Professional Documents
Culture Documents
Incremental Analysis
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
A
Problems
B
Problems
1.
1, 2
2.
3, 4
1, 17
3.
2, 3, 4, 18
1A
1B
4.
6, 7
5, 6, 7,
8, 18
2A
2B
5.
8, 9, 10
5, 6
9, 10, 11,
12, 18
3A
3B
6.
11
13, 14, 18
4A
4B
7.
12
15, 16,
17, 18
5A
5B
Description
Difficulty
Level
Time
Allotted (min.)
Simple
2030
1A
2A
Moderate
3040
3A
Moderate
3040
4A
Moderate
3040
Moderate
3040
Simple
2030
Moderate
3040
3B
Moderate
3040
4B
Moderate
3040
Moderate
2030
5A
1B
2B
5B
Correlation Chart between Blooms Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems
Learning Objective
Knowledge Comprehension
1.
Q7-1
Q7-2
E7-1
2.
Q7-3
Q7-4
E7-1
3.
4.
5.
6.
7.
Application
Analysis
Synthesis
Evaluation
BE7-2
E7-17
Q7-5
BE7-3 DI71
E7-2
E7-3
E7-4
E7-18
P7-1A
P7-1B
Q7-6
Q7-7
BE7-4
DI7-2
E7-5
E7-6
E7-7
E7-8
E7-18
P7-2A
P7-2B
BE7-5
BE7-6
DI7-3
E7-9
E7-10
E7-11
E7-12
E7-18
P7-3A
P7-3B
Q7-11
BE7-7
E7-13
E7-14
E7-18
P7-4A
P7-4B
Q7-12
BE7-8 DI74
E7-15
E7-16
E7-17
E7-18
P7-5A
P7-5B
Q7-8
Q7-9
Q7-10
BYP7-1
BYP7-4
BYP7-5
BYP7-2
BYP7-8
BYP7-9
BYP7-3
BYP7-6
BYP7-7
B
L
O
O
M
S
T
A
X
O
N
O
M
Y
ANSWERS TO QUESTIONS
1.
The
(1)
(2)
(3)
(4)
2.
3.
Disagree. Incremental analysis involves the identification of financial data that change under
alternative courses of action.
4.
In incremental analysis, the important point to consider is whether costs will differ (change)
between the two alternatives. As a result, sometimes (1) variable costs do not change under the
alternative courses of action and (2) fixed costs do change.
5.
The relevant data in deciding whether to accept an order at a special price are the incremental
revenues to be obtained compared to the incremental costs of filling the special order.
6.
The manufacturing costs that are relevant in the make-or-buy decision are those that will change
if the parts are purchased.
7.
Opportunity cost may be defined as the potential benefit that may be obtained by following an
alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the
facilities used to make the part can be used to generate additional income.
8.
The decision rule in a decision to sell a product or to process it further is: Process further as
long as the incremental revenue from the additional processing exceeds the incremental
processing costs.
9.
Joint products are products that are produced from a single raw material and a common
production process. An accounting issue related to joint products is how to allocate the joint costs
incurred during the production process that creates the joint products.
10. Joint costs are irrelevant to a sell-or-process-further decision because they are sunk costs and
will not change whether the decision is to sell the existing product or process it further. Therefore,
joint costs are ignored in this decision.
11. A sunk cost is a cost that cannot be changed by any present or future decision. Sunk costs, such
as the book value of an old piece of equipment, therefore, are not relevant in a decision to retain
or replace equipment.
12. Net income will be lower if an unprofitable product line is eliminated when the product line is
producing a positive contribution margin and its fixed costs cannot be avoided or reduced.
