Question

         MA18-46. Absorption Costing and Performance Evaluation

   On July 2, 2017 Maddon Financial acquired 90 percent of the outstanding stock of Kluber Industries in exchange for 2,000 shares of its own stocks. Maddon Financial has a reputation as a “high flier “company that commands a high price-to-earnings ratio because it's management team works wonders in improving the performance of ailing companies.

      At the time of the acquisitions, Kluber was producing and selling at an annual rate of 100,000 units per year. This is in line with the firm’s average annual activity. Fifty thousand units were produced and sold during the first half of 2017.

       Immediately after the acquisition Maddon Financial installed its own management team and increased production to practical capacity. One-hundred thousand units were produced during the second half of 2017.

    At the end of the year, the new management declared another dramatic turnaround and a $100,000 cash dividend when the following set of income statements were issued:

KLUBER INDUSTRIES Income Statement For the first and second half-years of 2017
	First	Second	Total
Sales	$1,400,000	$1,400,000	$2,800,000
Cost of goods sold*	(1,200,000)	(700,000)	(1,900,000)
Gross profit	200,000	700,00	900,000
Selling and administrative expenses	(200,000)	(400,000)	(600,000)
Net Income	$0	$300,000	$300,000

        Required

        As the only representative of the minority interest on the board of directors, evaluate the performance of the new management team.

         

Answer 1

Solution:-

Required :-

As the only representative of the minority interest on the board of directors, evaluate the performance of the new management team :-

	First	Second	Total
Sales	$1,400,000	$1,400,000	$2,800,000
Cost of goods sold	$1,200,000	$700,000	$1,900,000
Gross profit	$200,000	$700,00	$900,00
Gross margin	= [1,400,000 - 1,200,000] / 1,400,000 = 0.1428 = 14.28%	= [1,400,000 - 700,000] / 1,400,000 = 0.5 = 50%	= [2,800,000 - 1,900,000] / 2,800,000 = 0.3214 = 32.1%
Operating expenses :
Selling and administrative expenses	$200,000	$400,000	$600,000
Net Income	$0	$300,000	$300,000
Net margin	= 0 / 1,400,000 = 0%	= 300,000 / 1,400,000 = 0.2142 = 21.42%	= 300,000 / 2,800,000 = 0.1071 = 10.7%