Exercise 23-6 (15 minutes)
Scrap
Rework
Sale of scrapped/reworked units ……………..……
$55,000
$187,000
Less out–of-pocket costs to rework ………….……
Less opportunity cost of not making new
units (22,000 @ $2.50) ……………………………..……
—-
—-
(99,000)
(55,000)
$55,000
$ 33,000
(1) The incremental income from selling as scrap is $55,000 (22,000 x $2.50).
(2) The incremental income from reworking is $33,000.
(3) The product should not be reworked as the $33,000 income from
Exercise 23-7 (15 minutes)
INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING
Revenue if processed further (7,000 x $25) …………………………..….………..
$175,000
Revenue if sold as is (7,000 x $8) …………………………………………….………..
56,000
Incremental revenue ……………………………………………………………….………..
119,000
Less incremental cost of processing ……………………………………….………..
125,000
Incremental net income …………………………..………………………………………..
$ (6,000)
RECOMMENDATION: Varto should not process these units further, as they will
be $6,000 worse off if they do so. (Note that the $22 per unit manufacturing
cost is not relevant because it is a sunk cost.)
Exercise 23-8 (25 minutes)
Sell as is
Process
further
Incremental revenue ………………………………..……
$700,000
$1,372,000*
Incremental costs …………………………………………
—-
(420,000)
Income ……………………………………………………….
$700,000
$ 952,000
*Revenue from processed products
Units
Price
Total
Product B ……………………………………………………………………
5,600
$105
$ 588,000
Product C ……………………………………………………………………
11,200
70
784,000
Total revenue from processed products ……………….………
$1,372,000
ALTERNATE SOLUTION FORMAT
Net income (loss) from processed products
Revenue if processed further …………………………………………..
$1,372,000
Less: Additional costs of processing …………………………….
$(420,000)
Opportunity cost (lost sales of Product A) …………….
(700,000)
(1,120,000)
Net benefit to processing…………………………………………………
$ 252,000
RECOMMENDATION: This analysis shows that the company will be better off
by $252,000 if it chooses to process Product A into the two products of B
and C. (Note that the $28 per unit cost of manufacturing Product A is sunk
and irrelevant to this decision.)
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
Contribution per unit …………………………………….……
$10.20
$ 4.00
Machine-hours to produce 1 unit …………………..……
0.50
0.20
(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
hours
Hours needed per unit …………………………………………….……..
0.20
4,700
2,000
Exercise 23–10 (30 minutes)
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
Unavoidable ……….………………….
107,800
51,800
12,600
4,200
29,400
9,800
Total expenses …..………………………
140,000
61,600
12,600
26,600
29,400
9,800
Net income (loss) …………………………..
$ (21,000)
$ 1,400
$(12,600)
$29,400
$(29,400)
$(9,800)
Explanation: This income statement reflects elimination of Departments N,
P, and T. The sales and avoidable expenses are the combined amounts for
Departments M and O. The net loss has actually increased because the
excess of sales dollars over avoidable expenses has declined and less
remains to cover unavoidable expenses.
2. DEPARTMENTS WITH LESS SALES THAN AVOIDABLE EXPENSES ELIMINATED
Total
M
N
O
P
T
Sales …………………..………
$161,000
$63,000
$ 0
$56,000
$42,000
$ 0
Expenses
Avoidable …………..………………
46,200
9,800
0
22,400
14,000
0
Unavoidable ……….………………….
107,800
51,800
12,600
4,200
29,400
9,800
Total expenses …..………………………
154,000
61,600
12,600
26,600
43,400
9,800
Net income (loss) …………………………..
$ 7,000
$ 1,400
$(12,600)
$29,400
$ (1,400)
$(9,800)
Explanation: This income statement reflects the Departments M, O, and P.
Departments N and T are eliminated because their sales dollars do not
cover their avoidable costs.
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
Pounds of material required……………………
÷ 4
÷ 3
÷ 6
Contribution margin per pound…………………
$ 16
$ 9
$ 11
Childress should produce and fill orders for K1 first because it has the
highest contribution margin per pound of materials. Production and orders
for G9 should be addressed second, and production and orders for S5
should be addressed third.