Revenues
Costs
Net
income
Alternative
A
$160,000
100,000
$ 60,000
Alternative
B
$180,000
125,000
$ 55,000
Net Income
Increase
(Decrease)
$ 20,000
(25,000)
($ 5,000)
Revenues
CostsVariable manufacturing
Shipping
Net income
Reject
Order
$0
0
0
$0
Accept
Order
$75,000*
60,000**
6,000***
$ 9,000
Net Income
Increase
(Decrease)
$ 75,000
(60,000)
(6,000)
$ 9,000
*3,000 X $25
**3,000 X $20
***3,000 X $ 2
Make
Buy
$50,000
30,000
0
$80,000
$ 0
30,000
60,000
$90,000
Net
Income
Increase
(Decrease)
$ 50,000
0
(60,000)
$(10,000)
Sell
Process
Further
Net Income
Increase (Decrease)
$62.00
$70.00
$8.00
36.00
10.00
46.00
$16.00
43.00
10.00
53.00
$17.00
(7.00)
0
(7.00)
$1.00
New machine
cost Sell old
machine
Total
Retain
Equipment
Replace
Equipment
Net 4-Year
Income
Increase
(Decrease)
$3,000,000
$2,500,000
300,000
(30,000)
$2,770,000
$ 500,000
(300,000)
30,000
$ 230,000
$3,000,000
The old factory machine should be replaced.
BRIEF EXERCISE 7-8
Sales
Variable costs
Contribution margin
Fixed costs
Net income
Continue
Eliminate
$200,000
180,000
20,000
30,000
$ (10,000)
Net Income
Increase (Decrease)
0
0
0
20,000
$(20,000)
$(200,000)
180,000
(20,000)
10,000
$ (10,000)
The Big Bart product line should be continued because $20,000 of contribution margin will not be realized if the line is eliminated. This amount is
greater than the $10,000 savings of fixed costs.
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 71
Reject
Revenues
Costs
Net income
$ 0
$ 0
$ 0
Accept
$180,000
138,000*
$ 42,000
Net Income
Increase (Decrease)
$180,000
(138,000)
$ 42,000
Given the results of the above analysis, Maize Company should accept the
special order.
DO IT! 7-2
Net Income
Increase (Decrease)
(a)
Make
Direct materials
Direct labor
Variable manufacturing
costs
Fixed manufacturing
costs
Purchase price
Total cost
Buy
$ 30,000
42,000
45,000
60,000
0
$177,000
0
0
$ 30,000
42,000
45,000
45,000
162,000
$207,000
15,000
(162,000)
$ (30,000)
Given the results of the above analysis, Rubble Company will incur
$30,000 of additional costs if it buys the switches.
(b)
Make
Total cost
Opportunity cost
Total cost
$177,000
34,000
$211,000
Buy
Net Income
Increase (Decrease)
$207,000
0
$207,000 $ 4,000
$(30,000)
34,000
Yes, the answer is different: The analysis shows that net income will
be increased by $4,000 if Rubble Company purchases the switches.
DO IT! 7-3
Sell
Process
Further
Net Income
Increase (Decrease)
Sales per
unit Cost per
unit
Variable
Fixed
Total
$75
$100
$25
$40
10
$50
$ 57
13
$ 70
($17)
(3)
($20)
$25
$ 30
$ 5
The tables should be processed further and Mesa Verde should finish the
tables because the incremental revenues exceed incremental costs by
$5 per unit.
DO IT! 7-4
Sales
Variable costs
Contribution margin
Fixed costs
Net income
Continue
$500,000
370,000
130,000
150,000
$ (20,000)
Eliminate
$
0
0
0
38,000
$(38,000)
Net Income
Increase (Decrease)
$(500,000)
370,000
(130,000)
112,000
$ (18,000)
The analysis indicates that Gator should not eliminate the gloves and mittens
line because net income would decrease $18,000.
SOLUTIONS TO EXERCISES
EXERCISE 7-1
1.
2.
3.
4.
5.
6.
7.
8.
9.
EXERCISE 7-2
(a)
Revenues ($4.80)
Materials ($0.50)
Labor ($1.50)
Variable overhead ($1.00)
Fixed overhead
Sales commissions
Net income
Reject
Order
$ 0
0
0
0
0
0
$ 0
Accept
Order
$24,000
(2,500)
(7,500)
(5,000)
(6,000)
0
$ 3,000
Net Income
Increase
(Decrease)
$24,000
(2,500)
(7,500)
(5,000)
(6,000)
0
$ 3,000
(b) As shown in the incremental analysis, Gruden should accept the special
order because incremental revenue exceeds incremental expenses by
$3,000.
(c) It is assumed that sales of the golf discs in other markets would not be
affected by this special order. If other sales were affected, Gruden would
have to consider the lost sales in making the decision. Second, if Gruden
is operating at full capacity, it is likely that the special order would be
rejected.
