Deck 16: Revenue and Customer Profitability Analysis

Question 1

Which of the following statements is TRUE?

A) Joint product allocation results in more accurate assignment of revenues to products than does revenue allocation.
B) Revenue allocation results in more accurate assignment of revenues to products than does revenue tracing.
C) Revenue tracing results in more accurate assignment of revenues to products than does revenue allocation.
D) Revenue allocation results in more accurate assignment of revenues to products than does joint product allocation.
E) Joint product allocation results in more accurate assignment of revenues to products than does revenue tracing.

Answer 1

Revenue tracing results in more accurate assignment of revenues to products than does revenue allocation.

Question 2

Which of the following statements is TRUE?

A) The two main classes of revenue allocation methods are the step-up method and the incremental method.
B) The stand-alone revenue allocation method ranks the individual products in a bundle and then uses this ranking to allocate the bundled revenues to these individual products.
C) A bundled product is a package of two or more products or services, sold for multiple prices.
D) The issues discussed with revenue tracing and sales returns apply to cost tracing.
E) The two main classes of revenue allocation methods are the stand-alone method and the incremental method.

Answer 2

The two main classes of revenue allocation methods are the stand-alone method and the incremental method.

Question 3

Use the information below to answer the following question(s).
John's Video Game Outlet encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the video games are sold as a single package. Managers at John's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows:
Stand-Alone Sales Price
The unit manufacturing costs are $3.60, $4.00, and $5.00 for games A, B, and C, respectively.

-Calculate the allocation of packaged price for Game A in Package 1, using selling prices as the base.

A) $14.00
B) $20.00
C) $30.00
D) $25.00
E) $35.00

Answer 3

$20.00

Question 4

Use the information below to answer the following question(s).
John's Video Game Outlet encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the video games are sold as a single package. Managers at John's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows:
Stand-Alone Sales Price
The unit manufacturing costs are $3.60, $4.00, and $5.00 for games A, B, and C, respectively.

-Calculate the allocation of packaged price Game A in Package 3, using selling prices as the base.

A) $34.20
B) $30.00
C) $25.00
D) $22.80
E) $19.00

Question 5

Use the information below to answer the following question(s).
John's Video Game Outlet encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the video games are sold as a single package. Managers at John's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows:
Stand-Alone Sales Price
The unit manufacturing costs are $3.60, $4.00, and $5.00 for games A, B, and C, respectively.

-Calculate the revenue allocation for Game A in Package 1, using physical units as the base.

A) $12.57
B) $14.67
C) $20.84
D) $22.00
E) $23.16

Question 6

Use the information below to answer the following question(s).
John's Video Game Outlet encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the video games are sold as a single package. Managers at John's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows:
Stand-Alone Sales Price
The unit manufacturing costs are $3.60, $4.00, and $5.00 for games A, B, and C, respectively.

-Calculate the allocation of packaged price for Game A in Package 1, using unit costs as the base.

A) $12.57
B) $13.97
C) $20.84
D) $22.00
E) $23.16

Question 7

Max's DVD Store encounters revenue allocation decisions with its bundled product sales. Here, two or more of the DVDs are sold as a single package. Managers at Max's are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:

Required:
a. With selling prices as the weights, allocate the $25 packaged price of "All Three"
to the three videos using the stand-alone revenue allocation method.
b. Allocate the $25 packaged price of "All Three"
to the three types of videos using the incremental revenue allocation method. Assume New Releases is the primary product, followed by Older Releases, and then Classics.

Question 8

Manny's DVD Store encounters revenue allocation decisions with its bundled product sales. Here, two or more of the DVDs are sold as a single package. Managers at Max's are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:

Required:
a. With cost as the weights, allocate the $17 packaged price of "New & Classics"
using the stand-alone revenue allocation method.
b. Allocate the $17 packaged price of "New & Classics"
using the incremental revenue allocation method. Assume New Releases is the primary product, followed by Older Releases, and then Classics.

Question 9

Roper's Cablevision encounters revenue allocation decisions with its bundled product sales. Two or more of its services are sold as a single package. Managers at Roper's are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows:
‪
The unit variable costs are estimated at $4.00, $3.00, and $2.50 for Sports, Lifestyle, and TV Classics, respectively. Basic Sports is considered to be the primary product, Lifestyle the first incremental, and TV Classics the second incremental .
Required:
a. Allocate the bundled revenue to each product in the 'Sports & Classics' bundle, using selling prices as the base.
b. What is the allocated revenue to the Sports in each bundle, using the incremental revenue allocation method?

