'The new dean believes in using cost accounting information to make decisions and is

reviewing a staff-developed income statement broken down by the degree offered. The
dean is considering closing down the Bachelor of Business Administration (BBA) program
because the analysis, which follows, shows a loss.'
'Tuition increases are not possible. The dean has asked for your advice. If the BBA
degree program is dropped, school administration costs are not expected to
change, but direct costs of the program, such as operating costs, building
maintenance, and classroom costs would be saved! There will be no other changes in
the operations or costs of other programs.'

Revenue

2,000,000

Total Costs

(2,050,000)

Net Profit/Loss

(50,000)

costs
BBA advertising
Faculty Salaries
Degree operating Costs
(part time employees)
Building maintenance
Classroom Costs
Allocated school admin

$
$

(75,000)
(1,020,000)

$
$
$
$

(130,000)
(185,000)
(425,000)
(215,000)

1.
Q. What revenues and costs are probably differential for the decision to drop the
BBA program?
A. The differential costs and revenues are the revenues and costs that would
change with the cancellation of the BBA program. The differential revenue is the
program's revenue of $2 million. The differential costs is only the costs that will
change if the program is no longer running. These costs include the BBA advertising
($75,000), the degree operating costs ($130,000), building maintenance ($185,000)
and classroom costs ($425,000). The total differential costs equals $815,000.
2.
Q. What will be the net effects on the SUBS contribution (profit) if the BBA
program is dropped?
A. If the BBA program is cancelled The faculty salaries and the school
administration costs will remain the same. This means that even though there is no
revenue from the BBA program there will still be costs the school will acquire because
these costs are fixed costs. The net effects of discontinuing the BBA program would
be a loss of ($1,235,00).

and is
red. The
) program

BBA
d to
ding
changes in

p the

uld
he
ll
rtising
,000)

is no
ecause
would

The dean of the Business School is considering expanding the BBA program by
offering an evening program in a nearby city. The program would be the same size
(in terms of students) will be twice the current revenue, as shown in Exercise 1-22.
Because the evening program will be new, advertising expenses for the evening
session will be three times their current level. Faculty salaries will double. Degree
operating costs will increase by 50%. Building maintenance and classroom costs
will remain unchanged, but classroom space will be rented at a cost of $100,000
per academic year. School administration costs will increase by $10,000 and
allocated school administration costs (for both programs) will be $260,000 per
academic year.
1.
Q. What will the contribution of the combined BBA program be, given these
estimates?
A.

Revenue

$ 4,000,000

costs
BBA advertising
Faculty Salaries
Degree operating Costs
(part time employees)
Building maintenance
Classroom Costs
Classroom Space Cost
Allocated school admin

$ (225,000)
$(2,040,000)
$
$
$
$
$

(195,000)
(185,000)
(425,000)
(100,000)
(260,000)

Total Costs

$(3,430,000)

Net Profit/Loss

570,000

2.
Q. Are there other factors the dean should consider before making her
decision?
A. Setting a budget for the two different BBA programs will be important. To
stay within the estimated net profit shown above. If management does not stay
within the estimated budget the net profit/loss will be different. Another factor that
should be considered is if there is interest for the BBA program in the second
location. This is important because the estimated net profit could be completely
different if students are not interested in persuing a BBA degree in the second
location.

by
me size
e 1-22.
ening
Degree
costs
,000
d
per

hese

t. To
stay
tor that
d
etely
nd

KC Services provides landscaping services in Edison. Kate Chen, the owner, is

concerned about the recent losses the company has incurred and is considering
dropping its lawn services, which she feels are marginal to the company's business.
She estimates that doing so will result in lost revenues of $100,000 per year
(inlcuding the lost tree business from customers who use the companyfor both
services). The present manager will continue to supervise the tree services with no
reduction in salary. Without the lawn business, Kate estimates that the company
will save 15% of the equipment leases, labor, and other costs. She also expects to
save 20% on rent and utilites.
a. Prepare a report of the differential costs and revenues if the lawn services is
discontinued

KC Services
Projected Income Statement
For One Year
(1)

Current

(2)
Removal of
lawn
Service

(3)

Difference

Revenue

608,000

$ 508,000

(100,000)

Cost
Equipment Leases
Labor
Utilities
Rent
Other Costs
Manager's Salary
Total Costs
Operating Profit

$
$
$
$
$
$
$
$

240,000
192,000
32,000
64,000
32,000
80,000
640,000
(32,000)

$(204,000)
$(163,200)
$ (25,600)
$ (51,200)
$ (27,200)
$ 80,000
$(391,200)
$ 116,800

$
$
$
$
$
$
$
$

(36,000)
(28,800)
(6,400)
(12,800)
(4,800)
(160,000)
(248,800)
84,800

b. Should Kate discontinue the lawn service?

Accourding to the the chart shown above, the company would financially
benefit from the discontinued lawn services.
c. Are there factors other than the differential costs and revenues that Kate should
consider?
Kate should be aware that these are just estimates and may change if costs are
not truly reduced to what they are expecting. Though she my reduce the services
provided for the lawn service customers she will be able to improve the quality of
service the the tree service customers.

not truly reduced to what they are expecting. Though she my reduce the services
provided for the lawn service customers she will be able to improve the quality of
service the the tree service customers.

