Explain the difference between a controllable and a non-controllable cost.
A controllable cost is one that the administration can influence with their choices. A non-controllable cost is one that the administration cannot impact.
The costs that can be changed in response to a need or business option are called controllable costs. These costs pertain exclusively to a specific item, division or function. Some examples are direct labour, direct supply, contribution, preparation cost, bonus, membership, legitimate expenses and official costs.
Alludes to a cost which will be changed depending on a necessity or business choice.
Alludes to a cost that cannot be changed in response to a particular business need or choice.
short-term changes are possible
Long-term cost changes are possible.
Direct labour, direct supplies, contributions, and other expenses are controlled costs.
Depreciation, insurance, and administrative overhead are examples of unavoidable expenditures.
Zims, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: professional and residential. The following divisional information was available for the past year:
Net Sales Revenue Operating Income Average Total Assets
Residential $ 550,000 $ 65,280 $ 192,000
Professional 1,090,000 164,820 402,000
Management has a 26% target rate of return for each division.
1. Calculate each division’s ROI. Round all of your answers to four decimal places.
2. Calculate each division’s profit margin ratio. Interpret your results.
3. Calculate each division’s asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude?
The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information:
Chair Division Cushion Division
Sales Price per Chair $ 85 Sales Price per Cushion $ 32
Variable Cost (other than cushion) 42 Variable Cost per Cushion 13
Variable Cost (cushion) 22
Contribution Margin per Chair $ 21 Contribution Margin per Cushion $ 19
1. Determine the total contribution margin for Harris Company for the quarter.
2. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?
3. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?
4. Review your answers for Requirements 1, 2, and 3. What is the best option for Harris Company?
5. Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
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