Answers appear in red. http://www.unf.edu/~dtanner/ http://www.unf. edu/~dtanner/StudyHall2071/s StudyHall2071/studyprobes/2071_20 tudyprobes/2071_20_23Prob.htm _23Prob.htm
Problem 1 - Coleman Company owns a machine that produces a component for the products the company makes and sells. The company uses 1,800 units of this component in production each year. The costs of making one unit of this component are Direct material $7 Variable manufacturing overhead 6 Direct labor 4 Fixed manufacturing overhead 5
The fixed overhead costs are unavoidable, and the unit cost is based on the present annual usage of 1,800 units of the component. An outside supplier has offered to sell Coleman this component for $18 per unit and can supply all the units it needs. A. If Coleman buys the component from the outside supplier instead of making it, how much will net income change? Should Coleman make or buy the component? Use the incremental approach to justify your your answer. Since net income decreases, Coleman should continue making the component. Variable cost = $7 + $6 + $4 = $17 Incremental cost savings from not making component (1,800 x $17) $30,600 Incremental cost of buying buying component (1,800 x $18)
(32,400)
Incremental decrease in net income due to buying component
$(1,800)
B. Suppose Coleman could rent the machine to another company for $5,000 per year. How would your response change to part A? Use the incremental approach to justify your answer. Since net income increases, the company should choose to buy the components. Incremental cost savings from not making component (1,800 x $17) $30,600 Incremental Annual rent from machine Incremental Cost of buying buying component (1,800 x $18) Incremental Increase in net income due to buying component
5,000 (32,400) $3,200
Problem 2 - Tenchavez Company makes and sells 12,000 pairs of running shoes each year. The cost of making one pair of these shoes is Direct material $ 11 Variable manufacturing overhead 5
Direct labor 4 Fixed manufacturing overhead 7 The fixed overhead costs are unavoidable. Tenchavez allocates fixed overhead costs based on its annual capacity of 15,000 pairs it is able to make. An overseas company recently offered to buy 3,000 pairs of shoes at $21 per pair. Regular customers buy shoes from Tenchavez at $30 per pair. How much is incremental income if Tenchavez accepts the special order? Should Tenchavez accept? Use the incremental approach to justify your your answer. Variable cost = $11 + $5 + $4 = $20 per unit Tenchavez should accept. Incremental revenue from special order (3,000 x $21) $63,000 Incremental cost to fill special order (3,000 x $20)
(60,000)
Incremental income from accepting special order
$ 3,000
Problem 3 - Brislin Company makes and sells two products, Olives and Popeyes. The income statement for the prior year, 2001, was as follows: Olives Popeyes Sales $16,000 $24,000 Variable cost of goods sold 6,000 10,000 Manufacturing contribution margin $10,000 $14,000 Fixed production 5,000 7,000 Variable selling and administration 2,000 5,000 Fixed selling and administration 1,000 3,000 Net income $2,000 ($1,000) Brislin's fixed costs are unavoidable and are allocated to products on the basis of sales revenue. If Popeyes are dropped, sales of Olives are expected to increase by 40 percent next year. A. Use the incremental approach to determine if Popeyes should be dropped.
Incremental revenue ($16,000* 40%) of Olives Incremental revenue of Popeyes Incremental cost savings of Popeyes CGS Incremental cost savings of Popeyes S&A cost Incremental variable cost of Olives ($6,000*40%) Incremental s&a cost of Olives ($2,000*40%) Incremental decrease in income if Popeyes discountinued
$ 6,400 (24,000) +10,000 +5,000 (2,400) (800) ($5,800)
Problem 4 - Monk Company manufactures widulators. Watson Company has approached Monk with a proposal to sell the company a component use in its widulators at a price of $12,000 for 4,000 units. Monk is currently making these components in its own factory. The following costs are associated annually with this part of the process when 4,000 units are produced: Direct material $4,000 Direct labor 2,000 Manufacturing overhead (fixed & variable) 6,800 Total $12,800 All but $3,000 of the manufacturing overhead costs will continue if Monk discontinues making the components. Monk will be able to eliminate machine rental of $1,800 per year if the components are no longer manufactured.
A. How much are the incremental cost or savings if Monk outsources? Use the incremental approach to justify your answer. Of the $6,800, $3,000 is avoidable, and $3,800 will continue. Incremental cost to buy 4,000 components Incremental manufacturing savings if bought: Machine rental $ 1,800 Direct materials 4,000 Direct labor 2,000 Overhead – avoidable portion 3,000 Total Incremental savings Incremental cost of buying components
($ 12,000)
10,800 ($1,200)
B. What is the amount of avoidable costs if Monk buys rather than makes the components? $10,800 – from part A above….the costs that can be avoided if the alternative course of action—buying—is taken. C. Which costs/amounts from above are opportunity costs, if any? $1,800......the rent savings are given up if the alternative action--buying--is undertaken. Note that the cost of the products--whether bought or made is still a 'cost' for the company. D. Should Monk make or buy the components? Briefly justify your answer. Monk should make the components. There is an additional cost of $1,200 if Monks buys the components. Increases in costs are bad choices in decision making because the cost must be passed on to the customer or absorbed as lower profits by the seller. Problem 5 - Anheiser, Inc. has three divisions: Bud, Wise, and Er. Results of May, 2003 are presented below: Bud Wise Er Total
Units sold Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income
3,000 $70,000 32,000 14,000 6,000 $18,000
5,000 $50,000 26,000 19,000 10,000 ($5,000)
2,000 $40,000 16,000 12,000 4,000 $ 8,000
10,000 $160,000 74,000 45,000 20,000 $21,000
The variable costs are directly attributable to the products produced for the specific departments. All of the allocated costs willcontinue even if a division is discontinued. Anheiser allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Anheiser feels that it should be discontinued. Anheiser feels if the division is closed, that sales at the Bud division will increase by 20%, and that sales at the Er division will stay the same. A. Prepare an incremental analysis showing the effect of discontinuing the Wise division on the remainingdivisions. Bud Incremental revenue 20%*$70,000 - $50,000