, is
ering
business.
ar
oth
s with no
mpany
pects to

es is

e should

osts are
ervices
lity of

ervices
lity of

Tom's Tax Services is a small accounting firm that offers tax services to small
businesses and individuals. A local store owner has approached Tom about doing his
taxes but is concerned about the fees Tom normally charges. The costs and
revenues at Tom's Tax Services are presented on the following page.
If Tom gets the store's business, he will incur an additional $60,000 in labor costs.
Tom also estimates that he will have to increase equipment leases by about 10%,
supplies by 5%, and other costs by 15%.

Tom's Tax Services

Projected Income Statement
For One Year
(1)

Current

(2)
Removal of
lawn Service

(3)

Difference

Revenue

720,000

791,000

71,000

Cost
Labor
Equipment Costs
Rent
Supplies
Tom's Salary
Other Costs
Total Costs
Operating Profit

$
$
$
$
$
$
$
$

477,000
50,400
43,200
32,400
75,000
22,800
700,800
19,200

$
$
$
$
$
$
$
$

537,000
55,440
43,200
34,020
75,000
26,220
770,880
20,120

$
$
$
$
$
$
$
$

(60,000)
(5,040)
(1,620)
(3,420)
(70,080)
920

a. What are the differential costs that would be incurred as a result of adding this
new client
Differential costs are the costs that will be different if Tom chooses to take on this
new client. The differential costs are labor, equipment leases, supplies, and other
costs.
b. Tome would normally charge about $75,000 in fees for the services the store
would require. How much could he offer to charge and still not lose money on this
client?
As seen in the report above Tom could not charge less than $70,800 just to
break even in additional cost he would incur. The minimum suggested offer should
not be less than $71,000. This will allow the company to make a small profit and
service a new client.
c. What considerations, other than costs, are necessary before making this decision?
Another consideration Tom should take into account before taking on this client is
whether the small store will be able to afford such high costs for their accounting
needs. Tom's Tax Service may not be a good fit fir the small store. An evealuation
should be done to determine whether the potential client will be able to afford such
high costs.

service a new client.

c. What considerations, other than costs, are necessary before making this decision?
Another consideration Tom should take into account before taking on this client is
whether the small store will be able to afford such high costs for their accounting
needs. Tom's Tax Service may not be a good fit fir the small store. An evealuation
should be done to determine whether the potential client will be able to afford such
high costs.

doing his

osts.
10%,

Refer to Exhibit 1.5. Assume that Carme's Cookies is preparing a budget for
the month ending September 30th. Management prepares the budget by
starting with the actual results for April that appear in Exhibit 1.5. Then,
management considers what the difference in costs will be between April and
September.
Management expects cookie sales to be 20% greater in September than in
April, and it expects all food costs to be 20% higher in September than in April
because of the increase in cookie sales. Management expects 'other' labor
costs to be 25% higher in September than in April, partly because more labor
will be required in September and partly because of pay increases. The
manager will get a pay raise that will increase the salary from $3,000 in April to
$3,500 in September. Utilities will be 5% higher in September than in April.
Rent will be the same in September as in April.
Now fast forward to early October and assume the following actual results
occurred in September:
a. Prepare a statement like the one in Exhibit 1.5 that compares the budgeted
and the actual costs for September.

Carmen's Cookies
Retail Responsibility Center
Budgeted versus Actual Costs
For the Month Ending September 30

Actual
Food
Flour
Eggs
Chocolate
Nuts
Other
Total food
Labor
Manager
Other
Total Labor
Utilities
Rent
Total Cookie Costs
Number of Cookies Sold

$
$
$
$
$
$

2,700
6,500
2,100
2,300
2,700
16,300

$
$
$
$
$
$

3,500
1,850
5,350
2,200
5,000
28,850
38400

Budget

Difference

$ 2,640
$ 9,400
$ 3,800
$ 3,800
$ 2,640
$ 22,281

$
$
$
$
$
$

###
1,875
5,375
3,600
###
$ 36,256
32640

$
$
(25)
$
(25)
$ (1,400)
$
$ (7,406)
$ 5,760

$
$
$

60
(2,900)
(1,700)
(1,500)
60
(5,981)

b. Suppose that you have limited time to determine why actual costs are not
the same as the budgeted costs. Which three costs items would you
investigate to see why actual and budgeted costs are different? Why would you
choose those three costs.
The three actual costs that should be investigated are eggs, chocolate, and
utilities. The reason for this is because they are the three costs that are the

b. Suppose that you have limited time to determine why actual costs are not
the same as the budgeted costs. Which three costs items would you
investigate to see why actual and budgeted costs are different? Why would you
choose those three costs.
The three actual costs that should be investigated are eggs, chocolate, and
utilities. The reason for this is because they are the three costs that are the
furthest from budget. Even though there is less costs actually incurred than
budgeted they should be investiagted on to improve the budget for the future.

dgeted