EXERCISE 7-3
(a)
Revenues (15,000 X $7.60)
Cost of goods sold
Operating expenses
Net income
Reject
Order
$0
0
0
$0
Accept
Order
$114,000
78,000 (1)
30,000 (2)
$ 6,000
Net Income
Increase
(Decrease)
$114,000
(78,000)
(30,000)
$ 6,000
Revenues
Variable costs:
Direct materials
Direct labor
Variable overhead
Total variable costs
Net income
Reject
Order
$0
0
0
0
0
$0
Accept
Order
$1,187,500 (1)
Net Income
Increase
(Decrease)
$1,187,500
500,000
187,500
250,000
937,500
$ 250,000
(500,000)
(187,500)
(250,000)
(937,500)
$ 250,000
EXERCISE 7-5
(a)
Make
Direct materials (30,000 X
$4.00) Direct labor (30,000 X
$5.00)
Variable overhead costs
($150,000 X 70%)
Fixed manufacturing costs
Purchase price (30,000 X
$12.75)
Total annual cost
Net Income
Increase
(Decrease)
Buy
$120,000
150,000
0
0
105,000
45,000
0
$420,000
0
45,000
382,500
$427,500
$ 120,000
150,000
105,000
0
(382,500)
$ (7,500)
(b) No, Schopp Inc. should not purchase the shades. As indicated by the
incremental analysis, it would cost the company $7,500 more to purchase the lamp shades.
(c) Yes, by purchasing the lamp shades, a total cost saving of $17,500 will
result as shown below.
Make
Buy
Net Income
Increase
(Decrease)
$420,000
25,000
$445,000
$427,500
0
$427,500
$ (7,500)
25,000
$ 17,500
EXERCISE 7-6
(a) 1.
Make
Direct materials
Direct labor
Variable overhead
Fixed overhead
Purchase price
Total annual cost
Buy
$1,000,000 $ 0
800,000
0
120,000
0
600,000
195,000
0 2,300,000
$2,520,000 $2,495,000
Net Income
Increase
(Decrease)
$ 1,000,000
800,000
120,000
405,000
(2,300,000)
$ 25,000
Yes. The offer should be accepted as net income will increase by $25,000.
Net Income
Increase
(Decrease)
Make
Direct materials
Direct labor
Variable overhead
Fixed overhead
Opportunity cost
Purchase price
Totals
$1,000,000
800,000
120,000
600,000
405,000
0
$2,925,000
Buy
0
$ 1,000,000
0
800,000
0
120,000
600,000
0
0
405,000
2,300,000(2,300,000)
$2,900,000
$
25,000
Yes. The offer should be accepted as net income would be $25,000 more.
(b) Qualitative factors include the possibility of laying off those employees
that produced the robot and the resulting poor morale of the remaining
employees, maintaining quality standards, and controlling the purchase
price in the future.
EXERCISE 7-7
Net Income
Direct materials
Direct labor
Variable overhead
Purchase price
Total unit cost
Make Sails
$100
80
35
0
$215
Buy Sails
$ 0
0
0
250
$250
Increase
(Decrease)
$ 100
80
35
(250)
$ (35)
Gibbs should be making the sails, because they could save $35 per
unit or $42,000. The president was including the fixed overhead cost
in the calculation. Variable overhead = Total overhead ($100) Fixed
overhead ($78,000 1,200) = $35. This amount has been allocated, so
Gibbs will incur the cost whether or not they make the sails. This is an
example of an irrelevant cost, because it does not differ between the
two alternatives.
Per
Unit
$215
$250
Make
Sails
$258,000
0
77,000
$335,000
Buy Sails
$
0
300,000
0
$300,000
Net Income
Increase
(Decrease)
$ 258,000
(300,000)
77,000
$ 35,000
Make IMC2
$ 65.00
45.00
6.50
72.00*
0
$188.50
Buy IMC2
$
0
0
0
0
200.00
$200.00
Net Income
Increase
(Decrease)
$ 65.00
45.00
6.50
72.00
(200.00)
$ (11.50)
(c)
EXERCISE 7-9
Sell
(Basic Kit)
Process Further
(Stage 2 Kit)
$30
$35
$14
0
$14
$ 7 (1)
9 (2)
$16
$16
$19
Net Income
Increase
(Decrease)
$5
$7
(9)
$(2)
$3
(1) The cost of materials decreases because Rachel can make two Stage
2 Kits from the materials for a basic kit.
(2) The total time to make the two kits is one hour at $18 per hour or
$9 per unit.
