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Problem 23-4A (30 minutes)
Alternative 1: Sell to a second-hand shop
Incremental revenue (5,000 x $6.00) .................................................
$ 30,000
Incremental cost .................................................................................
0
Incremental income ............................................................................
$ 30,000
Alternative 2: Disassemble and sell to a recycler
Incremental revenue (5,000 x $12.00) ...............................................
$ 60,000
Incremental cost .................................................................................
32,000
Incremental income ............................................................................
$ 28,000
Alternative 3: Rework and sell at regular prices
Incremental revenue (3,000 x $45.00) ...............................................
$135,000
Incremental cost .................................................................................
102,000
Incremental income ............................................................................
$ 33,000
Decision: Harold should choose alternative 3, as this provides the highest
incremental income.
Problem 23-5A (55 minutes)
Part 1
Product G
Product B
Selling price per unit .....................................................
$120
$160
Variable costs per unit ..................................................
40
90
Contribution margin per unit ........................................
$ 80
$ 70
Machine hours to produce 1 unit ................................
0.4
1.0
Contribution per machine hour
(or contribution/[hours per unit]) ..............................
$200
$ 70
Part 2
Sales Mix Recommendation. To the extent allowed by production and
market constraints, the company should produce as much of Product G as
possible. With a single shift yielding 176 hours per month (8 x 22), the
company can produce these units of Product G:
Maximum output of G = = 440 units per month
176 hrs. per mo.
0.4 hrs. per unit
Problem 23-5A (Continued)
Part 3
Sales Mix Recommendation with Second Shift. If the second shift is added,
However, this level of output exceeds the company’s market constraint of
600 units of G per month. This means the company should produce 600
units of Product G, and commit the remainder of the productive capacity to
Product B. This is computed as follows
Units of Product G ...............................................................
= 600 units per month
Hours per unit ................................................................
0.4
Hours used for Product G ..................................................
240
hours
Hours available for Product B (352 hrs - 240 hrs) ...................
112
hours
The output of Product B with 112 production hours is
Units of Product B = = 112 units per month
Contribution Margin at This Sales Mix
Units
Contr./unit
Total
From G ................................................................
600
$80
$48,000
From B ................................................................
112
70
7,840
Less extra shift costs ..........................................
(15,000)
Total contribution margin ................................
$40,840
Management decision. The contribution margin of $40,840 exceeds the
contribution margin of $35,200 generated by one shift alone (see part 2).
Therefore, management should add the second shift.
0.4 hrs. per unit
112 hrs. per mo.
1 hr. per unit
Problem 23-5A (Continued)
Part 4
Sales Mix Recommendation. By incurring additional marketing cost, the
company can relax the market constraint for sales of Product G up to the
point where 700 units can be sold. This means the company can produce
700 units of Product G, and commit the remainder of its productive
Problem 23-6A (60 minutes)
Part 1
ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
Total
Eliminated
Continuing
Expenses
Expenses
Expenses
Cost of goods sold ..............................................
$469,000
$207,000
$262,000
Direct expenses
Advertising .........................................................
29,000
12,000
17,000
Store supplies used ................................
7,800
3,800
4,000
Depreciation—Store equipment .......................
8,300
8,300
Allocated expenses
Sales salaries* ....................................................
104,000
52,000
52,000
Rent expense ......................................................
14,160
14,160
Bad debts expense ................................
18,000
8,100
9,900
Office salary* ......................................................
31,200
31,200
Insurance expense* ................................
3,100
770
2,330
Miscellaneous office expenses* .......................
4,000
400
3,600
Total expenses .....................................................
$688,560
$284,070
$404,490
*Computation notes. Closing Department 200 will eliminate 70% of its insurance
expense and 25% of its miscellaneous office expense. Sales salaries will be
reduced by the amounts paid to the two clerks who will not be replaced. The
office salary will not be eliminated, but it will be reclassified so that one-half will
be reported as sales salary and one-half as office salary.
Problem 23-6A (Continued)
Part 2
ELEGANT DECOR COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department 200
Sales .........................................................................................................
$436,000
Cost of goods sold .................................................................................
262,000
Gross profit from sales ..........................................................................
174,000
Operating expenses
Advertising ............................................................................................
17,000
Store supplies used .............................................................................
4,000
Depreciation of store equipment ........................................................
8,300
Sales salaries ........................................................................................
67,600*
Rent expense ........................................................................................
14,160
Bad debts expense ...............................................................................
9,900
Office salary ..........................................................................................
15,600*
Insurance expense ...............................................................................
2,330
Miscellaneous office expenses ...........................................................
3,600
Total operating expenses.......................................................................
142,490
Net income ...............................................................................................
$ 31,510
* Administrative salary reassignment
Total
Sales
Office
Salaries
Salaries
Salary
Salesclerks ................................................................
$52,000
$52,000
Administrative worker .......................................................
31,200
$31,200
Reassign admin. worker to sales ................................
0
15,600
(15,600)
Revised salaries ................................................................