($36,000)
Incremental variable costs savings 20%*32,000 - $26,000 Incremental direct fixed costs saved
Increase increase in profit if discontinued
19,600
19,000 $2,600
B. Should Anheiser close the Wise division? Briefly indicate why or why not. Yes. The profit increases by $2,600 when the division is eliminated. Direct fixed costs and variable costs for the Wise division were relatively high compared to those for the Bud and Er divisions. The increase in sales by 20% of the Bud division was enough to offset the loss of the Wise division. Problem 6 - Gordon Company sells two items, corn and broccoli. The company is considering dropping corn. It is expected that sales of broccoli will increase by 40% as a result. Dropping corn will allow the company to cancel its monthly rental of its corn shucker costing $100 a month. The other equipment will be used for additional production of broccoli. One employee earning $200 can be terminated if corn production is dropped. Gordon’s otherallocated costs are unavoidable. The company rents all of its equipment. A condensed, budgeted monthly income statement with both products is below: Total Corn Broccoli Sales $20,000 $8,000 $12,000 Food materials 4,500 2,000 2,500 Direct labor 3,200 1,200 2,000 Equipment rental 2,900 2,600 300 Other allocated overhead 3,100 2,100 1,000 Operating income $6,300 $ 100 $6,200
In good form, prepare an incremental analysis to determine the financial effect of dropping corn production. Incremental change in revenue: Increase in broccoli sales: $12,000 x 40% = +$4,800 Decrease in corn sales (8,000) Incremental decrease in revenue ($3,200) Incremental change in variable costs: Food materials: Increase in broccoli costs: $2,500 x 40% (1,000) Decrease in corn costs +2,000 Direct labor: Increase in broccoli labor: $2,000 x 40% (800) Decrease in corn labor +1,200 Incremental decrease in variable costs +1,400 Equipment rental reduction - corn shucker +100 Incremental decrease in profits if corn production is dropped ($1,700) Parrino has three product lines in its retail stores: books, videos, and music. Results of the 4th quarter are presented below: Books Music Videos Total Units sold 1,000 2,000 2,000 5,000 Revenue $22,000 $40,000 $23,000 $85,000 Variable departmental costs 15,000 22,000 12,000 49,000 Direct fixed costs 1,000 3,000 2,000 6,000 Allocated fixed costs 7,000 7,000 7,000 21,000 Net income ($1,000) $ 8,000 $ 2,000 $ 9,000 The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines. If Parrino discontinues the Books product line, what is the effect on profit? Use the incremental approach. Incremental revenue ($22,000) Incremental costs: Variable costs savings +15,000 Direct fixed costs savings +1,000 Incremental drop in profits if discontinued ($6,000)
Problem 7 -
Problem 8 - Temple, Inc. produces grandfather clocks and sells 100 per year.
:
Direct materials
Unit Cost $ 200
Direct labor 240 Variable overhead 160 Fixed overhead (40% 300 avoidable) A. An outside supplier has offered to produce the clocks for Temple for $700. Use the incremental approach. Relevant costs are the incremental costs of making one clock: Incremental Cost to buy ($70,000) Incremental DM cost savings +20,000 Incremental DL cost savings +24,000 Incremental VOH cost savings +16,000 Incremental FOH cost savings (40%*$300*100clocks) +12,000 Incremental Net savings to buy per unit +$2,000 Problem 9 - Young Siding Co. produces computers, which s ell for $400 each. A foreign distribution wants to order 1,000 units at $300 a unit. 70% of th e
fixed overhead is unavoidable. Production costs per unit are: Direct materials $90 Direct labor 120 Variable overhead 50 Fixed overhead 60 A. How much is the relevant cost of producing one more computer? Relevant costs are incremental costs of making one unit. $90 + $120 + $50 = $260 Note that fixed costs do not increase when one additional unit is produced.
B. What the effect on net income of accepting the special order? Use the incremental approach. Incremental revenue = $1,000 x $300 = $300,000 Incremental costs = $1,000 x 260 = ($260,000) Increase of $40,000 Problem 10 - Scott, Inc. has a capacity of producing 300,000 units a year and sells them at $28 a unit. At present Scott is selling 250,000 units. A foreign
distributor has offered to purchase 40,000 units at $20 a unit. Variable selling costs will be reduced by 40%. The sales manager determined that incremental costs of accepting the order are $744,000. Should Scott accept the order? Use the incremental approach. Yes, incremental profit is $56,000.
Incremental Revenue = 40,000 x $20 = $800,000 Incremental costs = $744,000 Incremental profit = $800,000 - $744,000 = $56,000
Problem 11 - It costs Roy Company $14 of variable costs and $6 of allocated fixed costs to produce a toy truck that sells for $30. A buyer offers to purchase 3,000 units at $18 each. Roy has unused capacity. What will occur to profits is the offer is accepted and produced? Use the incremental approach. Incremental increase in revenue (3,000*$18) $54,000 Incremental increase in costs (3,000*$14) Incremental increase in profits to accept
(42,000) $12,000
Problem 12 - At the start of the year, West Coast Grocery Supply budgeted sales and variable costs for three product lines as shown below in the table. With this level of allocation, the Canned Goods line does not appear profitable. Canned Meat Dairy Total Goods Sales $15,000 $1,500 $20,000 $36,500 Variable Costs 10,000 1,000 18,000 29,000 Contribution Margin 5,000 500 2,000 7,500 Fixed Costs 1,644 164 2,192 4,000 Profit (Loss) $ 3,356 $ 336 ($ 192) $ 3,500 West Coast Grocery Supply is operating at capacity in terms of the existing warehouse and the current fleet of delivery trucks. If the Canned Goods line is dropped, $500 of fixed costs specifically associated with the Canned Goods line can be avoided. Additionally, sales of Meat and Dairy can be increased by 20% each. A. How much is the fixed cost savings related to canned goods?
The amount of fixed costs that can be avoided = $500 B.
Using the cost allocation death spiral concept, indicate whether West Coast should drop its canned goods line.No, the company will lose more money if it drops canned goods. Since not all fixed costs can be eliminated,they must be allocated to the other divisions causing those divisions to have reduced profits or create losses. Problem 13 - Hand Devices makes and sells hand-held computers. Each computer regularly sells for $200. The following cost data per computer are based on a normal production of 8,000 computers produced each period. The company has the capacity to produce 12,000 computers.
