Connect - Managerial Accounting Chapter 10

1.

Farrow Co. expects to sell 150,000 units of its product in the next period with the following results.

Sales (150,000 units)		$	2,250,000
Costs and expenses
Direct materials			300,000
Direct labor			600,000
Overhead			150,000
Selling expenses			225,000
Administrative expenses			385,500
Total costs and expenses			1,660,500
Net income		$	589,500

The company has an opportunity to sell 15,000 additional units at $12 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 15% and (2) administrative expenses would increase by $64,500.

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit.

Normal Volume Additional Volume Combined Total Sales $2,250,000 $180,000 $2,430,000 Costs and expenses: Direct materials 300,000 30,000 330,000 Direct labor 600,000 60,000 660,000 Overhead 150,000 22,500 172,500 Selling expenses 225,000 225,000 Administrative expenses 385,500 64,500 450,000 Total costs and expenses 1,660,500 177,000 1,837,500 Incremental income (loss) from new business $589,500 $3,000 $592,500

Should the company accept or reject the offer?

The company should accept the offer 

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2.

Gilberto Company currently manufactures 65,000 units per year of one of its crucial parts. Variable costs are $1.95 per unit, fixed costs related to making this part are $75,000 per year, and allocated fixed costs are $62,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.25 per unit guaranteed for a three-year period.

   

Calculate the total incremental cost of making 65,000 units. (Round cost per unit answer to 2 decimal places.)

	Incremental Costs to Make Relevant Amount per Unit Relevant Fixed Costs Total Relevant Costs Variable cost per unit $1.95 $126,750 Fixed manufacturing costs $75,000 $75,000 Total incremental cost to make $201,750

Calculate the total incremental cost of buying 65,000 units. (Round cost per unit answer to 2 decimal places.)

	Incremental Costs to Buy Relevant Amount per Unit Relevant Fixed Costs Total Relevant Costs Purchase price per unit $3.25 $211,250 Total incremental cost to buy $211,250

Should the company continue to manufacture the part, or should it buy the part from the outside supplier?
Make 

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3.

A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 replacement units at a cost of $6 each, and sell them at the full price of $8.50 each.

What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Enter costs and losses as negative values.)

	Sale as Scrap Rework Sales of scrap units $55,000 Sales of reworked units $187,000 Cost to rework units (99,000) Opportunity cost of not making new units (55,000) Incremental income (loss) $55,000 $33,000 The company should: sell as is

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4.

Cobe Company has already manufactured 28,000 units of Product A at a cost of $28 per unit. The 28,000 units can be sold at this stage for $700,000. Alternatively, the units can be further processed at a $420,000 total additional cost and be converted into 5,600 units of Product B and 11,200 units of Product C. Per unit selling price for Product B is $105 and for Product C is $70.

1.	Prepare an analysis that shows whether the 28,000 units of Product A should be processed further or not.

	Sell as is Process Further Sales $700,000 $1,372,000 Relevant costs Costs to process further 420,000 Total relevant costs 420,000 Income (loss) $700,000 $952,000 Incremental net income (or loss) if processed further $252,000 Incremental income The company should process further

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5.

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows.

  

	Alternative A			Alternative B
Cost	$	115,000		$	125,000
Variable manufacturing costs per year		19,000			15,000

  

Calculate the total change in net income if Alternative A is adopted.  (Cash outflows should be indicated by a minus sign.)

	ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine $(115,000) Cash received to trade in old machine 52,000 Reduction in variable manufacturing costs 85,000 Total change in net income $22,000

Calculate the total change in net income if Alternative B is adopted. (Cash outflows should be indicated by a minus sign.)

	ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine $(125,000) Cash received to trade in old machine 52,000 Reduction in variable manufacturing costs 105,000 Total change in net income $32,000

Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase?

  Alternative B 

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Questions 6-7

[The following information applies to the questions displayed below.]

Suresh Co. expects its five departments to yield the following income for next year.

	Dept. M				Dept. N					Dept. O				Dept. P					Dept. T					Total
Sales		$	63,000			$	35,000				$	56,000			$	42,000				$	28,000			$	224,000
Expenses
Avoidable			9,800				36,400					22,400				14,000					37,800			$	120,400
Unavoidable			51,800				12,600					4,200				29,400					9,800			$	107,800
Total expenses			61,600				49,000					26,600				43,400					47,600				228,200
Net income (loss)		$	1,400			$	(14,000	)			$	29,400			$	(1,400	)			$	(19,600	)		$	(4,200	)

   

Recompute and prepare the departmental income statements (including a combined total column) for the company under each of the following separate scenarios.

6.

(1)	Management eliminates departments with expected net losses.

	DEPARTMENTS WITH EXPECTED NET LOSSES ELIMINATED Dept. M Dept. N Dept. O Dept. P Dept. T Total Sales $63,000 $56,000 $119,000 Expenses: 0 Avoidable 9,800 22,400 32,200 Unavoidable 51,800 12,600 4,200 29,400 9,800 107,800 Total expenses 61,600 12,600 26,600 29,400 9,800 140,000 Net income (loss) $1,400 $(12,600) $29,400 $(29,400) $(9,800) $(21,000)

7.

	DEPARTMENTS WITH LESS SALES THAN AVOIDABLE EXPENSES ELIMINATED Dept. M Dept. N Dept. O Dept. P Dept. T Total Sales $63,000 $56,000 $42,000 $161,000 Expenses: Avoidable 9,800 22,400 14,000 46,200 Unavoidable 51,800 12,600 4,200 29,400 9,800 107,800 Total expenses 61,600 12,600 26,600 43,400 9,800 154,000 Net income (loss) $1,400 $(12,600) $29,400 $(1,400) $(9,800) $7,000

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8.