$83,200
$67,600
$15,600
Problem 23-6A (Continued)
Part 3
ELEGANT DECOR COMPANY
Reconciliation of Combined Income With Forecasted Income
Combined net income .........................................................................
$ 37,440
Less Dept. 200's lost sales ................................................................
(290,000)
Plus Dept. 200’s eliminated expenses................................................
284,070
Forecasted net income ........................................................................
$ 31,510
ANALYSIS
Department 200's avoidable expenses of $284,070 are $5,930 less than its
revenues of $290,000. This means the company's annual net income would
be $5,930 less from eliminating Department 200. This analysis suggests
the department should probably not be eliminated.
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Financial and Managerial Accounting, 6th Edition
1366
PROBLEM SET B
Problem 23-1B (45 minutes)
WINDMIRE COMPANY
COMPARATIVE INCOME STATEMENTS
(1)
(2)
(3)
Normal
New
Volume
Business
Combined
Sales ............................................................
$1,200,000
$172,000
$1,372,000
Costs and expenses
Direct materials ........................................
384,000
64,000
448,000
Direct labor ...............................................
96,000
24,000
120,000
Overhead ..................................................
288,000
36,000
324,000
Selling expenses ......................................
120,000
120,000
Administrative expenses.........................
80,000
4,000
84,000
Total costs and expenses .........................
968,000
128,000
1,096,000
Operating income ......................................
$ 232,000
$ 44,000
$ 276,000
Supporting computations
Normal direct material cost .......................................................
$384,000
Units of output ............................................................................
300,000
Cost per unit ................................................................................
$ 1.28
New business volume ................................................................
50,000
New business direct material cost ...........................................
$ 64,000
Normal direct labor cost ............................................................
$ 96,000
Units of output ............................................................................
300,000
Cost per unit ................................................................................
$ 0.32
Overtime per unit (50%) .............................................................
0.16
New business direct labor cost per unit ................................
$ 0.48
New business volume ................................................................
50,000
New business direct labor cost ................................................
$ 24,000
Total overhead ............................................................................
$288,000
Fixed overhead (25%) ................................................................
72,000
Variable overhead ................................................................
$216,000
Units of output ............................................................................
300,000
Cost per unit ................................................................................
$ 0.72
New business volume ................................................................
50,000
New business variable overhead cost ................................
$ 36,000
Problem 23-2B (50 minutes)
Part 1
MERVIN COMPANY
COMPARATIVE INCOME STATEMENTS
(a)
(b)
(c)
Normal
New
Volume
Business
Combined
Sales ..................................................
$4,400,000
$300,000
$4,700,000
Costs and expenses
Direct materials ..............................
825,000
75,000
900,000
Direct labor ................................
1,100,000
100,000
1,200,000
Overhead ........................................
1,375,000
100,000
1,475,000
Selling expenses ............................
275,000
20,000
295,000
Administrative expenses...............
550,000
700
550,700
Total costs & expenses ...................
4,125,000
295,700
4,420,700
Operating income ............................
$ 275,000
$ 4,300
$ 279,300
Supporting computations
Normal sales revenue (550,000 x $8).............................
$4,400,000
New business sales revenue (50,000 x $6) ...................
$ 300,000
Normal direct materials cost ..........................................
$ 825,000
Units of output .................................................................
550,000
Cost per unit .....................................................................
$ 1.50
New business volume .....................................................
50,000
New business direct materials cost ..............................
$ 75,000
Normal direct labor cost .................................................
$1,100,000
Units of output .................................................................
550,000
Cost per unit .....................................................................
$ 2.00
New business volume .....................................................
50,000
New business direct labor cost .....................................
$ 100,000
Problem 23-2B (concluded)
Total overhead .................................................................
$1,375,000
Fixed overhead (20%) ......................................................
275,000
Variable overhead ............................................................
$1,100,000
Units of output .................................................................
550,000
Cost per unit .....................................................................
$ 2.00
New business volume .....................................................
50,000
New business variable overhead cost ..........................
$ 100,000
Total selling expenses ....................................................
$ 275,000
Fixed selling expenses (60%) .........................................
165,000
Variable selling expenses ...............................................
110,000
Units of output .................................................................
550,000
Cost per unit .....................................................................
$ 0.20
Plus additional selling expenses per unit ....................
0.20
Total selling cost per unit for this order .......................
$ 0.40
New business volume .....................................................
50,000
New business selling expenses.....................................
$ 20,000
Part 2
Based on the financial analysis above, Mervin should accept the order.
The order provides additional income of $4,300. Other factors that Mervin
should consider are:
Will the customer expect additional circuit boards at this special price?
Will regular customers demand a reduction in their price?
Can Mervin maintain quality and production at full capacity?
Part 3
If the new customer demands 100,000 units instead of 50,000, this will
mean that Mervin will lose sales of 50,000 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 circuit
boards. This could lead to a permanent loss of volume at the regular price
of $8 per unit.