Direct materials Direct labor Factory Overhead (75% variable, 25% unavoidable fixed)
$75 55 40
Hand Devices has received a special order for a sale of 500 computers to an overseas customer. The customer is willing to pay $150 per computer. The only selling costs that would be incurred on this order would be $10 per computer for shipping. Hand is now selling 8,000 computers through regular distributors each period. Should Hand Devices accept the special order? use the incremental approach. No. The incremental costs are $170 per computer, which exceeds the price the customer is willing to pay. Incremental revenue per computer = $150 Incremental cost per computer.$75 + $55 + [75% x $40] + $10 = $170 Incremental loss per computer = $150 - $170 = $20 Problem 14 - Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $100,000 for 50,000 units. Chapman is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced: Direct material $44,000 Direct labor 20,000 Manufacturing 60,000 overhead Total $124,000 The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Chapman. The remaining manufacturing overhead will continue whether or not Chapman makes the components. From Chapman’s point of view, what is the amount of avoidable costs if it buys rather than makes the components? $44,000 + $20,000 + $32,000 = $96,000 Problem 15 - Wilson Company is considering replacing equipment which originally cost $56,000 and which has $43,000 accumulated depreciation to date. A new machine will cost $67,000. How much costs are sunk in this situation? $56,000 This will not affect the outcome of decision making. Problem 16 - Darnell Inc. budgeted 5,000 widgets for production during 2004. Fixed factory overhead is allocated using ABC. The following estimated costs were provided: Direct material ($80/unit) $400,000 Direct labor ($22/hr. * 2 hrs./unit) 220,000 Variable manufacturing overhead 40,000 ($8/unit) Fixed factory overhead costs 269,000 ($53.80/unit) Total $929,000 Cost per unit = $185.80
A. Darnell received an order for 400 units from a new customer in a country in which Darnell has never done business. This customer would like to spend $160 per widget. Darnell has capacity to produce 5,500 units. Should Darnell accept the order? Support your work with an incremental analysis. Yes, it can make $11,200 Incremental revenue per widget $160 Incremental cost per widget: $80 + ($22 x 2) + $8 = 132 Incremental profit per unit $ 28 Total incremental profit = $28 x 400 = $11,200 B. Darnell received an offer from another company to manufacture the same quality widgets for them at $140. Should Darnell let someone else manufacture all 5,000 widgets and focus on only distribution? Support your work with an incremental analysis. No, Darnell can expect profitability to decline $40,000 if it outsources production. Incremental Cost to buy per widget ($140*5,000) ($700,000) Incremental Cost to make per widget/savings if buy widgets: $80 + ($22 x 2) + $8 = $132*5,000 +660,000 Incremental savings if manufactured $ 40,000 C. While evaluating the offer to outsource, Darnell realized it could rent its manufacturing space for $ 50,000. Now, should Darnell outsource the manufacture of the widgets? Support your work with an incremental analysis. Yes, Darnell can expect profitability to increase $ 10,000 if they outsource production Cost to buy all 5,000 widgets: $140 x 5,000 = ($700,000) Opportunity cost of renting facility +50,000 Cost to make per widget: $132 x 5,000 = +660,000 Incremental savings if outsourced +$10,000 Problem 17 - Auchter Company has old inventory on hand that cost $12,000. Its scrap value is only $5,000. The inventory could be sold for $20,000 if
manufactured further at an additional cost of $13,000. What should Auchter do? Support your work with an incremental analysis. Process further and sell: Incremental revenue $20,000 Incremental costs (13,000) Incremental profit 7,000 Incremental revenue to sell as is: $5,000 Best option is to process further and sell at $20,000. Problem 18 -
Zweig, Inc. produces batches of chocolate chip cookies: Batch Cost
Direct materials $ 8.00 Direct labor 3.00 Variable overhead 1.00 Fixed common overhead 4.00 An outside supplier has offered to produce the cookies for $14 per batch. What is the minimum amount that Zweig would sell additional batches of cookies if the company is under capacity? $8 + $3 + $1 = $12; Relevant = incremental. Note that avoidable means it is a cost that will not be incurred if the product is bought instead of made, i.e., it is a cost savings. The direct costs are saved as well. Only the costs that are different if the cookies are made instead of bought are relevant. Problem 19 - Barry Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials $ 1.00 Direct labor 10.00 Variable overhead 5.00 Fixed overhead 8.00 Total $24.00 Funkhouser Company has contacted Barry with an offer to sell it 5,000 of the subassemblies for $18.00 each. Total relevant costs if Barry makes the subassemblies are $85,000. Should Barry make or buy the subassemblies? Support your answer with an incremental analysis. Cost to make - costs to buy = incremental cost $85,000 (given) - (5,000 x $18) = ($5,000) Cost savings if made. Note that you do not know how much of the fixed overhead is avoidable per unit, so you can't use per unit amounts. In addition, since the relevant cost to make is given, it is much easier to find the answer than calculating.
The cost to produce Part A was $10 per unit in 2003. During 2004, it has increased to $11 per unit. In 2004, Supplier Company has offered to supply Part A for $9 per unit. For the make-or-buy decision, identify the following amounts that are relevant: A. Incremental revenues There are never any incremental revenues with make or buy decisions. B. Differential costs are $2 per unit. Cost to make - cost to buy = $11 - $9 = $2 per unit
Problem 20 -
Problem 21 - A company uses 10,000 units of Part A in producing its products. A supplier offers to make Part A for $70. Max Company has relevant costs of $80 a unit to manufacture Part A. There is excess capacity. How much is the opportunity cost of buying Part A from the supplier? Zero. Opportunity costs are the value of benefits forgone by selecting one alternative over another. There are no opportunity costs in this problem.
