# Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces.

Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the snail extraction line of products takes up approximately 50 percent of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering snail extraction tools or focus only on serving pieces. If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided and serving piece sales would increase by 13 percent. Allocated fixed costs are assigned based on relative sales. Snail Extraction Serving Tools Pieces Total Sales \$1,200,000 \$800,000 \$2,000,000 Less cost of goods sold 700,000 500,000 1,200,000 Contribution margin 500,000 300,000 800,000 Less direct fixed costs: Salaries 175,000 175,000 350,000 Other 60,000 60,000 120,000 Less allocated fixed costs: Rent 14,118 9,882 24,000 Insurance 3,529 2,471 6,000 Cleaning 4,117 2,883 7,000 Executive salary 76,470 53,530 130,000 Other 7,058 4,942 12,000 Total costs 340,292 308,708 649,000 Net income \$159,708 (\$ 8,708) \$151,000 Prepare an incremental analysis in good form to determine the incremental effect on profit of discontinuing the snail extraction tool line. (Points : 6) 2. (TCO 4) Paschal’s Parasailing Enterprises has estimated that fixed costs per month are \$115,600 and variable cost per dollar of sales is \$0.38. (a) What is the break-even point per month in sales? (b) What level of sales is needed for a monthly profit of \$67,000? (c) For the month of August, Paschal’s anticipates sales of \$585,000. What is the expected level of profit? (Points : 6) 3. (TCO 6) Princess Cruise Lines has the following service departments; concierge, valet, and maintenance. Expense for these departments are allocated to Mediterranean and Trans-Atlantic cruises. Expenses for the departments are totaled (both variable and fixed components are combined) and as follows: Concierge \$2,500,000 Valet \$1,750,000 Maintenance \$4,250,000 The sea miles logged are 6,000,000 for the Mediterranean and 18,000,000 for the Trans- Atlantic voyages. Based upon the sea miles logged, allocate the service department costs. (Points : 6) 4. (TCO 9) Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center his lot. The building and equipment are estimated to cost \$1,100,000 and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munster’s required rate of return for this project is 12 percent. Net income related to each year of the investment is as follows: Revenue \$450,000 Less: Material cost \$ 60,000 Labor 100,000 Depreciation 110,000 Other 10,000 280,000 Income before taxes 170,000 Taxes at 40% 68,000 Net income \$102,000 (a) Determine the net present value of the investment in the service center. Should Munster invest in the service center? (b) Calculate the internal rate of return of the investment to the nearest ½ percent. (c) Calculate the payback period of the investment. (d) Calculate the accounting rate of return. (Points : 8) 5. (TCO 5) The following information relates to Vice Versa Ventures for calendar year 20XX, the company’s first year of operations: Units produced 20,000 Units sold 17,000 Selling price per unit \$35 Direct material per unit \$5 Direct labor per unit \$5 Variable manufacturing overhead per unit \$2 Variable selling cost per unit \$3 Annual fixed manufacturing overhead \$160,000 Annual fixed selling and administrative expense \$80,000 (a) Prepare an income statement using full costing. (b) Prepare an income statement using variable costing. (Points : 8) 6. (TCO 8) Leekee Shipyards has a new barnacle removing product for ocean going vessels. The company invests \$1,200,000 in operating assets and plans to produce and sell 400,000 units per year. Leekee wants to make a return on investment of 20% each year. Leekee needs to know what price to charge for this product. Use the absorption costing approach to determine the markup necessary to make the desired return on investment based on the following information: Per Unit Total Direct Materials \$ 2.00 Direct Labor \$ 1.50 Variable Manufacturing Overhead \$ 1.00 Fixed Manufacturing Overhead \$ 100,000 Variable Selling and Administrative Expense \$ 0.10 Fixed Selling and Administrative Expense \$ 100,000 (Points : 6)