$ 130,000
(100,000)
$ 30,000
$ 440,000
(100,000)
(280,000)
$ 60,000
(c)
(1)
Incremental revenue
Incremental costs
Incremental profit (loss)
(1)
$ 420,000
(100,000)
(250,000)
$ 70,000
Net income is $10,000 ($70,000 $60,000) higher in (d) than in (b) because
product 12 is not processed further, thereby increasing overall profit $10,000.
EXERCISE 7-11
To determine whether each of the three joint products should be sold as is,
or processed further, we must determine the incremental profit or loss that
would be earned by each. The allocated joint costs are irrelevant to the
decision since these costs will not change whether or not the products are
sold as is or processed further.
Larco
Incremental revenue
Incremental cost
Incremental profit (loss)
$100,000*
(110,000)
$ (10,000)
Marco
Narco
$100,000**
(85,000)
$ 15,000
$395,000***
(250,000)
$145,000
From this analysis we see that Marco and Narco should be processed further
because the incremental revenue exceeds the incremental costs, but Larco
should be sold as is.
*$300,000 $200,000
**$400,000 $300,000
***$800,000 $405,000
EXERCISE 7-12
(a)
The costs that are relevant in this decision are the incremental revenues
and the incremental costs associated with processing the material
past the split-off point. Any costs incurred up to the split-off point are
sunk costs, and therefore, irrelevant to this decision.
(b)
D
$20,000
(14,000)
$ 6,000
E
$27,600
(20,000)
$ 7,600
F
$ 6,400
(9,000)
$(2,600)
(c)
The decision would remain the same. It does not matter how the joint
costs are allocated because joint costs are irrelevant to this
decision.
EXERCISE 7-13
(a)
Cost
Accumulated depreciation
Book value
Sales proceeds
Loss on sale
$100,000
(25,000*)
75,000
40,000
$ 35,000
Retain
Scanner
Replace
Scanner
$315,000*
$225,000**
110,000
(40,000)
$295,000
$315,000
Net Income
Increase
(Decrease)
$90,000
(110,000)
40,000
$ 20,000
EXERCISE 7-14
Operating costs
New machine cost
Salvage value
(old)
Total
Retain
Machine
$125,000 (1)
0
0
$125,000
Replace
Machine
$100,000
25,000 (2)
(6,000)
$119,000
Net Income
Increase
(Decrease)
$ 25,000
(25,000)
6,000
$ 6,000
(1) $25,000 X 5.
(2) $20,000 X 5.
The current machine should be replaced. The incremental analysis shows
that net income for the five-year period will be $6,000 higher by replacing the
current machine.
EXERCISE 7-15
Sales
Variable costs
Cost of goods sold
Operating expenses
Total variable
Contribution margin
Fixed costs
Cost of goods sold
Operating expenses
Total fixed
Net income (loss)
Continue
$100,000
61,000
26,000
87,000
13,000
15,000
24,000
39,000
$(26,000)
Eliminate
$
0
0
0
0
15,000
24,000
39,000
$(39,000)
Net Income
Increase
(Decrease)
$(100,000)
61,000
26,000
87,000
(13,000)
0
0
0
$ (13,000)
Judy is incorrect. The incremental analysis shows that net income will be
$13,000 less if the Huron Division is eliminated. This amount equals the
contribution margin that would be lost through discontinuing the division.
(Note: None of the fixed costs can be avoided.)