Problem 22 - Temple, Inc. produces several models of grandfather clocks. An outside supplier has offered to produce the economy clocks for Temple for $350 each. Temple needs 1,200 clocks annually. Temple has provided the following unit costs for its economy model:
Direct materials Direct labor Variable overhead Fixed overhead (40% avoidable)
Unit Cost $ 100 120 80 150
Using good form, prepare an incremental analysis which shows the effect of the make or buy decision. Show calculations to support your answers in the space outside the answer box. Incremental analysis: Incremental effect Incremental Cost to buy (1,200 x $350) ($420,000) Incremental Cost savings: Savings of DM $100 x 1,200 = $120,000 Savings of DL $120 x 1,200 = 144,000 Savings of VOH $80 x 1,200 = 96,000 Savings of FOH 40% x $150 x 1,200 = 72,000 Incremental total cost savings +432,000 Incremental cost saving if clocks are bought instead of made $12,000 Problem 23 - A division has the following data: Sales $600,000 Variable expenses 320,000 Fixed expenses 310,000 What will be the incremental effect on net income if this division is eliminated, assuming the fixed expenses will be allocated to profitable segments? Use the incremental analysis approach. Effect on profit Incremental revenue ($600,000) Incremental variable costs +320,000 Incremental effect on profit ($280,000) Only costs that change between alternatives are incremental. Fixed expenses that are allocated never change. Problem 24 - Diversified Machines has four product lines, one of which reflects the following results: Sales $220,000 Variable expenses 120,000 Contribution margin 100,000 Fixed expenses 120,000
Net loss $(20,000) If this product line is eliminated, 40% of the fixed expenses can be eliminated and the other 60% will be allocated to other product lines. A. Create an incremental analysis to determine if this product line should be eliminated. Effect on Profit Incremental decrease in revenue ($220,000) Incremental variable cost savings $120,000 Incremental fixed cost savings ($120,000 x 40%) +48,000 Incremental decrease in profits if eliminated ($52,000) B. Identify any non-relevant costs. Since the other 60% of fixed costs will be incurred regardless of decision, they are not relevant. Problem 25 - Sally Industries can produce 100 units of a necessary component part with the following costs: Direct Materials $30,000 Direct Labor 13,000 Variable Overhead 32,000 Fixed Overhead 12,000 If Sally Industries purchases the component externally, $3,000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying? The company is indifferent when the cost of making the part equals the cost of buying the part, which is $78,000: Incremental savings: Effect on Profit ($30,000 + $13,000 + $32,000 + $3,000) $78,000 Problem 26 - Hernandez, Inc. manufactures 3 models of picture frames. Hernandez Corporation manufactures 5,000 frames per year. The unit cost to produce a metal frame follows: Direct Materials $6 Direct Labor 7 Variable Overhead 2 Fixed Overhead (70% 5 unavoidable) Total $20 A local company has offer ed to supply Hernande z the 5,000 metal fra mes it needs for $16 each. In good form, create an incremental analysis for the make or buy decision. Incremental cost to buy ($80,000) 5,000 x $16 = $80,000 Incremental savings: Direct materials savings +$30,000 5,000 x $6 = $30,000 Direct labor savings +35,000 5,000 x $7 = $35,000 Variable overhead savings +10,000 5,000 x $2 = $10,000
Fixed overhead savings - avoidable portion Incremental savings if 'buy' decision is made
+7,500 5,000 x $5 x 30% = $7,500 $2,500
Problem 27 - Crisp has 4 product lines: milk, ice cream, yogurt, and butter. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are allocated. Results of June follow: Milk Ice Cream Yogurt Butter Total Units sold 2,000 500 400 200 3,000 Revenue $10,000 $20,000 $10,000 $20,000 $60,000 Variable departmental costs 6,000 13,000 4,200 4,800 28,000 Fixed costs 5,000 2,000 3,000 7,000 17,000 Net income (loss) ($1,000) $5,000 $2,800 $8,200 $15,000
A. In good form, prepare an incremental analysis of the effect of dropping the milk product line. Incremental revenue Incremental variable cost savings Incremental fixed cost savings (5,000 x .40) Incremental decrease in profits
($10,000) +6,000 +2,000 ($2,000)
B. Briefly state how the cost allocation death spiral concept applies to this problem. The cost allocation death spiral occurs when a company drops a product line/division that has a loss. Management may believe this will eliminate the loss, however, since the common fixed costs must be allocated and absorbed by other products, the total profit of the company declines. i.e., allocated fixed costs cannot be avoided. Problem 28 - Evans Corporation currently manufactures 3,000 subassemblies annually for its main product. The costs per unit are as follows: Direct materials $ 3.00 Direct labor 8.00 Variable 4.00 overhead Fixed overhead 7.00 Total $22.00
Howard Company has contacted Evans with an offer to sell it 3,000 subassemblies for $18.00 each. $5 of the fixed overhead per unit is unavoidable. In good form in the answer box below, create an incremental analysis for the make or buy decision. (Do not include extraneous information/calculations inside the answer box.) Incremental analysis: Incremental cost to buy Incremental savings on direct materials
Calculations (not part of analysis): ($54,000) 3,000 x $18 +9,000 3,000 x $3
Incremental savings on direct labor Incremental savings on variable MOH Incremental savings on fixed MOH Incremental net cost to buy
+24,000 3,000 x $8 +12,000 3,000 x $4 +6,000 3,000 x $2* ($3,000)
*The unavoidable portion of this cost ($5) exists whether or not the company makes or buys the subassemblies. If the subassemblies are bought, the company saves the avoidable portion of the cost, $2 per unit. Problem 29 Parrino has three product lines in its retail stores: books, videos, and music. The allocated fixed costs are based on units sold and are unavoidable. Results of the fourth quarter are presented below: Books Music Videos Total Units sold 1,000 2,000 2,000 5,000 Revenue $24,000 $48,000 $34,000 106,000 Variable departmental costs 15,000 22,000 23,000 60,000 Direct fixed costs 3,000 6,000 5,000 14,000 Allocated fixed costs 4,400 8,800 8,800 22,000 Net income (loss) $ 1,600 $11,200 ($2,800) $10,000
Demand of individual products is not affected by changes in other product lines. In good form, prepare an incremental analysis of the effect of dropping the Video product line. Incremental analysis: Incremental revenue ($34,000) Incremental savings on variable costs +23,000 Incremental savings on direct fixed costs +5,000 Incremental decrease in profit to drop video line ($6,000) Note: Incremental analyses show only the differences in revenues and costs. Comparative columns or comparative income statements, or a revised income statement showing the net amounts to be reported after the drop are NOT incremental analyses. We emphasized incremental analysis using this approach in class. Problem 30 - Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 800 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor and $5 for fixed manufacturing overhead. The unit cost is based on the monthly usage of 800 baskets. The company determined that 30% of the fixed manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $12 each, and can supply all the units it needs. In good form, prepare anincremental analysis to determine if Calc should buy the component from the supplier? Incremental cost to buy (800 x $12) ($9,600)
