Problem 23-3B (30 minutes)
Part 1
INCREMENTAL COST OF MAKING TH1
Variable costs:
Direct materials (400,000 units x $1.20 per unit) …………………………..
$ 480,000
Direct labor (400,000 units x $1.50 per unit) …………………………..
600,000
Variable overhead (2,400,000* x 25%) …………………………………..…………
600,000
Total incremental cost of making 50,000 units ………………………..…
$1,680,000
* Total overhead = 400,000 units x $6 per unit = $2,400,000
INCREMENTAL COST OF BUYING THE PART
Cost per unit to buy ……………………………………………………………….…………
$ 4.00
Total incremental cost of buying 400,000 units ……………………….….
$1,600,000
Problem 23-4B (45 minutes)
Alternative 1: Sell to a wholesaler
Incremental revenue (7,500 x $75.00) ………………………………………..……….
$ 562,500
Incremental cost ……………………………………………………………………………….
0
Incremental income ………………………………………………………………….……….
$ 562,500
Alternative 2: Disassemble and sell to a recycler
Incremental revenue (7,500 x $130.00) ……………………………………………….
$ 975,000
Incremental cost ……………………………………………………………………………….
400,000
Incremental income ………………………………………………………………….……….
$ 575,000
Incremental revenue (7,500 x $500.00) ……………………………………………….
$3,750,000
Incremental cost ……………………………………………………………………………….
3,200,000
Incremental income ………………………………………………………………….……….
$ 550,000
Decision: Micron should choose alternative 2, as this provides the highest
incremental income.
Problem 23-5B (55 minutes)
Part 1
Product R
Selling price per unit ……………………………………………..
$ 60
Variable costs per unit …………………………………………..
20
Contribution margin per unit ………………………………....
$ 40
Machine hours to produce 1 unit …………………………..
0.4
Contribution per machine hour
(or contribution/[hours per unit]) ………………………...
$100
$ 35
Part 2
Sales Mix Recommendation To the extent allowed by production and
market constraints, the company should produce as much of Product R as
possible. With a single shift yielding 176 hours per month (8 x 22), the
company can produce these units of Product R:
Maximum output of R = = 440 units per month
176 hrs. per mo.
0.4 hrs. per unit
Problem 23-5B (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
550 units of Product R per month. This means the company should
= 550 units per month
Contribution Margin at This Sales Mix
Units
Contr./unit
Total
From R ……………………………………………………….
550
$40
$22,000
From T ……………………………………………………….
132
35
4,620
Less extra shift costs ……………………………………
(3,250)
Total contribution margin …………………………..
$23,370
Management decision This amount of $23,370 exceeds the contribution
margin of $17,600 generated by one shift alone (see part 2). Therefore,
management should add the second shift.
0.4 hrs. per unit
1.0 hrs. per unit
Problem 23-5B (Continued)
Part 4
Sales Mix Recommendation By incurring additional marketing cost, the
company can relax the market constraint for sales of Product R up to the
point where 675 units can be sold. This means the company can produce
Problem 23-6B (60 minutes)
Part 1
ESME COMPANY
Analysis of Expenses under Elimination of Department Z
Total
Eliminated
Continuing
Expenses
Expenses
Expenses
Cost of goods sold ……………………………….………
$586,400
$125,100
$461,300
Direct expenses
Advertising …………………………………………………
30,000
3,000
27,000
Store supplies used …………………………….………
7,000
1,400
5,600
Depreciation of store equip. ………………..………
21,000
21,000
Allocated expenses
Sales salaries* …………………………………….………
93,600
46,800
46,800
Rent expense ………………………………………………
27,600
27,600
Bad debts expense ……………………………..………
25,000
4,000
21,000
Office salary* ………………………………………………
26,000
26,000
Insurance expense* …………………………….………
5,600
910
4,690
Miscellaneous office expenses* …………..………
4,200
750
3,450
Total expenses ……………………………………..………
$826,400
$181,960
$644,440
Computation Notes Closing Department Z will eliminate 65% of its insurance
expense and 30% 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 23-6B (Continued)
Part 2
ESME COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department Z
Sales ………………………………………………………………………………………...
$700,000
Cost of goods sold …………………………………………………………………...
461,300
Gross profit from sales ……………………………………………………………..
238,700
Operating expenses
Advertising ……………………………………………………………………………..
27,000
Store supplies used ………………………………………………………………..
5,600
Depreciation of store equipment ……………………………………………..
21,000
Sales salaries ………………………………………………………………………….
59,800*
Rent expense …………………………..……………………………………………..
27,600
Bad debts expense ……………………………………………………….………...
21,000
Office salary …………………………………………………………………………...
13,000*
Insurance expense ………………………………………………………………….
4,690
Miscellaneous office expenses ………………………………………………..
3,450
Total operating expenses…………………………..……………………………...
183,140
Net income ………………………………………………………………………………..
$ 55,560
* Office salary reassignment
Total
Sales
Office
Salaries
Salaries
Salary
Sales clerks ……………………………………….………………
$46,800
$46,800
Office clerk ………………………………………..……………..
26,000
$26,000
Reassign office clerk to sales ……………..……………
0
13,000
(13,000)
Revised salaries ……………………………………………………….
$72,800
$59,800
$13,000
Problem 23-6B (Continued)
Part 3
ESME COMPANY
Reconciliation of Combined Income with Forecasted Income
Combined net income …………………………..……………………………….……
$ 48,600
Less Dept. Z’s lost sales ………………………………………………………………
(175,000)
Plus Dept. Z’s eliminated expenses ………………………………………………
181,960
Forecasted net income …………………………………………………………………
$ 55,560
ANALYSIS
Department Z’s avoidable expenses of $181,960 are $6,960 greater than its
revenues of $175,000. This means the company’s annual net income would
be $6,960 higher from eliminating Department Z. This analysis suggests
management should probably go ahead with the elimination of the
department as planned.