Exercise 23–12 (20 minutes)
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
*(36,000 – $19,000) X 5 years
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
**(36,000 – $15,000) X 5 years
The company should replace the machine with alternative machine B. This
will increase net income by $32,000.
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
Variable selling & administrative ………………………….
200,000
Total variable costs saved ……………………………………..
1,450,000
Contribution margin lost ………………………………………..
550,000
Direct fixed costs saved …………………………………………
375,000
Income lost ……………………………………………………………
$ 175,000
Based on the above analysis, the canoes should not be discontinued.
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
Direct materials …………………………..
576,000
72,000
648,000
Direct labor ………………………………………..
144,000
27,000
171,000
Overhead …………………………………………..
320,000
30,000
350,000
Selling expenses …………………………..
150,000
150,000
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
New business direct materials cost ………………………...
$ 72,000
Normal direct labor cost ………………………………………….
$144,000
Units of output ……………………………………………………….
400,000
Cost per unit …………………………………………………………...
$ 0.36
Overtime per unit (50%) …………………………………………..
0.18
New business direct labor cost per unit …………………..
$ 0.54
New business volume ……………………………………………..
50,000
New business direct labor cost ……………………………….
$ 27,000
Total overhead ……………………………………………………….
$320,000
Fixed overhead (25%) ……………………………………………...
80,000
Variable overhead …………………………………………………...
$240,000
Units of output ……………………………………………………….
400,000
Cost per unit …………………………………………………………...
$ 0.60
New business volume ……………………………………………..
50,000
New business variable overhead cost ……………………..
$ 30,000
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
Overhead ………………………………….
960,000
84,000
1,044,000
Selling expenses ……………………….
560,000
62,000
622,000
Administrative expenses…………...
480,000
1,000
481,000
Total costs and expenses …………...
3,440,000
327,000
3,767,000
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
Units of output ………………………………………………………..
80,000
Cost per unit ……………………………………………………………
$ 10.00
New business volume ……………………………………………..
10,000
New business direct materials cost …………………………
$ 100,000
Normal direct labor cost ………………………………………….
$ 640,000
Units of output ………………………………………………………..
80,000
Cost per unit ……………………………………………………………
$ 8.00
New business volume ……………………………………………..
10,000
New business direct labor cost ……………………………….
$ 80,000
Problem 23-2A (concluded)
Total overhead ………………………………………………………..
$ 960,000
Fixed overhead (30%) ………………………………………………
288,000
Variable overhead ……………………………………………………
$ 672,000
Units of output ………………………………………………………..
80,000
Cost per unit ……………………………………………………………
$ 8.40
New business volume ……………………………………………..
10,000
New business variable overhead cost ……………………..
$ 84,000
Total selling expenses …………………………..………………..
$ 560,000
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
Total selling cost per unit for this order …………………..
$ 6.20
New business volume ……………………………………………..
10,000
New business selling expenses……………………………….
$ 62,000
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
should consider are:
Will the customer expect additional skateboards at this special price?
Will regular customers demand a reduction in their price?
Can Calla maintain quality and production at full capacity?
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
to consider the contribution margin lost on these units, as well as whether
their regular customers will go elsewhere to obtain their skateboards. This
could lead to a permanent loss of volume at the regular price of $50 per
unit.
Problem 23-3A (30 minutes)
Part 1
INCREMENTAL COST OF MAKING RX5
Variable costs:
Direct materials (50,000 units x $5.00 per unit) ……………………….
$250,000
Direct labor (50,000 units x $8.00 per unit) ……………………………..
400,000
Variable overhead ($450,000* x 20%) …………………………..………...
90,000
Total incremental cost of making 50,000 units ………………………….
$740,000
* Total overhead = 50,000 units x $9.00 per unit = $450,000
INCREMENTAL COST OF BUYING THE PART
Cost per unit to buy ………………………………………………………………...
$ 18.00
Total incremental cost of buying 50,000 units …………………………..
$900,000
Haver is better off making RX5.
Part 2
Other factors Haver should consider besides cost are:
Will the supplier provide the quality that Haver needs?
Will the supplier provide the RX5 on a timely basis?
Will the supplier’s cost remain at $18 per unit or will it go up or down?
What can Haver do in the space that is now used to produce RX5? Can
they produce something that will provide additional income?