Essay
[QUESTION]
154. Nicklin Corporation is considering two alternatives that are code-named M and N. Costs associated with
the alternatives are listed below:
Alternative M
Alternative N
Supplies costs ……….
$32,000
$58,000
Assembly costs ……..
$47,000
$47,000
Power costs …………..
$28,000
$23,000
Inspection costs ……..
$16,000
$16,000
Required:
a. Which costs are relevant and which are not relevant in the choice between these two alternatives?
b. What is the differential cost between the two alternatives?
155. Costs associated with two alternatives, code-named Q and R, being considered by Hunnicutt
Corporation are listed below:
Alternative Q
Alternative R
Supplies costs ……….
$69,000
$69,000
Power costs …………..
$38,000
$38,000
Inspection costs ……..
$15,000
$26,000
Assembly costs ……..
$40,000
$28,000
Required:
a. Which costs are relevant and which are not relevant in the choice between these two alternatives?
b. What is the differential cost between the two alternatives?
Supplies costs ……….
Not relevant since the costs do not differ between alternatives
Power costs …………..
Not relevant since the costs do not differ between alternatives
Inspection costs ……..
Relevant, since costs differ between alternatives
Assembly costs ………
Relevant, since costs differ between alternatives
Supplies costs ……….
Relevant, since costs differ between alternatives
Assembly costs ………
Not relevant since the costs do not differ between alternatives
Power costs …………..
Relevant, since costs differ between alternatives
Inspection costs ……..
Not relevant since the costs do not differ between alternatives
Supplies costs ……….
Assembly costs ………
Power costs …………..
Inspection costs ……..
Total ……………………..
156. The management of Bercegeay Corporation is considering dropping product Y25C. Data from the
company’s accounting system appear below:
Sales …………………………………………………………
$610,000
Variable expenses ………………………………………
$244,000
Fixed manufacturing expenses …………………….
$226,000
Fixed selling and administrative expenses ……..
$171,000
All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further
investigation has revealed that $117,000 of the fixed manufacturing expenses and $78,000 of the fixed selling
and administrative expenses are avoidable if product Y25C is discontinued.
Required:
a. What is the net operating income earned by product Y25C according to the company’s accounting system?
Show your work!
b. What would be the effect on the company’s overall net operating income of dropping product Y25C?
Should the product be dropped? Show your work!
Difference
Sales …………………………………………………………
($610,000)
Variable expenses ………………………………………
Contribution margin …………………………………….
Fixed expenses:
Total fixed expenses …………………………………..
Net operating income (loss) …………………………
($171,000)
Supplies costs ……….
Power costs …………..
Inspection costs ……..
Total ……………………..
157. The management of Leinberger Corporation is considering dropping product S48J. Data from the
company’s accounting system appear below:
Sales …………………………………………………………
$120,000
Variable expenses ………………………………………
$64,000
Fixed manufacturing expenses …………………….
$38,000
Fixed selling and administrative expenses ……..
$30,000
All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further
investigation has revealed that $28,000 of the fixed manufacturing expenses and $21,000 of the fixed selling
and administrative expenses are avoidable if product S48J is discontinued.
Required:
What would be the effect on the company’s overall net operating income if product S48J were dropped?
Should the product be dropped? Show your work!
Difference
Sales …………………………………………………………
($120,000)
Variable expenses ………………………………………
Contribution margin …………………………………….
Fixed expenses:
Fixed manufacturing expenses ………………….
Fixed selling and administrative expenses ….
Total fixed expenses …………………………………..
Net operating income (loss) …………………………
158. Costabile Corporation is considering dropping product G41O. Data from the company’s accounting
system appear below:
Sales …………………………………………………………
$450,000
Variable expenses ………………………………………
$185,000
Fixed manufacturing expenses …………………….
$149,000
Fixed selling and administrative expenses ……..
$113,000
All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further
investigation has revealed that $117,000 of the fixed manufacturing expenses and $46,000 of the fixed selling
and administrative expenses are avoidable if product G41O is discontinued.
Required:
a. According to the company’s accounting system, what is the net operating income earned by product
G41O? Show your work!
b. What would be the effect on the company’s overall net operating income of dropping product G41O?
Should the product be dropped? Show your work!