Incremental cost savings: DM ($4 x 800) +3,200 VOH ($3 x 800) +2,400 DL ($2 x 800) +1,600 FOH ($5 x 30% x 800) +1,200 Incremental cost to buy ($1,200) Since 30% of the fixed cost is avoidable, this cost will be a savings. Problem 31 - Boys Toys sells three products in its retail stores: planes, trains, and cars. Results of the 4th quarter are below: Planes Trains Cars Total Units sold 1,000 2,000 2,000 5,000 Revenue $31,000 $43,000 $26,000 $100,000 Variable departmental costs 22,000 24,000 13,000 59,000 Direct fixed costs 5,000 4,000 3,000 12,000 Allocated fixed costs 6,000 7,000 7,000 20,000 Net income ($2,000) $ 8,000 $ 3,000 $ 9,000 Demand of individual products are not affected by changes in other product lines. In good form, prepare anincremental analysis to determine if planes should be discontinued. Incremental revenue ($31,000) Incremental VC savings +22,000 Incremental direct fixed costs +5,000 Incremental decline in profit if discontinued ($4,000) Problem 32 - The following estimated costs were provided by Young Company: Direct material ($30/unit) $30,000 Direct labor ($12/hr. * 3 hrs./unit) 36,000 Variable manufacturing overhead 15,000 ($15/unit) Fixed factory overhead costs 10,000 ($10/unit) Total $91,000 Young received an order for 600 units from a new customer in a country in which Young has never done business. This customer would like to spend $86 per widget. Young has capacity to produce 900 more units. Should Young accept the order? Support with an incremental analysis. Yes, it can make $3,000 more profit
Incremental revenue (600 x $86) = +$51,600 Incremental DM cost (600 x $30) = (18,000)
Incremental DL cost (600 x $36) = (21,600) Incremental VMOH cost (600 x $15) = (9,000) Incremental profit = + $3,000 Fixed OH is not incremental since it does not change. Problem 33 - Kirk Company plans to produce 50,000 buckets next year at a total cost of $850,000. Fixed costs are $3 per unit at this level of operations. Selling price is $8 per unit. Kirk is considering lowering the price to $7 per unit, and feels that this action will cause sales to climb to 60,000 buckets. Use incremental analysis to calculate incremental profit or loss if the change is made to the sales price. Incremental revenue: Effect on Profit Before change: $8 x 50,000 = $400,000 After change: $7 x 60,000 = 420,000 Incremental increase in profits $20,000 Problem 34 - Zeriff’s Donuts currently sells donuts for $4.00 per dozen. These donuts cost $2.70 per dozen to produce. Business was very slow yesterday, and several dozen donuts have been marked down to $1.50 per dozen on the day-old table today. What is the sunk cost associated with these donuts? The original cost of the donuts is $2.70 no matter what and it can't be changed. This is a sunk cost. Problem 35 - Morley, Inc. has three product lines in its retail stores: putters, drivers, and sinkers. The allocated fixed costs are based on units sold and are unavoidable. Results of May follow: Putters Drivers Sinkers Total Units sold 500 1,000 1,000 2,500 Revenue $24,000 $48,000 $34,000 106,000 Variable departmental costs 15,000 22,000 23,000 60,000 Direct fixed costs 3,000 6,000 5,000 14,000 Allocated fixed costs 4,000 8,000 8,000 20,000 Net income (loss) $ 2,000 $12,000 ($2,000) $12,000 Demand of individual products is not affected by changes in other product lines. In good form, prepare an incremental analysis of the effect of dropping the sinkers product line. Incremental analysis: Incremental decrease in revenue ($34,000) Incremental savings of variable costs +23,000 Incremental savings of direct fixed costs +5,000 Incremental decline in profit if Sinkers dropped ($6,000)
Problem 36 - Walker, Inc. currently manufactures 4,000 motors for its electric scooters annually. Direct material costs are $48,000 and direct labor total $12,000 annually. Overhead totals $10 per unit of which $4 is variable. Thirty percent of the fixed overhead is unavoidable. Anthony, Inc. has contacted Walker with an offer to sell the motors for $21 each. In good form, create an incremental analysis for the make or buy decision. Incremental analysis: Incremental cost to buy ($21 x 4,000) Incremental direct material cost savings Incremental direct labor cost savings Incremental variable overhead cost savings ($4 x 4,000) Incremental fixed overhead cost savings [$10- $4] x 4,000 x 70% Incremental net cost savings if buy instead of make
($84,000) +48,000 +12,000 +16,000 +16,800 $8,800
Problem 37 - Bing Corporation currently manufactures a lid for its main product. The relevant costs to produce one unit for direct costs are $1.70, and the allocated common costs are $0.80 per unit. A supplier has offered to provide the monthly supply of 12,000 lids for $21,600. Should Bing outsource the lids? Use incremental analysis. No, the cost increases by $1,200 Incremental savings of cost to make: $1.70 x 12,000 = $20,400 Incremental cost to buy: ($21,600) Incremental cost to buy instead of make: $20,400 - $21,600 = ($1,200) Problem 38 - Block Corporation currently makes the rolls that it uses for its sandwiches. It uses 50,000 rolls annually. The costs to make the rolls are given below: Materials $0.04 Labor $0.03 VOH $0.02 FOH $0.07 A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are purchased, 20% of the f ixed overhead could be avoided. Determine the effect if Block accepts the offer. Use incremental analysis. Profits will decrease (costs will increase) by $300 if accepted. Incremental analysis: Incremental cost to buy ($0.11) Incremental cost savings: DM savings + $0.04 DL savings + $0.03 VOH savings + $0.02
FOH savings ($.07 x 20%) + $0.014 Incremental decrease in profit per unit = $.006 Total incremental decrease in profit (50,000 x $0.006) = $300 Problem 39 - Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if th e bowling shoes were dropped. Bowling Shoes Athletic Shoes Boots Sales $120,000 $420,000 $360,000 VC 64,000 220,000 140,000 CM 56,000 200,000 220,000 Direct FC 40,000 70,000 90,000 Allocated FC 20,000 70,000 60,000 NI ($4,000) $60,000 $70,000 If bowling shoes are dropped, what would happen to the overall net income? Support with incremental analysis. It would decrease by $16,000. Incremental Revenue ($120,000) Incremental VC savings + $64,000 Incremental Direct FC savings + $40,000 Incremental decrease in profits ($16,000) Problem 40 - Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped. Bowling Shoes Athletic Shoes Boots Sales $120,000 $420,000 $360,000 VC 64,000 220,000 140,000 CM 56,000 200,000 220,000 Direct FC 40,000 70,000 90,000 Allocated FC 20,000 70,000 60,000 NI ($4,000) $60,000 $70,000 Assume that boots normally sell for $90 per pair. An exporter has approached Menlo about buying 1,000 pairs of boots for a one-time export deal for $80 pe r pair. $3.00 per unit of the normal variable cost could be avoided on this sale, but Menlo would have to pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to produce this order, and no regular sales will be affected. Should Menlo accept this order? Support with an incremental analysis. Yes, profits will increase by $44,000. # of boots sold = $360,000/$90 = 4,000
Incremental cost per unit = $140,000/4,000 = $35 Incremental revenue ($80 x 1,000) Incremental VC ($35 - $3) x 1,000 Increase in fixed costs Incremental increase in profits
$80,000 (32,000) 4,000 $44,000
Problem 41 BarBQue Heaven has three product lines in its stores: ribs, chicken, and beef. Results of May are presented below: Ribs Chicken Beef Total Units sold 2,000 4,000 4,000 10,000 Revenue $22,000 $40,000 $23,000 $85,000 Variable departmental costs 15,000 22,000 12,000 49,000 Direct fixed costs 1,000 3,000 2,000 6,000 Allocated fixed costs 7,000 7,000 7,000 21,000 Net income ($1,000) $ 8,000 $ 2,000 $ 9,000 Allocated fixed costs are unavoidable. Individual product demand is not affected by changes in other product lines.
