Exercise 23-4 (20 minutes)
Make Buy
Variable costs (65,000 @ $1.95)…………….….…... $126,750 —-
Incremental fixed costs………………..….….….….…
75,000
RECOMMENDATION : Note that the allocated fixed costs of $62,000 are not
relevant to this managerial decision because they will continue whether the
Note: We should recognize that this decision depends on the alternative uses for the
productive facilities dedicated to making the part. If they can be used to produce a profit
Exercise 23-5 (20 minutes)
Make Buy
Variable costs (40,000 @ $1.95)…………….….…... $78,000 —-
Incremental fixed costs………………..….….….….…
65,000
RECOMMENDATION : Note that the allocated fixed costs of $58,500 are not
relevant to this managerial decision because they will continue whether the
Exercise 23-6 (15 minutes)
Scrap Rework
Sale of scrapped/reworked units………….……….. $55,000 $187,000
Less out-of-pocket costs to rework…..…...........
—-
(99,000)
(1) The incremental income from selling as scrap is $55,000 (22,000 x $2.50).
Exercise 23-7 (15 minutes)
INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING
Revenue if processed further (7,000 x $25)………………..……….….….….…..$175,000
Incremental net income…………..………………………………………..….….….…...$ (6,000)
Financial and Managerial Accounting, 6th Edition
Exercise 23-8 (25 minutes)
Sell as is
Process
further
Incremental revenue……….……………….…..….…... $700,000 $1,372,000*
*Revenue from processed products
Units Price Total
Product B….……..…….……..……..…….…..……..…………….………5,600 $105 $ 588,000
ALTERNATE SOLUTION FORMAT
Net income (loss) from processed products
Revenue if processed further………….…………………..……….… $1,372,000
Less: Additional costs of processing……………………………. $(420,000)
RECOMMENDATION : This analysis shows that the company will be better off
Exercise 23-9 (30 minutes)
Preliminary computations
Contribution margin per hour Product TLX Product MTV
Selling price per unit…..……..……..…….………………….. $15.00 $ 9.50
Variable costs per unit……….……..…….………..…….….. 4.80 5.50
(or contribution/hours per unit)………….…..……..….. $20.40 $20.00
Exercise 23-9 (continued)
1. FOR PRODUCT TLX
Maximum sales…………..…………………………………..………………4,700 units
Hours needed per unit……………………………..…………..….….…. 0.50
Total hours used (4,700 x 0.50)………………..…………….….….…2,350 hours
FOR PRODUCT MTV
SALES MIX RECOMMENDATION : These results suggest the company
should manufacture as many units of Product TLX as it can produce
2. CONTRIBUTION MARGIN FROM THE RECOMMENDED SALES MIX
Un
its
Contribution
per Unit Total
Product TLX……………..………………... 4,700 $10.20 $47,940
Financial and Managerial Accounting, 6th Edition
Exercise 23-10 (30 minutes)
Instructor note: In all cases, the total unavoidable expenses of $107,800 remain the same
because they cannot be avoided by eliminating departments.
1. DEPARTMENTS WITH EXPECTED NET LOSSES ELIMINATED
Total M N O P T
Sales…………..…….…….………….……..……$119,000 $63,000 $ 0 $56,000 $ 0 $ 0
Expenses
Avoidable…………….……..…….……………32,200 9,800 0 22,400 0 0
Exercise 23-11 (30 minutes)
K1 S5 G9
Selling price per unit……………………………… $160 $112 $210
Variable costs per unit…………………………… 96 85 144
Contribution margin per unit…………………… 64 27 66
Exercise 23-12 (20 minutes)
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine……….…………………………………………………………$(115,000)
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine……….…………………………………………………………$(125,000)
Cash received to trade in old machine…………..………………….….….….…... 52,000
The company should replace the machine with alternative machine B. This
Financial and Managerial Accounting, 6th Edition
Exercise 23-13 (15 minutes)
If canoes are discontinued
Revenue lost………………….……………..………….….….….… $2,000,000
Variable costs saved
Direct materials……………..…………..…..….….….….….…. $450,000
Direct labor……………..………………….….….….….….….…. 500,000
Variable overhead…………………………..……………………. 300,000
PROBLEM SET A
Problem 23-1A (45 minutes)
JONES PRODUCTS
COMPARATIVE INCOME STATEMENTS
(1) (2) (3)
Normal New
Volume Business Combined
Sales……………..……………………………….…...$2,400,000 $260,000 $2,660,000
Costs and expenses
Administrative expenses…………….….….. 100,000 5,000 105,000
Total costs & expenses…..….….…..….….... 1,290,000 134,000 1,424,000
Operating income………….………………….….$1,110,000 $126,000 $1,236,000
Supporting computations
Normal direct materials cost……………………….……….… $576,000
Units of output………………………………….……………….….. 400,000
Cost per unit………………………………..…..…….……….……. $ 1.44
New business volume………..………………………..………... 50,000
Total overhead…………………………..………….…….………... $320,000
Fixed overhead (25%)………….…………………………………. 80,000
Variable overhead…………….………………………………..….. $240,000
Units of output………………………………….……………….….. 400,000
Financial and Managerial Accounting, 6th Edition
Problem 23-2A (50 minutes)
Part 1
CALLA COMPANY
COMPARATIVE INCOME STATEMENTS
(a) (b) (c)
Normal New
Volume Business Combined
Sales……………..……………..….….…..… $4,000,000 $450,000 $4,450,000
Costs and expenses
Direct materials……….….….….…..... 800,000 100,000 900,000
Direct labor……..….….….….….….….. 640,000 80,000 720,000
Operating income………….……..….…. $ 560,000 $123,000 $ 683,000
Supporting computations
Normal sales revenue (80,000 x $50)………………….…… $4,000,000
New business sales revenue (10,000 x $45)................ $ 450,000
Normal direct materials cost……………………….……….… $ 800,000
New business direct labor cost……….…………………..…. $ 80,000
Problem 23-2A (concluded)
Total overhead…………………………..………….…….………... $ 960,000
Fixed overhead (30%)………….…………………………………. 288,000
Variable overhead…………….………………………………..….. $ 672,000
Fixed selling expenses (40%)………..……………………….. 224,000
Variable selling expenses……………………………..….……. 336,000
Units of output………………………………….……………….….. 80,000
Cost per unit………………………………..…..…….……….……. $ 4.20
Plus additional selling expenses per unit…..…….…….. 2.00
Part 2
Based on the financial analysis above, Calla should accept the order. The
order provides additional income of $123,000. Other factors that Calla
Part 3
If the new customer demands 15,000 units instead of 10,000, this will mean
that Calla will lose sales of 5,000 units at the regular price. They will have
Financial and Managerial Accounting, 6th Edition
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