EXERCISE 7-16
(a)
Tingler
Sales
Variable expenses
Contribution margin
Fixed expenses
Net income
Shocker
$300,000
150,000
150,000
142,500*
$ 7,500
$500,000
200,000
300,000
267,500**
$ 32,500
Total
$800,000
350,000
450,000
410,000
$ 40,000
C
$95
50
$45
D
$75
40
$35
E
$115
40
$ 75
C
9,000
D
20,000
Total
$855,000
450,000
$405,000
$1,500,000
800,000
$ 700,000
$2,355,000
$1,250,000
1,105,000
638,000
Net income
$ 467,000
C
9,900*
$940,500
495,000
$445,500
E
10,000
Total
$1,150,000
$2,090,500
400,000 895,000
$ 750,000
1,195,500
638,000
$ 557,500
SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
(a)
Reject
Order
$0
0
Accept
Order
$270,000
220,000 (1)
Net Income
Increase
(Decrease)
$ 270,000
(220,000)
0
$0
20,000 (2)
$ 30,000
(20,000)
$ 30,000
PROBLEM 7-2A
(a)
Direct materials
(8,000 X
$4.80)
Direct labor
(8,000 X
$4.30)
Indirect labor
Make CISCO
$38,400
34,400
Buy CISCO
$
Net Income
Increase
(Decrease)
$38,400
34,400
(8,000 X $.43)
Utilities (8,000 X $.40)
Depreciation
Property taxes
Insurance
Purchase price
Freight and inspection
(8,000 X $.35)
Receiving costs
Total annual cost
3,440
3,200
3,000
700
1,500
0
0
0
900
200
600
80,000
3,440
3,200
2,100
500
900
(80,000)
0
0
$84,640
2,800
1,300
$85,800
(2,800)
(1,300)
$ (1,160)
(b) The company should continue to make CISCO because net income
would be $1,160 less if CISCO were purchased from the supplier.
(c) The decision would be different. Because of the opportunity cost of
$3,000, net income will be $1,840 higher if CISCO is purchased as
shown below:
Net Income
Increase
(Decrease)
Make CISCO
Buy CISCO
Total annual cost
Opportunity cost
Total cost
$84,640
3,000
$87,640
$85,800
0
$85,800
$(1,160)
3,000
$ 1,840
PROBLEM 7-3A
(a) (1)
$400,000
216,000
$616,000
210,000
240,000
450,000
$166,000
$400,000
168,000
168,000
$736,000
210,000
240,000
100,000
550,000
$186,000
Incremental revenue
Incremental costs
Totals
(b) Dont
Process
Table Cleaner
Further
$216,000
0
$216,000
Process
Table Cleaner
Further
$336,000
100,000
$236,000
Net Income
Increase
(Decrease)
$120,000
(100,000)
$ 20,000
When trying to decide if the table cleaner should be processed further into
TSR and TP, only the relevant data need be considered. All of the costs that
occurred prior to the creation of the table cleaner are sunk costs and can
be ignored. The decision should be made by comparing the incremental
revenue from further processing to the incremental costs.
PROBLEM 7-4A
(a)
Cost
Accumulated depreciation
Book value
Sales proceeds
Loss on sale
$120,000
(24,000*)
96,000
(25,000)
$ 71,000
444,000
$516,000
*($29,000 X 4)
(2)
Revenues
Less costs:
Variable costs ($10,000 X 4)
Fixed costs ($8,500 X 4)
Selling and administrative
Depreciation
Operating income
Less: Loss on old elevator
Net income
(c)
Retain
Old
Elevator
Variable operating costs
Fixed operating costs
New elevator cost
Salvage on old elevator
Totals
$140,000
92,000
.