A. In good form, use the incremental approach to determine if BarBQue Heaven should discontinue Ribs. Label appropriately. Show calculations in the space provided if needed. . Incremental analysis: Incremental revenue ($22,000) Incremental variable costs savings + 15,000 Incremental direct fixed cost savings + 1,000 Incremental decrease in profit if ribs are dropped ($6,000) B, Briefly state how the cost allocation death spiral applies to this problem. When a division is eliminated, the fixed costs that had been allocated to it, have to be allocated to the remaining divisions. Hence, the allocated fixed costs do not disappear. Without the additional contribution margin from the dropped product, total profit declines. If more products aredropped the company spins into a deeper cut in profits or increased loss. Problem 42 - Halo Inc. budgeted 8,000 bearings for production during 2006. Fixed factory overhead is allocated using ABC. Halo received an offer from a suppler to manufacture the same quality bearings at $81 each. The space currently occupied by the manufacturing facility could be leased out for $20,000 per year if the supplier provides the bearings. The following estimated costs were provided: Direct material ($50/unit) $400,000 Direct labor ($16/hr. * 1.5 hrs./unit) 192,000 Variable manufacturing overhead 48,000 ($6/unit)
Fixed factory overhead costs ($18/unit) Total
144,000 $784,000
Cost per unit = $98.00 Use the incremental approach to determine if Halo should buy its bearings from the supplier. Label appropriately. Show calculations in the space provided if needed. . Incremental analysis: Calculations: Incremental cost to buy ($648,000) ($81*8,000) Incremental cost savings - DM +400,000 Incremental cost savings - DL +192,000 Incremental cost savings - VOH +48,000 Incremental lease revenue +20,000 Incremental cost savings to buy from supplier $12,000 Problem 43 Clinton Company makes and sells 16,000 ties each year. Fixed overhead costs are allocated to ties based on its annual production of 16,000 ties. The unit cost of making one tie at this activity level fo llows: Direct material $9 Variable manufacturing 3 overhead Direct labor 5 Fixed manufacturing 4 overhead Capacity is 20,000 ties. Forty percent of the fixed overhead costs is avoidable. An overseas company recently offered to buy 2,500 ties at $20 per tie even though Clinton’s regular customers pay $25 each. A. Use the incremental approach to determine the effect on income if Clinton accepts the order for 2,500 ties. Labe l appropriately. Show calculations in the space provided if needed. Incremental analysis: Calculations: Incremental revenue $50,000 2,500*$20 Incremental costs = DM (22,500) 2,500*$9 Incremental costs = DL (7,500) 2,500*$3 Incremental costs = VOH (12,500) 2,500*$5 Incremental costs avoided = FOH (4,000) 2,500*$4*40% Incremental increase in profit if special order accepted $3,500 B. Should Clinton accept? Briefly justify your answer. Most likely, yes. Profits increase by $3,500. Qualitative benefits and costs should be considered as well.
Problem 44 SMP Company's market for the Model 64 has changed significantly, and SMP has had to drop the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of $150 per unit associated with them. SMP could sell these units in their current state for $100 each. It will cost SMP $10 per unit to complete these units so that they can be sold for $125 each. Which of the following is the amount of sunk costs in this problem? $150 per unit Two costs are not relevant since the profits remain the same regardless if SMP is dropped or not. The original selling price of $265 does not make the company more or less profitable. The $150 cost exists regardless of the decision made. However, a sunk cost is an amount incurred for which it is too late to change. The previous selling price is not a 'cost'. Problem 45 Block Corporation currently makes the rolls that it uses for its sandwiches. It uses 50,000 rolls annually. The costs to make the rolls are given below: Materials $0.04 Labor $0.03 VOH $0.02 FOH $0.07 A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are purchased, 20% of the f ixed overhead could be avoided. If Block accepts the offer, it will be: Incremental analysis: Incremental cost to buy ($0.11) Incremental cost savings: DM savings + $0.04 DL savings + $0.03 VOH savings + $0.02 FOH savings + $0.014 ($.07 x 20%) Incremental decrease in profit per unit = $.006 Total incremental decrease in profit = $300 (50,000 x $0.006) Problem 46 Alan Company makes sets of wrenches. They are trying to decide whether to continue to make the case the wrenches are sold in, or to outsource it to another company. The direct material and direct labor cost to produce the cases total $2.00 per case. The overhead cost is $1.00 per case which consists of $0.40 in variable overhead which would all be eliminated if the case were bought from the outside supplier. The $0.60 of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the case production manager of $40,000 per year and $80,000 in depreciation on equipment that would have no resale value. The manager would be laid off if the cases were bought externally. Additionally, if the case production were stopped, the space that it is using could be rented out for $20,000 per year. The outside supplier has offered to supply the cases for $2.80 per case. How much will Alan save or lose if the cases are bought externally? Incremental analysis: Incremental cost to buy per case ($2.80)
Incremental cost savings to buy: DM and DL savings + $2.00 VOH savings + $0.40 FOH savings: Salary $40,000/200,000 = = $0.20 Incremental opportunity cost is bought +$0.10 ($20,000/200,000) Incremental cost increase if bought = ($0.10) per case Problem 47- Smith Company manufactures widgets. Newman Company has approached Smith with a proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000 units. Smith is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced: Direct material $44,000 Direct labor 20,000 MOH 60,000 The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Smith. The remaining manufacturing overhead will continue whether or not Smith makes the components. Answer the following questions from Smith's point of view. Should Smith make or buy the components for the widgets?
