Dell Case. Published income statements use the absorption-costing basis

Dell Case. Published income statements use the absorption-costing basis—after all, that is the method that is acceptable for use under GAAP. But the absorption-costing statement might not really provide the information that management needs to make future decisions because it does not separate fixed from variable costs. This exercise focuses on extracting contribution information from published absorption-costing financial statements of Dell Computer. As a manufacturer of computers, Dell has become a well-known, household name.

1. Go to the home page for Dell at . Take a look at one of the computers for home being offered. Once you’ve arrived at the product page, what type of information do you find about the computer? What information is available about prices? Is it possible that the model could have more than one price? Why or why not?
2. Look at the most recent 10-K report for Dell by following links to Investor Relations, Financial Reporting, and 10-K filings. Go to the section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” What was the total revenue for Dell? What is the change in the average selling price for desktop PCs? Why do you think this change occurred?
3. Look at the most recent Consolidated Statement of Operations. What were the cost of goods sold and the selling, administrative, and engineering expenses for the current year? Refer to the cash flow statement for the current year. How much was the depreciation and amortization for the current year? Assume that $3 billion of operating expense in addition to the depreciation and amortization are all the fixed expenses. Compute the average variable cost of goods sold percentage. Compute the average contribution margin percentage. What would be the break-even sales dollars under this scenario? Does this seem reasonable, given the current operating income reported by the firm?

Here’s the SOLUTION

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