Q1TIAT - Horngren'S Financial And Managerial Accounting

Question

Winnebago Industries, Inc. is a leading manufacturer of recreational vehicles (RVs), including motorized and towable products. The company designs, develops, manufactures, and markets RVs as well as supporting products and services. The RVs are sold to consumers through a dealer network. On the August 29, 2015, balance sheet, Winnebago reported inventory of approximately \(112 million. Of this amount, approximately \)12 million, about 11%, was Finished Goods Inventory (Notes to Consolidated Financial Statements, Note 3). Suppose Winnebago motor homes have an average sales price of $96,000 and cost of goods sold is 89% of sales. Thor Industries, Inc., a major competitor, has an average cost of goods sold of 86% of sales. For year ending August 29, 2015, Winnebago sold 9,097 motor homes (Form 10-K, Item 1 Business). 

Requirements 

1. Why would the Finished Goods Inventory be such a relatively small portion of total inventory? 

2. What is the average cost of goods sold (in dollars) for a Winnebago motor home? What is the average gross profit? 

3. If Winnebago could reduce production costs so that the average cost of goods sold is equal to their competitor’s average cost of goods sold, how much more profit would Winnebago earn on each motor home sold? 

4. Based on 2015 sales, how much would operating income increase if the company reduced the average cost of goods sold to equal their competitor’s average cost of goods sold? 

5. How could managers at Winnebago use managerial accounting to reduce costs and increase profits?

Step-by-Step Solution

Answer

Finished goods inventory is small as all the finished goods are sold to dealership. The average cost of goods sold are $85,440, average gross profit is $10,560. The increase in profits is $2,880 and the total increase in operating income is $26,199,360. Managerial accounting helps in analysing the costs.

Step-by-Step Solution Step 1: Finished goods are relatively small portion of total inventory

The company has the relatively small portion of total inventory as finished goods because the company manufactures RVs and sell them to dealerships for resale to the consumers or customers. The company does not own their dealerships. As the RVs got completed they are sold to the dealerships. The company will have the inventory of raw material and WIP inventory much higher in total inventory.

Step 2: Computation of average cost of goods sold and average gross profit for requirement 2

$\begin{array}{c} \mathrm{Average} \mathrm{cost} \mathrm{of} \mathrm{goods} \mathrm{sold}=\mathrm{Average} \mathrm{Sales} \mathrm{Price}\times \mathrm{Cost} \mathrm{of} \mathrm{goods}\%\\ =\$96,000\times 89\%\\ =\$85,440\end{array}$

$$\begin{gathered} \mathbf{Average}\mathbf{ }\mathbf{GrossProfit}\mathbf{=}\mathbf{Average}\mathbf{ }\mathbf{Sales}\mathbf{ }\mathbf{Price}\mathbf{-}\mathbf{Average}\mathbf{ }\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{sold} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{96}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{85}\mathbf{,}\mathbf{440} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{560} \end{gathered}$$

Step 3: Computation of increase in profits

$\begin{array}{c}\mathrm{Average} \mathrm{cost} \mathrm{of} \mathrm{goods} \mathrm{sold}=\mathrm{Average} \mathrm{Sales} \mathrm{Price}\times \mathrm{Cost} \mathrm{of} \mathrm{goods}\%\\ =\$96,000\times 86\%\\ =\$82,560\end{array}$

$$\begin{gathered} \mathbf{Average}\mathbf{ }\mathbf{GrossProfit}\mathbf{=}\mathbf{Average}\mathbf{ }\mathbf{Sales}\mathbf{ }\mathbf{Price}\mathbf{-}\mathbf{Average}\mathbf{ }\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{sold} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{96}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{82}\mathbf{,}\mathbf{560} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{13}\mathbf{,}\mathbf{440} \end{gathered}$$

$$\begin{gathered} \mathbf{Increase}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{Profit}\mathbf{=}\mathbf{Difference}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{average}\mathbf{ }\mathbf{gross}\mathbf{ }\mathbf{profits} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{13}\mathbf{,}\mathbf{440}\mathbf{-}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{560} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{880} \end{gathered}$$

Step 4: Computation of total increase in operating income

$$\begin{gathered} \mathbf{Total}\mathbf{ }\mathbf{Increase}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{OperatingIncome}\mathbf{=}\mathbf{Average}\mathbf{ }\mathbf{Increase}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{profits}\mathbf{ }\mathbf{permotorhome}\mathbf{\times }\mathbf{Number}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{motor}\mathbf{ }\mathbf{homes} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{880}\mathbf{\times }\mathbf{9}\mathbf{,}\mathbf{097} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{26}\mathbf{,}\mathbf{199}\mathbf{,}\mathbf{360} \end{gathered}$$

Step 5: Use of managerial accounting

Managerial Accounting provides the detailed information about all the costs incurred by the company. This information can be utilized by the managers to analyze different types of costs such as product costs and period costs to determine when the actual costs exceed the expected cost.