Reference no: EM131486003
Problem 1. In a narrative format, answer the questions posed in the case.
In the early years of the 21st century the housing market in the U.S. was booming. Housing prices were increasing rapidly, new houses were being constructed at record pace, and companies doing business in the construction and home improvement industry were enjoying rising profits. In 2006 the real estate market ha slowed considerably, and the slump continued through 2007.
Home Depot was one major company in the building supplies industry that was adversely affected by the slowdown in the housing market, On August 14, 2007, it announced that its revenues for the first half of the year were 3 percent lower than revenues were for the first six months of 2006. Of even greater concern was the fact that its earnings for the first half of 2007 were 21 percent lower than for the same period in the prior year.
Write a memorandum that explains how a 3 percent decline in sales could cause a 21 percent decline in profits, Your memo should address the following. Must be minimum of 300 words with two scholarly sources cited.
A. An identification of the accounting concept involved.
B. A discussion of how various major types of costs incurred by Home Depot were likely affected by the decline in its sales.
C. The effect of the decline in sales on Home Depot's margin of safety.
Problem 2. (Using ABC to improve product pricing) Answer the four questions posed in the case. Include in your answer the basic differences between volume based (traditional) overhead application procedures and the ABC method.
Using ABC to improve product pricing.Drilling Innovations, Inc., produces specialized cutting heads used by companies that drill for oil and natural gas.The company has recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for allproducts.To perform this evaluation, the company compiled data for the three products using both the traditional system and the new ABC system. The traditional system used a single driver(machine hours).The ABC system uses a variety of cost drivers related to the activities used to produce the cutting heads.The three products involved in the trial run of the ABC system were GS-157, HS-241, and OS-367.The following data related to these products; unit data have been rounded to the nearest penny.
Product Selling price Units produced Total costs allocated Cost per unit total cost Costs per
Per unit Traditional Traditional Allocated Unit
Costing Costing ABC ABC
GS-157 $19.30 120,000 $1,600,000 $13.33 $1,500,000 $12.50
HS-241 17.50 90,000 $1,100,000 12.22 $1,050,000 11.67
OS-367 15.10 40,000 400,000 10.00 550,000 13.75
Totals $3,100,000 $3,100,000
A. Determine the gross profit margin for each product produced based on the ABC data.(selling price - ABC cost per unit) x Units produced). Must explain in a minimum of 150 words and provide one scholarly source cited within the text.
B. Determine the gross profit margin for each product produced based on the traditional costing data. (Selling price - Traditional cost per unit) x Units produced. Must explain in a minimum of 150 words and provide one scholarly source cited within the text.
C. Provide an explanation as to why the cost of the OS-367 may have increased under the ABC system while the cost of the GS-157 decreased. Must explain in a minimum of 150 words and provide one scholarly source cited within the text.
D. Suggest what action management might take with respect to the discoveries resulting from the ABC versus traditional costing analysis.Assume that Drilling Innovations expects to produce a gross profit margin on each product of at least 30 % of the selling price. Must explain in a minimum of 150 words and provide one scholarly source cited within the text.