Chapter 23
QUESTIONS
1. The five steps are: (1) define the decision task, (2) identify alternative courses of
2. Nonfinancial information is relevant to decision making because it includes
3. A relevant cost is a cost that differs between two alternatives in a decision
costs.
4. Sunk costs are irrelevant because they remain the same whether the product is
5. An out-of-pocket cost requires a current outlay of cash. An opportunity cost is
6. An out-of-pocket cost requires a current outlay of cash. An opportunity cost is
7. Sunk costs are irrelevant because they remain the same whether the product is
8. There are virtually no incremental costs associated with shipping the additional
iPod. The company’s employees would not receive any additional compensation
9. Apple must consider such factors as: contribution margin lost from the closing of
the store and fixed costs saved from the closing. For instance it is possible that a
manager who is employed by the store will not be laid off but will be transferred to
©2016 by McGraw–Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial and Managerial Accounting, 6th Edition
1340
additional contribution margin must be considered as well. There also may be the
permanent loss of some customers if it becomes too difficult for them to find a KTM
store near them, and they may transfer their business to a competitor.
10. The company might be willing to sell the units internationally if (a) the company
has excess capacity, (b) the incremental costs of manufacturing and selling the
©2016 by McGraw–Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 23
1341
QUICK STUDIES
Quick Study 23-1 (5 minutes)
Item
Relevant
Not relevant
a.
X
b.
Direct materials cost of $1.00 per unit ……………….………….
X
c.
X
d.
Variable manuf. overhead of $1.50 per unit ………..…………….
X
e.
Fixed manuf. overhead of $0.75 per unit ………………………….
X
f.
Regular selling expenses of $1.25 per unit ………..…………….
X
g.
Additional selling expenses of $0.50 per unit …….…………….
X
h.
Administrative expenses of $0.60 per unit ……………………….
X
Quick Study 23-2 (10 minutes)
Additional operating income if Helix accepts the order
Per unit
Total for
2,000 units
Revenue …………………………………………………………………………
$6.00
$12,000
Direct materials ……………………………………………………….
(1.00)
(2,000)
Direct labor ………………………………………………………….…………
(2.00)
(4,000)
Variable manufacturing overhead …………………………..
(1.50)
(3,000)
Additional selling expenses…………………………..……..…………
(0.50)
(1,000)
Operating income from the order …………………………..
$1.00
$ 2,000
Based on financial considerations alone, Helix should accept the order.
Quick Study 23-3 (5 minutes)
Other factors that Helix should consider before accepting the order are:
$6.00 price in the future?
Quick Study 23-4 (15 minutes)
Revenue if repaired (10,000 x $5)…………………………………..
$50,000
Revenue if sold as is (10,000 x $2) ………………………………..
(20,000)
Incremental revenue …………………………………………………….
30,000
Cost to repair ……………………………………………………………….
(18,000)
Incremental net income if the units are repaired ……………
$12,000
Based on this information, Garcia should repair the units.
Quick Study 23-5 (5 minutes)
1. F 2. T 3. T 4. T 5. F
Quick Study 23-6 (15 minutes)
INCREMENTAL INCOME FROM NEW BUSINESS
Sales (750 units @ $250) ……………………………………………………….
$ 187,500
Incremental variable costs (750 units @ $150) ……………………….….
(112,500)
Incremental fixed costs …………………………………………………………………….
Incremental income from new business ………………………………..………….
(50,000)
$ 25,000
Quick Study 23-7 (15 minutes)
Incremental cost analysis
Costs of purchasing
Cost to purchase Product B …………………………………………………………..…
$5.00
Revenue loss from reduced price ($13.50 – $12.00) …………………………..
1.50
Total cost …………………………………………………………………………………………
6.50
Savings of purchasing
Costs eliminated if Product B purchased ($5 of $9) …………………………..
5.00
Net incremental cost of purchasing Product B ……………………………….…
$1.50
Analysis: Kando Co. should continue to manufacture and sell Product A.
Quick Study 23-8 (10 minutes)
(Per unit)
Make
Buy
Direct materials ……………………………………….……
$2.25
—-
Direct labor ……………………………………………..……
1.00
—-
Incremental overhead ……………………………………
Purchase price ………………………………………..……
$0.75
—-
—-
$5.00
Total ……………………………………………………….
$4.00
$5.00
Analysis: Xia should make the part.
Quick Study 23-9 (15 minutes)
Scrap
Rework
Sale of scrapped/reworked units ……………..……
$30,000
$120,000
Less out–of-pocket costs to rework ………….……
—-
80,000
Total ……………………………………………………….
$30,000
$ 40,000
Analysis: Reworking the phones will increase income by $10,000.
Quick Study 23–10 (15 minutes)
Sell as is
Process
further
Incremental revenue ………………………………..……
$67,500
$468,750*
Incremental costs ($250 x 1,250) ……………………
—-
(312,500)
Income ……………………………………………………….
$67,500
$156,250
*$375 x 1,250 = $468,750
By processing further incremental income will be $88,750, computed as
$156,250 – $67,500.
Quick Study 23–11 (5 minutes)
(Per unit)
Sell as is
Process
further
Incremental revenue ………………………………..……
$15.00
$21.00
Incremental costs …………………………………………
—-
(8.00)
Income ……………………………………………………….
$15.00
$13.00
The company should sell the product as is. The incremental income from
selling as is equals $2.00 per unit.
