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ACC 604 FINAL EXAM PART B
Pots and Pans Distributors, Inc. (P&P) is the distribution company and subsidiary of Cookware
Manufacturing Company. P&P buys its pots and pans from Cookware, its parent company, and
markets them through its three regional sales divisions in North America, Asia and Europe.
John Greer, the president of P&P has just received the divisional income and product reports (attached),
and is very disturbed by the very low (1%) profit margin of the company overall, especially the loss
sustained by the European division. His request to Cookware to reduce transfer prices has been
rejected. He comes to you, a consultant, for help and advice.
Upon interviewing company personnel, you learn that P & P does not prepare operating budgets with
which to plan and control future operations and measure the performance of its managers. Division
managers are paid a fixed salary plus a bonus based upon increases in total sales revenue over the
previous year. You also learn in your interviews that the equipment used by the European Division has
no alternative use and no resale value.
Required: Write your answers to all questions in Word, and for questions 2 through 6,
show your calculations in a neat, orderly fashion. Be sure to indicate the question number
with each answer.
1. After analyzing the Divisional Income Statement and the Product report, write a formal memo to
P & P's president in which you refer to specific percentage differences to identify possible causes for
the poor performance of the European Division. Then, provide a bulleted listing of possible strategies to be
considered with respect to product selling price, product-mix, planning and control, manager incentives, and
specific cost-saving measures.
(Be sure to review the facts carefully so that you address all those that are relevant.)
2. Based on its current contribution margin ratio, how much in ADDITIONAL sales must the
European Division achieve in order to at least cover its fixed costs and break even?
3. How much in ADDITIONAL sales must it achieve in order to achieve a SEGMENT MARGIN of
$25,000
4. If the European Division can increase its sales by 10%, what SEGMENT MARGIN will it achieve,
assuming no change in contribution margin ratio or in fixed expenses?
5. If the European Division cannot make sufficient changes to eliminate losses and start showing a
positive segment margin, should it be discontinued? Explain why or why not by showing the
contribution margin that would be lost vs. the avoidable fixed costs that would be saved.
6. A Russian company has offered to buy 50,000 pans from the European Division at a special
price of $3.50 each. No sales commission would be involved. Assuming Cookwear is unwilling
to reduce its prices to P & P, should the European Division accept the offer? Explain why or
why not.

Division IS

POTS & PANS DISTRIBUTORS, INC.
Divisional Income Statement
For the year ended December 31, 2003
Total North America Asia Europe
Sales % % % %
Pots 1,120,000 43.1 600,000 50.0 360,000 60.0 160,000 20.0
Pans 1,480,000 56.9 600,000 50.0 240,000 40.0 640,000 80.0
Total sales 2,600,000 100.0 1,200,000 100.0 600,000 100.0 800,000 100.0
Less variable expenses:
Cost of goods sold 1,782,000 68.5 810,000 67.5 396,000 66.0 576,000 72.0
Selling commission expense 130,000 5.0 60,000 5.0 30,000 5.0 40,000 5.0
Total variable expenses 1,912,000 73.5 870,000 72.5 426,000 71.0 616,000 77.0
Contribution margin 688,000 26.5 330,000 27.5 174,000 29.0 184,000 23.0
Less traceable fixed expenses:
Administrative salaries 221,000 8.5 88,400 7.4 48,620 8.1 83,980 10.5
Occupancy costs 65,000 2.5 23,400 2.0 13,000 2.2 28,600 3.6
Advertising 130,000 5.0 49,400 4.1 26,000 4.3 54,600 6.8
Depreciation 78,000 3.0 31,200 2.6 18,720 3.1 28,080 3.5
Total traceable fixed expense 494,000 19.0 192,400 16.0 106,340 17.7 195,260 24.4
Division segment margin 194,000 7.5 137,600 11.5 67,660 11.3 (11,260) (1.4)
Less common fixed expenses:
Corporate administrative 117,000 4.5
Research and development 52,000 2.0
Total common fixed expense 169,000 6.5
Net Income 25,000 1.0

Products

POTS & PANS DISTRIBUTORS, INC.
Schedule of Product Sales and Gross Margin
For the year ended December 31, 2003
Total Pots Pans
Catalog selling price: $10.00 per unit $5.00 per unit
Transfer price from Cookwear $6.00 per unit $3.75 per unit
North America % % %
Sales 1,200,000 100.0 600,000 100.0 600,000 100.0
Cost of goods sold 810,000 67.5 360,000 60.0 450,000 75.0
Gross margin 390,000 32.5 240,000 40.0 150,000 25.0
Asia
Sales 600,000 100.0 360,000 100.0 240,000 100.0
Cost of goods sold 396,000 66.0 216,000 60.0 180,000 75.0
Gross margin 204,000 34.0 144,000 40.0 60,000 25.0
Europe
Sales 800,000 100.0 160,000 100.0 640,000 100.0
Cost of goods sold 576,000 72.0 96,000 60.0 480,000 75.0
Gross margin 224,000 28.0 64,000 40.0 160,000 25.0

Data

POTS & PANS DISTRIBUTORS, INC.
Data
For the year ended December 31, 2003
Pots Pans
Territories North America Asia Europe
Total Sales 1,200,000 600,000 800,000
Percentage of total sales: 46.2% 23.1% 30.8%
Pots 50.0% 60.0% 20.0%
Pans 50.0% 40.0% 80.0%
Unit selling price:
Pots $10.00 $6.00 $10.00 $6.00 $10.00 $6.00
Pans $5.00 $3.75 $5.00 $3.75 $5.00 $3.75
Cost of goods sold %:
Pots 60.0 % 60.0 % 60.0 %
Pans 75.0 % 75.0 % 75.0 %
Selling commission rate 5.0 % 5.0 % 5.0 %