Childress Company produces three products, K1, S5, and G9. Each product uses the same type of direct material. K1 uses 4 pounds of the material, S5 uses 3 pounds of the material, and G9 uses 6 pounds of the material. Demand for all products is strong, but only 50,000 pounds of material are available. Information about the selling price per unit and variable cost per unit of each product follows.

	K1		S5		G9
Selling price	$	160	$	112	$	210
Variable costs		96		85		144

1.	Calculate the contribution margin per pound for each of the three products.

	Contribution margin per pound Product K1 Product S5 Product G9 Contribution margin per unit $64.00 $27.00 $66.00 Pounds per unit 4 3 6 Contribution margin per pound $16.00 $9.00 $11.00 Order in which products should be produced and filled: First Third Second

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9.

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.

	Product G						Product B
Selling price per unit			$	120					$	160
Variable costs per unit				40						90
Contribution margin per unit			$	80					$	70
Machine hours to produce 1 unit		0.4	hours					1.0	hours
Maximum unit sales per month		600	units					200	units

The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $15,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit $80.00 $70.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour $200.00 $70.00 Product G Product B Total Maximum number of units to be sold 600 200 Hours required to produce maximum units 240 200 440 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product 176 176 Units produced for most profitable sales mix 440 Contribution margin per unit $80.00 Total contribution margin - one shift $35,200 $35,200 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month? Product G Product B Total Hours dedicated to the production of each product 240 112 352 Units produced for most profitable sales mix 600 112 Contribution margin per unit $80.00 $70.00 Total contribution margin - two shifts $48,000 $7,840 $55,840 Total contribution margin - one shift 35,200 Change in contribution margin 20,640 Change in fixed costs 15,000 Change in operating income(loss) $5,640 Should the company add another shift? Yes 4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $12,000 per month in marketing efforts. Should the company pursue this strategy and the double shift? Product G Product B Total Hours dedicated to the production of each product 280 72 352 Units produced for most profitable sales mix 700 72 Contribution margin per unit $80.00 $70.00 Total contribution margin - two shifts and marketing campaign $56,000 $5,040 $61,040 Contribution margin - two shifts without marketing campaign 55,840 Change in contribution margin 5,200 Additional marketing costs 12,000 Change in fixed costs 15,000 Change in operating income(loss) $(21,800) Should the company pursue the marketing campaign? No

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Another name for relevant cost is unavoidable cost.
False

An opportunity cost is the potential benefit lost by taking a specific action when two or more alternative choices are available.
True

An opportunity cost:
Is the potential benefit lost by choosing a specific alternative course of action among two or more.

Elliot Company can sell all of its products A and Z that it can produce, but it has limited production capacity. It can produce 8 units of A per hour or 10 units of Z per hour, and it has 20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for Elliot Company?
0 units of A and 200,000 units of Z.

Bannister Co. is thinking about having one of its products manufactured by a subcontractor.
Currently, the cost of manufacturing 1,000 units follows:

Direct material	$45,000
Direct labor	30,000
Factory overhead (30% is variable)	98,000

If Bannister can buy 1,000 units from a subcontractor for $100,000, it should:
Buy the product because the total incremental costs of manufacturing are greater than $100,000.

Additional costs incurred if a company pursues a certain course of action are sunk costs.
False

A cost that requires a future outlay of cash, and is relevant for current and future decision making, is a(n):
Out-of-pocket cost.

If accepting additional business would cause existing sales to decline, the offer should always be declined.
False

A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):
Sunk cost.

Costs already incurred in manufacturing the units of a product that do not meet quality standards are relevant costs in a scrap or rework decision.
False

The Mad Hatter Company owns a machine that manufactures two types of chimney caps. Production time is .20 hours for cap A and .40 hours for cap B. The machine's capacity is 2,000 hours per year. Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 1,000 units of cap A and 6,000 units of cap B. Selling prices and variable costs per unit are shown below. Based on this information, what is the Mad Hatter's most profitable sales mix?

	Cap A	Cap B
Selling price per unit	$80	$60
Variable costs per unit	53	42

1,000 units of cap A and 4,500 units of cap B.

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.
True

Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:
Produce only Product B.

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.
True

Benjamin Company had the following results of operations for the past year:

Sales (16,000 units at $10)		$160,000
Direct materials and direct labor	$96,000
Overhead (20% variable)	16,000
Selling and administrative expenses (all fixed)	32,000	(144,000)
Operating income		$16,000

A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Benjamin accepts the offer, its profits will:
Increase by $4,300.

Additional power for operating machines, extra supplies, and added cleanup costs are examples of incremental overhead costs.
True

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. The incremental income or loss on reworking the units is:
$20,000 income.

To determine a product selling price based on the total cost method, management should include:
Total production and nonproduction costs plus a markup.

Markson Company had the following results of operations for the past year:

Sales (8,000 units at $20)		$160,000
Variable manufacturing costs	$86,000
Fixed manufacturing costs	15,000
Variable selling and administrative expenses	12,000
Fixed selling and administrative expenses	20,000	(133,000)
Operating income		$27,000

A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. If Markson accepts this additional business, its profits will:
Increase by $1,900.

Beta Inc. can produce a unit of Zed for the following costs:

Direct material	$10
Direct labor	20
Overhead	50
Total costs per unit	$80

An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit. If Beta buys from the supplier, it will still incur 40% of its overhead. Beta should:
Buy Zed since the relevant cost to make it is $60.

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:
$11,250 increase.