$232,000
350,000
610,000
71,000
$539,000
Replace
Old Elevator
Net Income
Increase
(Decrease)
$ 40,000
34,000
160,000
(25,000)
$209,000
$ 100,000
58,000
(160,000)
25,000
$ 23,000
MEMO
PROBLEM 7-5A
(a)
Sales
Variable costs
Cost of goods sold
Selling and administrative
Total variable expenses
Contribution margin
Division I
$250,000
Division II
$200,000
150,000
30,000
180,000
$ 70,000
172,800
42,000
214,800
$ (14,800)
(b) (1)
Net Income
Increase
(Decrease)
Division I
Continue
Eliminate
Contribution margin
(above) Fixed costs
Cost of goods sold
Selling and administrative
Total fixed expenses
Income (loss) from operations
$ 70,000
$0
$(70,000)
50,000
45,000
95,000
$(25,000)
25,000
22,500
47,500
$(47,500)
25,000
22,500
47,500
$(22,500)
Net Income
Increase
(Decrease)
(2)
Division II
Continue
Eliminate
Contribution margin
(above) Fixed costs
Cost of goods sold
Selling and administrative
Total fixed expenses
Income (loss) from operations
$(14,800)
19,200
18,000
37,200
$(52,000)
9,600
9,000
18,600
$(18,600)
$14,800
9,600
9,000
18,600
$33,400
GUTIERREZ COMPANY
CVP Income Statement
For the Quarter Ended March 31, 2014
Divisions
Sales
Variable costs
Cost of goods sold
Selling and
administrative
Total variable
costs
Contribution margin
Fixed costs
Cost of goods sold (1)
Selling and
administrative (2)
Total fixed
costs
Income (loss)
from operations
III
IV
Total
$250,000
$500,000
$450,000
$1,200,000
150,000
240,000
187,500
577,500
30,000
30,000
30,000
90,000
180,000
70,000
270,000
230,000
217,500
232,500
667,500
532,500
53,200
63,200
65,700
182,100
48,000
33,000
23,000
104,000
101,200
$(31,200)
96,200
$133,800
88,700
$143,800
286,100
$ 246,400
(1) Divisions fixed cost of goods sold plus 1/3 of Division IIs
unavoidable fixed cost of goods sold [$192,000 X (100% 90%) X
50% = $9,600]. Each divisions share is $3,200.
(2) Divisions fixed selling and administrative expense plus 1/3 of
Division IIs unavoidable fixed selling and administrative expenses
[$60,000 X (100% 70%) X 50% = $9,000]. Each divisions share
is $3,000.
Income from operations with Division II of $213,000 (given) plus
incremental income of $33,400 from eliminating Division II = $246,400
income from operations without Division II.
PROBLEM 7-1B
Reject
Order
(a)
Revenues (10,000 X $30)
Cost of goods sold
Selling and administrative
expenses
Net income
$0
0
0
$0
Accept
Order
$300,000
240,000
(1)
Net Income
Increase
(Decrease)
$ 300,000
(240,000)
25,000
(2)
$ 35,000
(25,000)
$ 35,000
PROBLEM 7-2B
(a)
Make FIZBE
FIZBE
Buy
Net Income
Increase
(Decrease)
$23,750
23,000
2,250
1,750
2,000
700
1,500
0
0
0
0
0
900
200
600
56,000
$ 23,750
23,000
2,250
1,750
1,100
500
900
(56,000)
0
0
$54,950
1,500
500
$59,700
(1,500)
(500)
$ (4,750)
(b) The company should continue to make FIZBE because net income
would be $4,750 less if FIZBE were purchased from the supplier.
(c) The decision would be different. Because of the opportunity cost of
$6,000, net income will be $1,250 higher if FIZBE is purchased as shown
below:
Make FIZBE
$54,950
6,000
$60,950
Buy FIZBE
$59,700
0
$59,700
Net Income
Increase
(Decrease)
$(4,750)
6,000
$ 1,250
PROBLEM 7-3B
(a) (1)
$450,000
250,000
$700,000
200,000
300,000
500,000
$200,000
$450,000
200,000
200,000
$850,000
200,000
300,000
140,000
640,000
$210,000
Incremental revenue
Incremental costs
Totals
(b) Dont
Process
G-P Cleaner
Further
$250,000
0
$250,000
Process
G-P Cleaner
Further
$400,000
140,000
$260,000
Net Income
Increase
(Decrease)
$150,000
(140,000)
$ 10,000
PROBLEM 7-4B
(a)
Cost
Accumulated depreciation
Book value