Continue to make them because the incremental cost of buying from Newman is $4,000. Incremental analysis: Incremental cost to buy ($100,000) Incremental cost savings to make: DM + $44,000 DL + $20,000 MOH + $32,000 Incremental cost to buy ($4,000) Problem 48 Huxley Sports Company sells logo sports merchandise and does custom screen printing. They are trying to decide whether or not to continue screen printing. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the screen printing were dropped. Screen Printing Apparel Sales Sales $120,000 $420,000 Variable costs 72,000 220,000 Contribution margin 48,000 200,000 Direct fixed costs 32,000 70,000 Allocated common fixed costs 20,000 70,000
Net income ($4,000) $60,000 Assume that more space will be allocated to apparel sales if screen printing is dropped. This will allow apparel sales to increa se by 25%. What is the impact on profits of the proposed change? Incremental revenue - screen ($120,000) Incremental revenue - apparel (25%*$420,000) 105,000 Incremental savings/(costs): VC - screen printing + 72,000 VC - apparel (25%*$220,00) (55,000) Direct FC +32,000 Incremental increase in profits $34,000 Problem 49 Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped. Bowling Shoes Athletic Shoes Boots Sales $120,000 $420,000 $360,000 VC 64,000 220,000 140,000 CM 56,000 200,000 220,000 Direct FC 40,000 70,000 90,000 Allocated FC 20,000 70,000 60,000 NI ($4,000) $60,000 $70,000 If bowling shoes are dropped, what would happen to overall net income? Incremental revenue ($120,000) Incremental VC savings + $64,000 Incremental direct FC savings + $40,000 Incremental decrease in profits ($16,000) Problem 50 Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bo wling shoes were dropped. Bowling Shoes Athletic Shoes Boots Sales $120,000 $420,000 $360,000 VC 64,000 220,000 140,000 CM 56,000 200,000 220,000 Direct FC 40,000 70,000 90,000 Allocated FC 20,000 70,000 60,000 NI ($4,000) $60,000 $70,000
Assume that boots normally sell for $90 per pair. An exporter has approached Menlo abou t buying 1,000 pairs of boots for a one-time export deal fo r $80 per pair. $3.00 per unit of the normal variable cost could be avoided on this sale, but Menlo would have to pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to produce this order, and no regular sales will be affected. If Menlo accepts this order: # of boots sold = $360,000/$90 = 4,000 Incremental cost per unit = $140,000/4,000 = $35 Incremental revenue ($80 x 1,000) Incremental VC ($35 - $3) x 1,000 Increase in fixed costs Incremental increase in profits
$80,000 (32,000) 4,000 $44,000
Problem 51Contesa Company plans to produce 8,000 units during May at a total cost of $29,000. Fixed costs total $13,000. Selling price per unit is $5.00. Management is considering lowering the price to $4.60 per unit, and feels that this action will cause sales to climb to 8,800 units. How much are the incremental costs incurred if 8,800 units are produced and sold? Total costs = FC + VC $29,000 = $13,000 + X; so VC = $16,000; VC per unit: $16,000/8,000 = $2 per unit Incremental costs to produce 800 more units (8,800 - 8,000): 800 units x $2 = $1,600 Problem 52 Don’s Donuts budgets the following costs for the production of 36,000 boxes of donuts next year: Rent, $20,000; other fixed costs, $6,000; direct materials, $54,000, and direct labor, $36,000. The normal selling price is $4.00 per box. A new convenience store has offered to pay Don’s $3.00 per box to supply them with 10,000 boxes of donuts during the year. Assuming that Don’s has the capacity to fill this order along with their other production and that accepting this order will not cause problems with any of their other customers, should Don’s Donuts accept this order? Justify your answer with computations. Yes, because incremental profits will increase by $5,000. Incremental revenue: $3.00 x 10,000 = $30,000 Incremental costs: VC/unit= [$54,000+$36,000]/36,000 = $2.50; so incremental costs are $2.50 x 10,000 boxes = $25,000; Incremental profit is revenue less cost: $30,000 - $25,000 = $5,000 Problem 53 - AT, Inc. plans to produce and sell 80,000 calculators next year. Fixed costs are $100,000. The current selling price is $7 ea ch and the variable cost per unit is $4. Management is considering raising the selling price to $8 per unit, but this is likely to cause the sales volume to drop to 76,000 units. How much is the incremental profit associated with the changes? Incremental revenue (80,000 x $7) - (76,000 x $8) $48,000 Incremental costs: Variable cost: ((80,000 - 76,000) x $4) (16,000) Incremental profit $32,000
Problem 54 Tague Company sells calculators. During the past year, 6,000 calculators were produced and sold at $10 each. Variable cost per unit was $3 and total fixed costs were $200,000. Tague would like to raise the selling price per unit to $11 each, but feels that this will reduce sales to 5,500 bottles per year. How much is the incremental revenue of raising the selling price? Old revenue: $10 x 6,000 = $60,000 New revenue: $11 x 5,500 = $60,500 Incremental revenue: $60,500 - $60,000 = $500 Problem 55 At Fruit Company, the total cost to produce 50,000 units is $750,000. Total fixed costs are $250,000. What is the expected cost to produce 48,000 units? VC = ($750,000 - $250,000) = $500,000 VC per unit = $500,000/50,000 = $10 Cost at 48,000 units = $10(48,000) + $250,000 = $730,000 Problem 56 At Richetti Company, the total variable cost to produce 15,000 units is $45,000. Total fixed costs are $21,000. What is the e xpected cost to produce 13,000 units? VC per unit = $45,000/15,000 = $3 per unit Total cost = variable cost + fixed costs = [$3*13,000] + $21,000 = $60,000 Note that product costs include both fixed and variable amounts. If the question asked for the incremental cost, then $39,000, the variable cost would be the answer, only if the difference in units was 13,000. Problem 57 Key Company plans to produce and sell 500 skateboards next year. Fixed costs are estimated at $50,000. Key sells each skateboard for $60. Total variable costs at 500 units are $12,000. Management is considering decreasing the selling price to $55 each, which is likely to cause the sales volume to increase to 600 units. How much is the incremental revenue associated with the changes? Option 1 (price at $60) = $60 x 500 = $30,000 Option 1 (price at $55) = $55 x 600 = $33,000 Incremental revenue = $33,000 - $30,000 = $3,000 Problem 58 Eng Company plans to produce and sell 400 skateboards next year. Fixed costs are estimated at $10,000. Eng sells each skateboard for $50. Variable costs are $20 per unit. Management is considering decreasing the selling price to $45 each, which is likely to cause the sales volume to increase to 500 units. How much is the incremental profit associated with the changes? Incremental revenue = (400 x $50) - (500 x $45) = +$2,500 Incremental costs = 100 x $20 = (2,000) Incremental profit = $2,500 - $2,000 = $500
Problem 59 Bell Company sells sims. During the past year, 8,000 sims were produced and sold at $10 each. Variable cost per unit was $4 and total fixed costs were $160,000. Bell would like to raise the selling price per unit to $12 each, but feels that this will reduce sales to 7,400 sims per year.