159. Northern Stores is a retailer in the upper Midwest. The most recent monthly income statement for
Northern Stores is given below:
Total
Store I
Store II
Sales ………………………………….
$2,100,000
$1,300,000
$800,000
Variable expenses ……………….
1,260,000
882,000
378,000
Contribution margin ……………..
840,000
418,000
422,000
Traceable fixed expenses …….
420,000
231,000
189,000
Segment margin ………………….
420,000
187,000
233,000
Common fixed expenses ………
350,000
210,000
140,000
Net operating income …………..
$ 70,000
$ (23,000)
$ 93,000
Northern is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would
continue. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Northern allocates
common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were
shut down.
Required:
Compute the overall increase or decrease in the net operating income of Northern Stores if Store I is closed.
Loss in contribution is Store I is closed:
173,250
Difference
Sales …………………………………………………………
($450,000)
Variable expenses ………………………………………
Contribution margin …………………………………….
Fixed expenses:
Total fixed expenses …………………………………..
Net operating income (loss) …………………………
($102,000)
160. The most recent monthly income statement for Kennaman Stores is given below:
Total
Store I
Store II
Sales ………………………………….
$2,000,000
$1,200,000
$800,000
Variable expenses ……………….
1,200,000
840,000
360,000
Contribution margin ……………..
800,000
360,000
440,000
Traceable fixed expenses …….
400,000
220,000
180,000
Segment margin ………………….
400,000
140,000
260,000
Common fixed expenses ………
300,000
180,000
120,000
Net operating income …………..
$ 100,000
$ (40,000)
$140,000
Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would
continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II.
Kennaman allocates common fixed expenses on the basis of sales dollars.
Required:
Compute the overall increase or decrease in Kennaman’s net operating income if Store I is closed.
Loss in contribution margin:
Total lost contribution margin …………..
Fixed costs avoided
165,000
Net decrease in operating income ……
161. Hanson, Inc. makes 1,000 units per year of a part called a prositron for use in one of its products. Data
concerning the unit production costs of the prositron follow:
Direct materials …………………………….
$342
Direct labor …………………………………..
80
Variable manufacturing overhead ……
48
Fixed manufacturing overhead ………..
520
Total manufacturing cost per unit …….
$990
An outside supplier has offered to sell Hanson, Inc. all of the prositrons it requires. If Hanson, Inc. decided to
discontinue making the prositrons, 10% of the above fixed manufacturing overhead costs could be avoided.
Net decrease in income of closing Store I …………………………..
Required:
a. Assume Hanson, Inc. has no alternative use for the facilities presently devoted to production of the
prositrons. If the outside supplier offers to sell the prositrons for $850 each, should Hanson, Inc. accept the
offer? Fully support your answer with appropriate calculations.
b. Assume that Hanson, Inc. could use the facilities presently devoted to production of the prositrons to
expand production of another product that would yield an additional contribution margin of $50,000 annually.
What is the maximum price Hanson, Inc. should be willing to pay the outside supplier for prositrons?
162. Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its
products. The company is presently producing Part X internally at a total cost of $80,000 as follows:
Direct materials …………………………….
$18,000
Direct labor …………………………………..
20,000
Variable manufacturing overhead ……
12,000
Fixed manufacturing overhead ………..
30,000
Total costs ……………………………………
$80,000
An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon Company stops
producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.
Required:
Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier’s offer.
Make
Outside purchase price ……
$65,00
Buy
Purchase cost ……………………………….
Direct materials …………………………….
Direct labor …………………………………..
Variable manufacturing overhead ……
Fixed manufacturing overhead* ………
Total cost ……………………………………..
Total cost of making the part internally …………..
Opportunity cost per unit ($50,000 ÷ 1,000) …….
163. Bulan Inc. makes a range of products. The company‘s predetermined overhead rate is $20 per direct
labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead ……
$140,000
Fixed manufacturing overhead ………..
$560,000
Direct labor-hours ………………………….
35,000
Component T6 is used in one of the company’s products. The unit product cost of the component according
to the company’s cost accounting system is determined as follows:
Direct materials …………………………...
$45.00
Direct labor ………………………………….
32.00
Manufacturing overhead applied …….
40.00
Unit product cost ………………………….
$117.00
An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for
quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really
driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision.
Bulan chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?
Variable manufacturing overhead ………………………………….
$140,000
÷ Direct labor-hours ……………………………………………………..