Sales proceeds
Loss on sale
$210,000
(42,000*)
168,000
(58,000)
$110,000
(2)
Revenues
Less costs:
Variable costs
Fixed costs
Selling and administrative
Depreciation
Operating income
Less: Loss on old equipment
Net income
(c)
Variable costs
Fixed costs
New equipment cost
Salvage on old equipment
Totals
668,000
$ 772,000
Replace Old Equipment
$1,440,000
$ 48,000
20,000
180,000
250,000
498,000
942,000
110,000
$ 832,000
Retain Old
Equipment
Replace Old
Equipment
$200,000
120,000
$ 48,000
20,000
250,000
(58,000)
$260,000
$320,000
Net
Income
Increase
(Decrease)
$152,000
100,000
(250,000)
58,000
$ 60,000
MEMO
PROBLEM 7-5B
(a)
Sales
Variable expenses
Cost of goods sold
Selling and administrative
Total variable expenses
Contribution margin
Division
IV
Division
III
$310,000
$170,000
189,000
45,000
234,000
$ 76,000
140,400
49,000
189,400
$ (19,400)
(b) (1)
Division III
Contribution margin (above)
Fixed expenses
Cost of goods sold
Selling and administrative
Total fixed expenses
Income (loss) from operations
Net Income
Increase
(Decrease)
Continue
Eliminate
$ 76,000
$0
$(76,000)
81,000
30,000
111,000
$(35,000)
40,500
15,000
55,500
$(55,500)
40,500
15,000
55,500
$(20,500)
Net Income
Increase
(Decrease)
(2)
Division IV
Continue
Eliminate
Contribution margin
(above) Fixed expenses
Cost of goods sold
Selling and administrative
Total fixed expenses
Income (loss) from operations
$(19,400)
15,600
21,000
36,600
$(56,000)
7,800
10,500
18,300
$(18,300)
$19,400
7,800
10,500
18,300
$37,700
II
III
Total
$510,000
$400,000
$310,000
$1,220,000
210,000
200,000
189,000
599,000
24,000
40,000
45,000
109,000
234,000
276,000
240,000
160,000
234,000
76,000
708,000
512,000
92,600
52,600
83,600
228,800
39,500
43,500
33,500
116,500
132,100
$143,900
96,100
$ 63,900
117,100
345,300
$ (41,100 ) $ 166,700
(1) Divisions fixed cost of goods sold plus 1/3 of Division IVs unavoidable fixed cost of goods sold [$156,000 X (100% 90%) X 50% =
$7,800]. Each divisions share is $2,600.
(2) Divisions fixed selling and administrative expenses plus 1/3 of
Division IVs unavoidable fixed selling and administrative expenses
[$70,000 X (100% 70%) X 50% = $10,500]. Each divisions share
is $3,500.
Income from operations with Division IV of $129,000 (given) plus incremental income of $37,700 from eliminating Division IV = $166,700 income
from operations without Division IV.
Situation #1
(a) Current Designs should accept the special order based on the following
calculations:
Revenues
Costs
Net Income
Reject Order
$0
0
$0
Accept Order
$25,000*
(19,000)**
$ 6,000
Net Income
Increase (Decrease)
$25,000
(19,000)
$ 6,000
*(100 X $250)
**(($80 + $60 + $20) X 100) + ($1,000 + $2,000)
(b) Assuming that Current Designs is currently operating with excess
capacity, it should accept the order based on the calculations shown
in part (a). If Current Designs is currently operating at full capacity, it
would have to weigh its options. If it displaced production of regular
kayaks in order to fill this order, it would have to consider the opportunity costs associated with this decision. The opportunity cost, when
operating at full capacity, would be the lost contribution margin from
regular sales given up in order to fulfill the special order. Alternatively,
rather than reject the special order, it might consider temporarily expanding the plants capacity by adding an additional production shift to
handle the special order. If this option were considered, it would have
to identify all additional incremental costs (for example, overtime pay)
that would be incurred.