A. Highlight the amounts of any items which are not relevant to this decision. Highlighted in green = not relevant. Fixed costs are not relevant since the amount stays the same regardless of whether the selling price stays at $10, or in raised to $12. B. How much is the incremental revenue? Current revenue: 8,000 x $10 = Revenue if change is made: 7,400 x $12 = Incremental revenue C. How much is the incremental profit? Incremental revenue (from part B) Incremental cost: [8,000 - 7,400] x $4 = Incremental profit
$80,000 88,800 +$8,800 +$8,880 (2,400) $6,400
Problem 60 Kirk Company plans to produce 50,000 buckets next year at a total cost of $850,000. Fixed costs are $3 per unit at this level of operations. Selling price is $8 per unit. Kirk is considering lowering the price to $7 per unit, and feels that this action will cause sales to climb to 60,000 buckets. Use incremental analysis to calculate incremental profit or loss if the change is made to the sales price. Incremental revenue: Effect on Profit Before change: $8 x 50,000 = $400,000 After change: $7 x 60,000 = 420,000 Increase in revenue $20,000 Problem 61 Don’s Donuts budgets the following costs for the production of 36,000 boxes of donuts next year: Rent, $20,000; other fixed costs, $6,000; direct materials, $54,000, and direct labor, $36,000. The normal selling price is $4.00 per box. A new convenience store has offered to pay Don’s $3.00 per box to supply them with 10,000 boxes of donuts during the year. Assuming that Don’s has the capacity to fill this order along with their other production and that accepting this order will not cause problems with any of their other customers, should Don’s Donuts accept this order? Yes, because incremental profits will increase by $5,000. Incremental revenue: $3.00 x 10,000 = $30,000 Incremental costs: VC/unit= [$54,000+$36,000]/36,000 = $2.50; so incremental costs are $2.50 x 10,000 boxes = $25,000 Incremental profit = revenue less cost: $30,000 - $25,000 = $5,000
Problem 62 Sabab, Inc. produces 4 different qualities of cable for broadband internet hookups. Sabab currently produces 800,000 yards of economy cable each month. The costs of making each yard is $0.12 for direct materials, $0.05 for variable manufacturing overhead, $0.03 for variable administrative overhead, $0.06 for direct labor, and $0.12 for fixed manufacturing overhead. Overhead is allocated based on direct labor hours. An outside supplier has offered to sell Sabab economy cable for $0.28 per yard, and can supply all it needs. The company determined that 15% of the fixed overhead is avoidable if the company discontinues production of the economy cable. In addition, the company could lease the machine used to make the economy cable to another company for $8,000 annually. In good form, prepare an incremental analysis to determine if Sabab should outsource the component. Incremental Analysis Amounts Calculations (if any): Incremental cost to buy ($224,000) Buy: $0.28*800,000 Incremental variable cost savings Direct materials +96,000 DM: $0.12*800,000 DL: $0.06*800,000 Direct labor +48,000 VMOH: $0.05*800,000 Variable manufacturing overhead +40,000 VAOH: $0.03*800,000 Variable administrative overhead +24,000 $0.15*800,000*15% Incremental fixed overhead savings +14,400 Incremental lease revenue is bought +8,000 Incremental increase in profit if bought +$6,400
Should Sabab outsource? Yes. Profits increase by $6,400. Problem 63 Hooters sells 3 child meals in its restaurants: Hot Wings, 3 Mile Wings, and Volcano Wings. Changes in product lines do not affect demand of other products. Results of June are below: Hot Wings 3 Mile Wings Volcano Total Units sold 4,000 2,500 2,600 9,100 Revenue $32,000 $30,000 $26,000 $88,000 Variable departmental costs 19,200 16,500 10,400 46,100 Direct fixed costs 5,000 7,000 4,000 16,000 Allocated fixed costs 6,500 8,500 7,500 22,500 Net income $1,300 ($2,000) $4,100 $3,400 Seventy percent of the allocated fixed costs are unavoidable. In good form, prepare anincremental analysis to determine if 3 Mile Wings should be discontinued. Incremental Analysis Amounts Incremental revenue if dropped ($30,000) Incremental variable cost savings +16,500 Incremental direct fixed cost savings +7,000 Incremental fixed costs avoided* +2,550 Incremental decrease in profit if dropped ($3,950) * $8,500*30% = $2,550
Should 3 Mile Wings be discontinued? Briefly justify your response as to why or why not. 3 Mile Wings should not be discontinued because profits would decline by $3,950, which results in a net loss of $550 for the company instead of a $3,400 profit. Problem 64 The following estimated costs were provided by Narb Company: Direct material ($20/unit) $240,000 Direct labor ($12/hr. * .25 hrs./unit) 36,000 Variable manufacturing overhead 18,000 Allocated fixed overhead costs 30,000 ($2.50/unit) Total $324,000 Narb received an order for 2,500 units from a new customer with whom Narb is anxious to do business. This customer would like to spend $26 per widget. Narb has the capacity to produce the additional units. In good form, prepare an incremental analysis to determine if Narb should accept the order. Incremental Analysis Amounts Calculations: Incremental revenue if accepted +$65,000 2,500 * $26 = $65,000 Incremental DL cost increase (7,500) $12*0.25hrs.*12,000 = $7,500 Incremental DM cost increase (50,000) 2,500 * $20 = $65,000 Incremental VOH cost increase (3,750) 2,500*12,000 = $3,750 Incremental increase in profit if accepted $3,750
# of units: $240,000/$20 = 12,000 units