35,000
= Variable portion of the predetermined overhead rate …….
Manufacturing overhead applied …….
= Direct labor-hours ………………………
Direct materials ………………
Direct labor …………………….
Variable overhead …………..
Fixed overhead* ……………..
Total ………………………………
164. Part O43 is used in one of Scheetz Corporation’s products. The company’s Accounting Department
reports the following costs of producing the 6,000 units of the part that are needed every year.
Per Unit
Direct materials ……………………………….
$8.20
Direct labor ……………………………………..
$6.90
Variable overhead …………………………...
$1.80
Supervisor’s salary …………………………..
$4.00
Depreciation of special equipment ……..
$8.80
Allocated general overhead……………….
$1.70
An outside supplier has offered to make the part and sell it to the company for $26.40 each. If this offer is
accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The
special equipment used to make the part was purchased many years ago and has no salvage value or other
use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s
offer were accepted, only $1,000 of these allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company’s total net operating income of buying part O43 from
the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
Direct materials (6,000 units × $8.20 per unit) ………………..
Direct labor (6,000 units × $6.90 per unit) ……………………..
Variable overhead (6,000 units × $1.80 per unit) …………….
Supervisor’s salary (6,000 units × $4.00 per unit)……………
Depreciation of special equipment (not relevant) ……………
Allocated general overhead (avoidable only) ………………….
Variable portion of the predetermined overhead rate …….
× Direct labor-hours …………………………………………………..
Direct materials …………………………….
Direct labor …………………………………..
Variable manufacturing overhead ……
Total variable cost …………………………
165. Foster Company makes 20,000 units per year of a part it uses in the products it manufactures. The unit
product cost of this part is computed as follows:
Direct materials …………………………….
$24.70
Direct labor …………………………………..
16.30
Variable manufacturing overhead ……
2.30
Fixed manufacturing overhead ………..
13.40
Unit product cost …………………………..
$56.70
An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the
company accepts this offer, the facilities now being used to make the part could be used to make more units
of a product that is in high demand. The additional contribution margin on this other product would be $44,000
per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.
However, $5.10 of the fixed manufacturing overhead cost being applied to the part would continue even if the
part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to
the company’s remaining products.
Required:
a. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part
if the supplier commits to supplying all 20,000 units required each year?
Direct materials ……………………………..
$24.70
Direct labor ……………………………………
16.30
Variable manufacturing overhead …….
2.30
Fixed manufacturing overhead ………..
8.30
Relevant manufacturing cost …………..
$51.60
Manufacturing cost savings …………
$1,032,000
Additional contribution margin ……..
Cost of purchasing the part …………
Net advantage (disadvantage) …….
Additional contribution margin ……..
Outside purchase price (6,000 units × $26.40 per unit) ……
Total cost ……………………………………………………….………….
166. Kerbow Corporation uses part B76 in one of its products. The company’s Accounting Department reports
the following costs of producing the 12,000 units of the part that are needed every year.
Per Unit
Direct materials ……………………………….
$7.20
Direct labor ……………………………………..
$7.10
Variable overhead …………………………...
$3.50
Supervisor’s salary …………………………..
$4.70
Depreciation of special equipment ……..
$3.40
Allocated general overhead……………….
$2.40
An outside supplier has offered to make the part and sell it to the company for $27.40 each. If this offer is
accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The
special equipment used to make the part was purchased many years ago and has no salvage value or other
use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s
offer were accepted, only $6,000 of these allocated general overhead costs would be avoided. In addition, the
space used to produce part B76 could be used to make more of one of the company’s other products,
generating an additional segment margin of $29,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company’s total net operating income of buying part B76 from
the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
Direct materials (12,000 units × $7.20 per unit) ………………..
Direct labor (12,000 units × $7.10 per unit) ……………………..
Variable overhead (12,000 units × $3.50 per unit) …………….
Supervisor’s salary (12,000 units × $4.70 per unit)……………
Depreciation of special equipment (not relevant) ……………..
Allocated general overhead (avoidable only) ……………………
Outside purchase price (12,000 units × $27.40 per unit) ……
Opportunity cost …………………………………………………………..
(29,000)
Total cost ……………………………………………………….……………
Total benefit ………………………………
Number of units …………………………
Benefit per unit ………………………….