$110,500*
0
0
$110,500
Replace
Oven
Net Income
Increase
(Decrease)
$ 97,500**
250,000
(10,000)
$337,500
$ 13,000
(250,000)
10,000
($ 227,000)
(b) Even with the cost of natural gas increasing at a faster than expected
rate, Current Designs still should not replace the Rotomold oven as the
rate increase does not cover the cost of the new oven based on the
following calculations:
Retain
Oven
Variable manufacturing costs
New oven cost
Proceeds from scrapping old oven
Total
$144,500*
0
0
$144,500
Replace
Oven
$127,500**
250,000
(10,000)
$367,500
Net Income
Increase
(Decrease)
$ 17,000
(250,000)
10,000
($ 223,000)
Make
Direct materials
Direct labor
Variable manufacturing costs
Fixed manufacturing costs
Purchase price ($50 X 3,000)
Total annual cost
$ 60,000
45,000
36,000
20,000
0
$161,000
Buy
$
0
0
0
15,000
150,000
$165,000
Net Income
Increase
(Decrease)
$ 60,000
45,000
36,000
5,000
(150,000)
($ 4,000)
Make
$161,000
20,000
$181,000
Buy
$165,000
0
$165,000
Net Income
Increase
(Decrease)
($ 4,000)
20,000
$16,000
Retain
Old Machine
Sales
Costs and expenses
Cost of goods sold
Selling expenses
Administrative expenses
Purchase price
Total costs and expenses
Net income
(1)
(2)
(3)
(4)
(5)
Purchase
New Machine
Net Income
Increase
(Decrease)
$6,000,000 (1)
$6,600,000 (2)
$ 600,000
4,500,000 (3)
900,000
500,000
5,900,000
$ 100,000
4,620,000 (4)
990,000
565,000
150,000 (5)
6,325,000
$ 275,000
(120,000)
(90,000)
(65,000)
(150,000)
(425,000)
$ 175,000
(a)
$ 14.50
Buy
TransTech
$ 14.50
$ 14.50
2.00
0.80
0.60
3.00
0.50
0
6.90
$ 7.60
$38,000
0
0
0
0
0
10.00
1.00*
11.00
$ 3.50
$17,500
0
0
0
0
0
5.00
1.00
6.00
$ 8.50
$42,500
Make
Sales Revenue
Variable Manufacturing Cost:
Circuit Board
Plastic Case
Alarms (4 @ $.15 each)
Labor
Overhead
Purchase Cost
Fixed Manufacturing Cost:
Total Manufacturing Cost
Profit per Unit
Total Profit
Buy
Omega
*The $5,000 cost that will continue to be incurred, even if the product is
not manufactured, divided by the 5,000 units.
The company will make the most profit if the clocks are purchased
from Omega Company. The company will make $4,500 less if the clocks
are manufactured by MiniTek. The company will make $25,000 less if
the clocks are purchased from Trans-Tech.
(b) There are several important nonfinancial factors described in the case.
Other factors might be identified as well. The factors described are:
The company is having serious difficulty manufacturing the clocks.
Therefore, it would probably be willing to have someone else manufacture the clocks, even if it cost more to do so. The most promising
company appears to be Omega; however, there is a serious question
about Omegas ability to remain in business. However, the company
could purchase just this one order from Omega, and then continue to
search for another manufacturer, or stop manufacturing the clocks.
Trans-Techs stringent requirements for preferred customer status, in
the form of large sales requirements, appear to limit the possibilities
for MiniTek to use it as a supplier. However, if MiniTek does desire to
continue to offer the clocks because of their popularity, then perhaps
Trans-Tech could be used in the future.
(a) Before building the special-order new ceiling fans, company management must consider the effect of the new lines on current production
capacity, existing and available channels of distribution, the effect on
manufacturing efficiency, the effect on sales of current lines of product,
and the supply of materials and labor.
(b) Incremental analysis would provide a financial comparison of income
with the special-order ceiling fans to income without the special orders.
(a) The types of outsourcing services that the company provides assistance on are:
Information technology outsourcing, finance and accounting, human resource outsourcing, business process outsourcing, procurement, and
call centers.
(b) Insourcing means to take work that is currently being performed by an
outside service provider back in-house. For example, collections of
accounts receivable might currently be performed by a collection
agency, and you might decide to establish a collection group within
your company.
(c) Some of the benefits of insourcing include:
To:
From:
Hank JewelProduction
Manager
I have spent considerable time thinking about the dilemma created by the
new PDD1130 machine. Clearly, it is far superior to our existing machine.
There is no question that it would save us tremendous amounts of money.
I hope I am not overstepping my bounds here, but I just reviewed a chapter
in my managerial accounting text on incremental analysis which has made
me think we need to reconsider this decision.
The key to incremental analysis is identifying relevant costs. Relevant
costs are those costs that vary depending on the course of action taken. In
our situation, a relevant cost would be the savings that we would
experience were we to purchase the new machine. The book value of the
existing machine is not a relevant cost since it would not be changed by
purchasing or not purchasing the new machine. Costs incurred in the past
that do not change are referred to as sunk costs. Sunk costs are irrelevant
to incremental analysis.
I would really like to lay out an analysis of our options to decide the proper
course of action. I am concerned that by using the old machine for a couple
of years the profitability of the plant could be impacted negatively.