CMA Study Group

 View Only

  • 1.  Study Unit 11: Marginal Analysis and Pricing | Subunit 4: Decision Making -- Other Situations

    Posted 09-19-2020 04:10 PM
    what is the corporate overhead?? and why did they add it back to profit??

    Study Unit 11: Marginal Analysis and Pricing | Subunit 4: Decision Making -- Other Situations
     
     
    Question: 12 A corporation manages five apartment complexes in a three-state area. Summary income statements for each apartment complex are shown as follows:
    Summary Income Statements (in thousands)
    One
    Two
    Three
    Four
    Five
    Rental Income
    $1,000
    $1,210
    $2,347
    $1,878
    $1,065
    Expenses
    800
    1,300
    2,600
    2,400
    1,300
    Profit
    $   200
    $    (90)
    $  (253)
    $  (522)
    $  (235)
    Included in the expenses is $1,200,000 of corporate overhead allocated to the apartment complexes based on rental income. The apartment complex(es) that the corporation should consider selling is (are)
    Answer (D) is correct.
    The amount of corporate overhead allocated to each complex is calculated below.
    Complex
    Income
    Percentage
    Allocation
    One
    $1,000
      13.33%
    $  160
    Two
    1,210
     16.13  
    194
    Three
    2,347
     31.29  
    375
    Four
    1,878
     25.04  
    300
    Five
    1,065
     14.21  
    171
    Total
    $7,500
    100.00%
    $1,200
    The revised profits would be as follows:
    Complex
    Original
    Allocation
    Adjusted
    One
    $ 200
    $160
    $ 360
    Two
    (90)
      194
    104
    Three
    (253)
      375
    122
    Four
    (522)
      300
    (222)
    Five
    (235)
      171
    (64)
    After eliminating the allocated costs from the income statement, Four and Five still have losses.




    Submit Inquiry/Feedback


    ------------------------------
    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
    ------------------------------


  • 2.  RE: Study Unit 11: Marginal Analysis and Pricing | Subunit 4: Decision Making -- Other Situations

    Posted 09-24-2020 09:50 AM
    Hi Tabya,

    Overhead head costs are cost incurred to support the business. It can be fixed or variable or a combination of both.
    Even if the product is not produced such costs continue to be incurred.
    Since corporate overhead is included in expenses, it is resulting in a loss.
    Hence it should be added back to the profits.

    Thank You
    Sanjana





    ------------------------------
    Sanjana
    ------------------------------

    Original Message