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Solutions Guide: Please reword the answers to essay type parts so as to guarantee

that your answer is an original. Do not submit as is


1.Gruner Company produces golf discs which it normally sells to retailers for $7 each.
The cost of manufacturing 20,000 golf discs is:
Materials
Labor
Variables overhead
Fixed overhead
Total

$ 10,000
30,000
20,000
40,000
100,000

Gruner also incurs 5% sales commission ($0.35) on each disc sold.


Travis Corporation offers Guner $4.75 per disc for 5,000 discs. Travis would sell the
discs under its own brand name in foreign market not yet serves by Gruner. If Gruner
accepts the offer, its fixed overhead will increase from $40,000 to $45,000 due to the
purchase of a new imprinting machine. No sales commission will result from the special
order.
a.
b.
c.

Prepare an incremental analysis for the special order.


Should Gruner accept the special order? Why or Why not?
What assumptions underlie the decision made in part (b)

(a)

Reject
Order
Revenues
Materials ($0.50)
Labor ($1.50)
Variable overhead ($1.00)
Fixed overhead
Sales commissions
Net income

$ -0-0-0-0-0 -0$ -0-

Accept
Order
$23,750
(2,500)
(7,500)
(5,000)
(5,000)
-0$3,750

Net Income Effect


$23,750
(2,500)
(7,500)
(5,000)
(5,000)
-0$3,750

(b)

As shown in the incremental analysis, Gruner should accept the special order
because incremental revenue exceeds incremental expenses by $3,750.

(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. Gruner would have to consider
the lost sales in making the decision. Second, if Gruner is operating at full
capacity, it is likely that the special order would be rejected.

2. Selleck has recently started the manufacture of RecRobo, a three-wheeled robot that
can scan a home for fires and gas leaks and then transmit this information to a mobile
phone. The cost structure to manufacture 20,000 RecRobo's is as follows.

Cost
robot)
robot)
robot)
robot)

Direct materials ($40 per


$ 800.00
Direct Labor ($30 per
600,00
Variables overhead ($6 per
120,000
Allocated fixed overhead ($25 per
500,000
Total

2,020,000

Selleck is approached by Padong Inc. , which offer to make RecRobo for $90 per unit or
$1,800,000.
a. Using incremental analysis, dertemine whether Selleck should accept this offer
under each of the following independent assumptions.
(1). Assume that $300.000 of the fixed overhead cost can be reduced (avoided).
(2). Assume that none of the fixed overhead can be reduced (avoided). However, if the
robots are purchased from Padong Inc., Selleck can use the released productive resources
to generate additional income of $300,000.
b. Describe the qualitative factors that might affect the decision to purchase the robot
from an outside supplier.

(a) (1)

Direct materials
Direct labor
Variable overhead
Fixed overhead
Purchase price
Total annual cost

Make
$ 800,000
600,000
120,000
500,000
0
$2,020,000

Buy
$

-0-0-0200,000
1,800,000
$2,000,000

Yes. The offer should be accepted as net income will increase by $20,000.

Net Income
Increase
(Decrease)
$ 800,000
600,000
120,000
300,000
(1,800,000)
$
20,000

(2)

Direct materials
Direct labor
Variable overhead
Fixed overhead
Opportunity cost
Purchase price
Totals

Make
$ 800,000
600,000
120,000
500,000
300,000
0
$2,320,000

Buy
$

0
0
0
500,000
0
1,800,000
$2,300,000

Net Income
Increase
(Decrease)
$ 800,000
600,000
120,000
0
300,000
(1,800,000)
$
20,000

Yes. The offer should be accepted as net income would be $20,000 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.
3. Nichols Company makes three models of phasers. Information on the three products is
given below.

Sales
Variables exp

Stunner
300,000
150,000

Double-Set
$500,000
200,000

Mega-Power
$200,000
140,000

Contribution marg 150,000


Fixed expen
120,000

300,000
225,000

60,000
90,000

Net income

$ 75,000

$(30,000)

$ 30,000

Fixed expenses consist of $300,000 of common costs allocated to the three products
based on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,000
(Double-Set), and $30,000 (Mega-Power). The common costs will be incurred regardless
of how many models are produced. The other fixed expenses would be eliminated if a
model is phased out.
Ralph Port, an executive with the company, feels the Mega-Power line should be
discontinued to increase the company's net income.
a. Compute current not income for Nichols Company.
b. Compute net income by product line and in total Nichols Company if the company
discontinues the Mega-Power product line.( Hint: Allocate the $300,000 common cist to

the two remaining product lines based in their relative sales).


c. Should Nichols eliminate the Mega-Power product line? Why or Why not?
(a) $30,000 + $75,000 $30,000 = $75,000
(b)
Sales
Variable expenses
Contribution margin
Fixed expenses
Net income

Stunner
$300,000
$150,000
$150,000
$142,500*
$7,500

Double-Set
$500,000
$200,000
$300,000
$262,500**
$37,500

Total
$800,000
$350,000
$450,000
$405,000
$45,000

*$30,000 + [($300,000 $800,000) $300,000]


**$75,000 + [($500,000 $800,000) $300,000]
(c) As shown in the analysis above, Nichols should not eliminate the Mega-Power
product line. Elimination of the line would cause net income to drop from $75,000 to
$45,000. The reason for this decrease in net income is that elimination of the product
line would result in the loss of $60,000 of contribution margin while saving only
$30,000 of fixed expenses.

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