167. Juett Company produces a single product. The cost of producing and selling a single unit of this product
at the company’s normal activity level of 70,000 units per month is as follows:
Direct materials ………………………………………..
$29.60
Direct labor ………………………………………………
$5.80
Variable manufacturing overhead ……………….
$2.50
Fixed manufacturing overhead ……………………
$17.20
Variable selling & administrative expense …….
$1.80
Fixed selling & administrative expense ………..
$6.70
The normal selling price of the product is $72.90 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special
discounted price. This order would have no effect on the company’s normal sales and would not change the
total amount of the company’s fixed costs. The variable selling and administrative expense would be $1.10
less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the
special discounted price on the special order is $66.10 per unit. By how much would this special order
increase (decrease) the company’s net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received from the
overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and
accepting the special order would require cutting back on production of 1,300 units for regular customers.
What would be the minimum acceptable price per unit for the special order?
Direct materials ……………………………………………
Direct labor ………………………………………………….
Variable manufacturing overhead …………………..
Variable selling & administrative expense ………..
Variable cost per unit on normal sales …………….
Variable cost per unit on special order:
Normal variable cost per unit …………………………
Reduction in variable selling & admin. …………….
Variable cost per unit on special order …………….
Selling price for special order …………………………
Variable cost per unit on special order …………….
Unit contribution margin on special order …………
Number of units in special order …………………….
Increase (decrease) in net operating income ……
Normal selling price per unit ………………………
$72.90
Variable cost per unit on normal sales ………..
39.70
Unit contribution margin on normal sales …….
$33.20
Unit contribution margin on normal sales …………
168. Globe Manufacturing Company has just obtained a request for a special order of 12,000 units to be
shipped at the end of the current year at a discount price of $7.00 each. The company has a production
capacity of 90,000 units per year. At present, Globe is only selling 80,000 units per year through regular
channels at a selling price of $11.00 each. Globe’s per unit costs at an 80,000 unit level of production and
sales are as follows:
Variable production cost ………………………………..
$4.60
Fixed production cost ……………………………………
$1.80
Variable selling and administrative expense …….
$1.00
Fixed selling and administrative expense ………..
$0.45
Variable selling and administrative expense will drop to $0.30 per unit on the special order units. The special
order has to be taken in its entirety. This means that by accepting the special order, Globe will be forced to
not sell 2,000 units to its regular customers.
Required:
If Globe accepts this special order, by what amount will its net operating income increase or decrease?
SHOW YOUR COMPUTATIONS.
Less incremental costs:
Total incremental cost ………………………………………………………………………
Incremental net operating income ………………………………………………………
169. Pilgrim Corporation makes a range of products. The company’s predetermined overhead rate is $23 per
direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead ……
$200,000
Displaced normal sales …………………………………
Lost contribution margin displaced sales …………
Total variable cost on special order ………………..
$120,360
Number of units in special order …………………….
Minimum acceptable price on special order ……..
Fixed manufacturing overhead ………..
$375,000
Direct labor-hours ………………………….
25,000
Management is considering a special order for 800 units of product N89E at $69 each. The normal selling
price of product N89E is $88 and the unit product cost is determined as follows:
Direct materials …………………………...
$28.00
Direct labor ………………………………….
22.50
Manufacturing overhead applied …….
34.50
Unit product cost ………………………….
$85.00
If the special order were accepted, normal sales of this and other products would not be affected. The
company has ample excess capacity to produce the additional units. Assume that direct labor is a variable
cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing
overhead would not be affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company’s overall profit?
Variable manufacturing overhead ………………………………….
$200,000
÷ Direct labor-hours ……………………………………………………..
25,000
= Variable portion of the predetermined overhead rate …….
Manufacturing overhead applied …….
$34.50
$23.00
= Direct labor-hours ………………………
Variable portion of the predetermined overhead rate …….
$8.00
× Direct labor-hours …………………………………………………..
$12.00
Special order price …………………………………………….
$69.00
Variable costs:
Direct materials ………………………………………………
28.00
Direct labor …………………………………………………….
22.50
Variable manufacturing overhead ……………………..
12.00
Total variable cost ……………………………………………..
62.50
Contribution margin ……………………………………………
$6.50
× Units ordered ………………………………………………….
= Total increase in profit from the special order ……..
$5,200