Question 10

Software For You encounters revenue allocation decisions with its bundled product sales. Two or more of the programs are sold as a single package. Managers at Software For You are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone prices of its individual products is as follows:
‪
The unit inventory costs is $18, $20, and $25 for WP, SS, and AS, respectively. Assume AS is the primary product, followed by SS, then WP.
Required:
Allocate the bundle revenue to each product in Package C, using inventory unit costs as the weighting factor.

Question 11

Easton Photography Ltd. sells cameras and related equipment. It often packages these into bundles for sale to consumers. Currently it is offering the following "package"
deal: a camera; a photo printer; and, a camera accessory pack that includes battery recharger, case and various lens adapters. The package deal is selling for $740. The individual prices and costs of these components are as follows:

Required:
Allocate the revenue among the products under each of the following:
a. Unit selling prices
b. Unit costs
c. Physical units

Question 12

Apply an ABC system to allocate costs when the customer is the cost object.
-Lynnwood Ltd. is reviewing two of its customers using ABC analysis. It has identified the following customer related activities and their rates:
The company has the following information regarding Enbright Ltd. and Jackson Inc.:
Sales for Enbright and Jackson are $280,000 and $148,000 respectively. The cost of goods sold on these sales are the same at 52%.
Required:
Using Customer ABC Analysis, analyze the relative profitability of Enbright and Jackson.

Question 13

Apply an ABC system to allocate costs when the customer is the cost object.
-Boxwood Ltd. is reviewing two of its customers using ABC analysis. It has identified the following customer related activities and their rates:
The company has the following information regarding Enbright Ltd. and Jackson Inc.:
Sales for Ecobright and Samson are $285,000 and $146,000 respectively. The cost of goods sold on these sales are the same at 48%.
Required:
Using Customer ABC Analysis, analyze the relative profitability of Ecobright and Samson.

Question 14

The sales-volume variance for revenue is the

A) (actual sales quantity in units divided by budgeted individual product selling price per unit) times (budgeted sales quantity in units).
B) (budgeted contribution margin per unit) times (actual unit sales plus static budget unit sales).
C) (actual sales quantity in units plus budgeted sales quantity in units) divided by (budgeted individual product selling price per unit).
D) (budgeted sales quantity in units divided by budgeted individual selling price per unit) times (actual sales quantity in units).
E) (budgeted individual product selling price per unit) times (actual sales quantity in units less budgeted sales quantity in units).

Question 15

A company sells two products: radios and speakers. The expected sales for radios were 1,500 units; 2,000 were sold. The budgeted selling price for radios was $15.00; however, the actual selling price was $13.00. The expected sales for speakers were 4,600 units; 5,000 were sold. The budgeted selling price for speakers was $7.50; however, the actual selling price was $9.00. Budgeted and actual variable costs were $4.00 per unit for the radios and $2.00 per unit for the speakers. What is the contribution margin sales-volume variance for the period?

A) $2,200 unfavourable
B) $2,200 favourable
C) $4,500 favourable
D) $7,700 favourable
E) $7,700 unfavourable

Question 16

Which of the following actually calculates the sales-quantity variance?

A) (actual units of all products sold) times (actual sales mix percentage minus budgeted sales mix percentage) times (budgeted contribution margin per unit)
B) (actual sales quantity in units minus static-budget sales quantity in units) times (budgeted contribution margin per unit)
C) (actual units of all products sold minus budgeted units of all products sold) times (budgeted sales-mix percentage) times (budgeted contribution margin per unit)
D) (actual units of all products sold minus budgeted units of all products sold) times (budgeted sales-mix percentage) times (actual contribution margin per unit)
E) (actual units of all products sold) times (actual sales mix percentage minus budgeted sales mix percentage) times (actual contribution margin per unit)

Question 17

Use the information below to answer the following question(s).
Remote Company manufactures remote control devices for electronic equipment. The following information was collected during June:


-What is the company's market-share variance?

A) $1,600 unfavourable
B) $1,600 favourable
C) $2,560 favourable
D) $1,200 unfavourable
E) $1,200 favourable

Question 18

Use the information below to answer the following question(s).
Remote Company manufactures remote control devices for electronic equipment. The following information was collected during June:


-What is the company's market-size variance?

