additional strategic benefits arise outside immediate profit calculations.

Conclusion

Effective managerial decisions hinge on detailed financial analysis. Segmenting revenues and expenses offers insight into individual contribution margins, helping prioritize resource allocation. Additionally, evaluating product discontinuation, procurement options, and special orders requires analyzing relevant costs, contribution margins, and strategic implications. These case analyses reinforce the importance of integrating financial metrics with operational considerations to optimize profitability and sustain competitive advantage.

References

  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Hilton, R. W., & Platt, D. E. (2019). Managerial Accounting: Creating Value in a Dynamic Business Environment (12th ed.). McGraw-Hill Education.
  • Drury, C. (2018). Management and Cost Accounting. Springer.
  • Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Sharpness. Harvard Business Review Press.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2020). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
  • Anthony, R. N., & Govindarajan, V. (2020). Management Control Systems (13th ed.). McGraw-Hill.
  • McKinney, A., & Homeyer, D. (2022). Advanced Managerial Accounting. Wiley.
  • Miller, R. M., & Vollman, M. (2020). Strategic Cost Management. Routledge.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Managerial Accounting (Next Generation). Wiley.
  • Simons, R. (1995). Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal. Harvard Business School Press.

Related Assignments