Exercise 12-2 (continued)
2. The segmented report can be improved by eliminating the allocation of
the common fixed expenses. Following the format introduced in Chapter
12 for a segmented income statement, a better report would be:
Total
Dirt
Bikes
Mountain
Bikes
Racing
Bikes
Sales ……………………………..
$300,000
$90,000
$150,000
$60,000
Variable manufacturing and
selling expenses …………….
120,000
27,000
60,000
33,000
Contribution margin ………….
180,000
63,000
90,000
27,000
Traceable fixed expenses:
Advertising ……………………
30,000
10,000
14,000
6,000
Depreciation of special
equipment ………………….
23,000
6,000
9,000
8,000
Salaries of the product line
managers …………………..
35,000
12,000
13,000
10,000
Total traceable fixed
expenses………………………
88,000
28,000
36,000
24,000
Product line segment margin
92,000
$35,000
$ 54,000
$ 3,000
Common fixed expenses …….
60,000
Net operating income ………..
$ 32,000
Exercise 12–3 (30 minutes)
1.
15,000 units
Make
Buy
Make
Buy
Cost of purchasing …………………..
$35
$525,000
Direct materials ………………………
$14
$210,000
Direct labor …………………………...
10
150,000
Variable manufacturing overhead .
3
45,000
Fixed manufacturing overhead,
traceable1 …………………………...
2
30,000
Fixed manufacturing overhead,
common ……………………………..
Total costs …………………………….
$29
$35
$435,000
$525,000
Difference in favor of continuing to
make the carburetors …………….
$6
$90,000
1
Only the supervisory salaries can be avoided if the carburetors are
purchased. The remaining book value of the special equipment is a
sunk cost; hence, the $4 per unit depreciation expense is not
relevant to this decision.
Based on these data, the company should reject the offer and should
continue to produce the carburetors internally.
2.
Make
Buy
Cost of purchasing (part 1) ……………………….
$525,000
Cost of making (part 1) …………………………...
$435,000
Opportunity cost—segment margin foregone
on a potential new product line ……………….
150,000
Total cost ………………………………………………
$585,000
$525,000
Difference in favor of purchasing from the
outside supplier ……………………………………
$60,000
Thus, the company should accept the offer and purchase the
carburetors from the outside supplier.