A) $4,800 favourable
B) $3,200 favourable
C) $2,400 favourable
D) $2,400 unfavourable
E) $3,200 unfavourable

Question 19

Answer the following questions using the information below:
The XTRA Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:
?

-What is the budgeted sales-mix percentage for the Standard and the Super vacuum cleaners, respectively?

A) 0.80 and 0.20
B) 0.70 and 0.30
C) 0.20 and 0.80
D) 0.30 and 0.70

Question 20

Columbia Coffee Inc. sells two types of coffee, Regular and Decaf. The monthly budget for Canadian coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the Canadian market. The following information is provided for March:

Required:
Calculate the static-budget, flexible-budget and sales-volume variances for the contribution margin, for the company for March.

Question 21

The Chair Company manufactures two modular types of chairs; one for the residential market, and the other for the office market. Budgeted and actual operating data for the past year are:

The industry volume for residential and office chairs of the type sold by the Chair company had been estimated at 2,400,000. Actual industry volume for the year was 2,200,000 chairs.
Required:
a. Compute the sale-mix variance and the sales- quantity variance by type of chair, and in total.
b. Compute the market-share variance and market-size variances. (Calculate actual and budgeted market share percentages to two decimal places.)

Question 22

Aromatic Coffee Inc.. sells two types of coffee, Colombian and Blue Mountain. The monthly budget for U.S. coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the U.S. market. The following information is provided for March:
Required:
a. Calculate the actual total contribution margin for the month.
b. Calculate the total contribution margin for the static budget.
c. Calculate the total contribution margin for the flexible budget.
d. Determine the total static-budget variance, the total flexible-budget variance, and the total sales-volume variance in terms of the contribution margin.

Question 23

Various Product Company is a manufacturer of numerous products which are similar and are processed on the same assembly line. The production manager has decided that she will require all product managers and assembly line managers to be responsible for their own operations. The accounting information system is a large complex system that can provide specialized reporting when needed. It also has room for new, permanent applications.
Required:
Discuss how the production manager can expand the reporting responsibilities of these managers.

Question 24

Which of the following statements is TRUE?

A) Managers often find the bar chart presentation to be the most accurate way to analyze customer profitability.
B) Managers find customer-profitability analysis useful because it frequently highlights how vital a small set of customers is to total profitability.
C) Managers find customer-profitability analysis useful because when a customer is ranked in the loss category, they can focus their resources on this type of customer.
D) The 80/20 rule means that 80% of the customers provide 80% of the profit and 20% of the customers provide the remainder.
E) Managers can ensure that low profitability customers receive high priority.

Question 25

The data for a paint manufacturing company for February are as follows:

Required:
Prepare a report showing the customer-specific contribution. Present one column for customer-specific contribution and a second column showing customer-specific contribution as a percentage of customer revenue net of discounts (round percentages to two decimal places).

Question 26

Jung Manufacturing Ltd. manufactures small engine parts. Data for two of the company's customers is as follows:

Required:
a. Prepare a comparative income statement in gross margin format with one column for each customer; present customer-specific costs as period expenses.
b. Which customer is relatively more profitable? Support your answer with comparative percentage analysis.

Question 27

Handy-Man Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:

Required:
a. Compute the operating income for each of the five customers.
b. What options should Handy-Man Services consider in light of the customer-profitability results?
c. What problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer?

Question 28

Each division manager for a paint manufacturer is provided with a customer profitability analysis for the past year. The managers use the analysis to determine how best to allocate the company's resources within their division, and when a customer is a "loss customer,"
that customer is dropped.
Required:
Advise (briefly) the managers on their strategy of focusing only on profitability over the year, in terms of improving the bottom line of their respective divisions. Include at least three other factors that managers should consider in deciding how to assess customer value.

Question 29

Bannock Safety Equipment Ltd. operates two stores, one in Edmonton and another in Thunderbay. The following income statements were prepared for the most recent year:
The store equipment and leasehold improvements have no market value. The building leases can be cancelled without penalty.
Required:
a. Calculate the dollar value of sales required for each store to break-even assuming that all of the fixed costs are to be covered?
b. Should management close the Thunderbay store? Assume that corporate overhead would be reduced by $100,000 if the Thunderbay store is closed.