Quick Study 23–12 (15 minutes)
X
Y
Contribution margin per unit ………………………………………..…
$ 5.00
$ 4.00
Production hours per unit …………………………………………….…
1/2
1/3
Contribution margin per production hour ……………………..…
$10.00
$12.00
Sales mix analysis: Since Excel Memory can sell all it can produce of both
products, it should allocate all of its production capacity to Product Y. This
is because Y yields a $12 contribution margin per production hour (versus
$10 for X).
Quick Study 23–13 (15 minutes)
Avoidable
Unavoidable
Expenses
Expenses
Cost of goods sold ………………………………….……
$56,000
—-
Direct expenses ……………………………………………
9,250
$1,250
Indirect expenses…………………………………….……
470
1,600
Service department costs ………………………..…
6,000
1,430
Total ……………………………………………………….
$71,720
$4,280
The division should not be eliminated because its sales of $72,000 are
greater than its avoidable expenses of $71,720.
Quick Study 23–14 (5 minutes)
Avoidable
Expenses
Variable costs ………………………………………….……
$145,000
Direct fixed costs …………………………………….……
30,000
Indirect expenses (40% avoidable) …………..……
20,000
Total ……………………………………………………….
$195,000
The division should not be eliminated because its sales of $200,000 are
greater than its avoidable expenses of $195,000.
Quick Study 23–15 (10 minutes)
INCREMENTAL INCOME FROM REPLACING MACHINE
Cost to buy new machine……………………………………………………….
$(112,500)
Cash received to trade in old machine …………………………………..………….
60,000
Reduction in variable manufacturing costs ……………………………………….
Incremental income ………………………………………………………………………….
65,000
$ 12,500
The company should replace the machine as this increases income by
$12,500.
EXERCISES
Exercise 23-1 (10 minutes)
1. Sunk cost
2. Relevant benefits
3. Avoidable costs
4. Out–of–pocket cost
5. Opportunity cost
Exercise 23-2 (25 minutes)
Normal
Additional
Combined
Volume
Volume*
Total
Sales …………………………………………..
$2,250,000
$180,000
$2,430,000
Costs and expenses
Direct materials …………………………
300,000
30,0001
330,000
Direct labor ……………………………….
600,000
60,0002
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
Net income ………………………………….
$ 589,500
$ 3,000
$ 592,500
The company should accept the offer as it increases income by $3,000.
1 (15,000 x $2) 2 (15,000 x $4)
* ADDITIONAL VOLUME COMPUTATIONS
Additional sales revenue = 15,000 units @ $12 = $180,000
Materials cost per unit = $300,000/150,000 units = $2 per unit
Labor cost per unit = $600,000/150,000 units = $4 per unit
Incremental overhead = $150,000 x 15% = $22,500
Incremental administrative = $64,500 (given)
Exercise 23-3 (20 minutes)
Part 1
Normal
Additional
Combined
Volume
Volume
Total
Sales …………………………………………..
$8,000,000
$1,500,000
$9,500,000
Costs and expenses
Direct materials …………………………
1,000,000
250,000
1,250,000
Direct labor ……………………………….
1,200,000
300,000
1,500,000
Variable overhead ……………………..
800,000
200,000
1,000,000
Fixed overhead ………………………….
1,400,000
0
1,400,000
Variable selling and admin. exp. ..
1,120,000
380,000
1,500,000
Fixed selling and admin. exp. …….
1,040,000
0
1,040,000
Total costs and expenses ………….
6,560,000
1,130,000
7,690,000
Net income ………………………………….
$1,440,000
$ 370,000
$1,810,000
Calculations:
Normal volume sales: 80,000 units x $100 per unit = $8,000,000
Additional revenue from new order: 20,000 units x $75 per unit = $1,500,000
Additional direct materials: 20,000 units x $12.50 per unit = $250,000
Additional direct labor: 20,000 units x $15.00 per unit = $300,000
Additional variable overhead: 20,000 units x $10.00 per unit = $200,000
Additional selling and administrative expense: 20,000 units x ($14 + $5) per unit = $380,000
Based on this analysis, Goshford should accept the new business.
Part 2
Other factors that Goshford should consider before deciding whether to
accept the new business are:
Will regular customers demand a reduction in their selling price if they
hear of the sale to the new customer?
Will the new customer expect to receive the special price for future
sales?
If Goshford accepts the new business, it will be operating at full
capacity. Can they maintain that full capacity without any defects?
What will happen to regular sales if they cannot meet current customers’
expectations because of this order?
Exercise 23-4 (20 minutes)
Make
Buy
Variable costs (65,000 @ $1.95) ………………..……
$126,750
—-
Incremental fixed costs …………………………………
Cost to buy (65,000 @ $3.25) …………………..……
75,000
—
$211,250
Total ……………………………………………………….
$201,750
$211,250
RECOMMENDATION: Note that the allocated fixed costs of $62,000 are not
relevant to this managerial decision because they will continue whether the
part is made or bought. Therefore, the incremental costs of making the
part are $9,500 less per year than buying it. This implies that the company
should continue to make this part.
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
greater than the $9,500 annual savings that the company attains by making this part, the
part should probably be purchased and the facilities used for the other more profitable
activities.
Exercise 23-5 (20 minutes)
Make
Buy
Variable costs (40,000 @ $1.95) ………………..……
$78,000
—-
Incremental fixed costs …………………………………
Cost to buy (40,000 @ $3.50) …………………..……
65,000
—
$140,000
Total ……………………………………………………….
$143,000
$140,000
RECOMMENDATION: Note that the allocated fixed costs of $58,500 are not
relevant to this managerial decision because they will continue whether the
part is made or bought. Therefore, the incremental costs of making the
part are $3,000 more per year than buying it. This implies that the company
should buy the part from the outside supplier rather than make the part.