PROBLEM 7-1B
(a)
Reject
Order
Accept
Order
Revenues (10,000 X $30)
Cost of goods sold
Selling and administrative
expenses
Net income
$0
0
0
$0
$300,000
240,000
25,000
$ 35,000
(1)
(2)
(1) Variable costs = $3,060,000 – $900,000 = $2,160,000;
(2) Variable costs = $360,000 – $180,000 = $180,000;
increased by $35,000.
(c) Unit selling price = $24 (variable manufacturing costs) + $2.50 (variable
(d) Nonquantitative factors to be considered are: (1) possible effect on
increasing costs.
PROBLEM 7-2B
(a)
Make FIZBE
Buy FIZBE
Net Income
Increase
(Decrease)
Direct materials (5,000 X $4.75)
Direct labor (5,000 X $4.60)
Indirect labor (5,000 X $.45)
Utilities (5,000 X $.35)
Depreciation
Property taxes
Insurance
Purchase price
Freight and inspection
(5,000 X $.30)
Receiving costs
Total annual cost
$23,750
23,000
2,250
1,750
2,000
700
1,500
0
0
0
$54,950
$ 0
0
0
0
900
200
600
56,000
1,500
500
$59,700
($ 23,750
( 23,000
( 2,250
( 1,750
( 1,100
( 500
( 900
( (56,000)
(
(1,500)
(500)
($ (4,750)
(c) The decision would be different. Because of the opportunity cost of
$6,000, net income will be $1,250 higher if FIZBE is purchased as shown
below:
Make FIZBE
Buy FIZBE
Net Income
Increase
(Decrease)
Total annual cost
Opportunity cost
Total cost
$54,950
6,000
$60,950
$59,700
0
$59,700
$(4,750)
6,000
$ 1,250
PROBLEM 7-3B
(a) (1)
General-Purpose Cleaner Not Processed Further
Sales
ShineBrite (750,000 ÷ 25) X $15
$450,000
General-Purpose Cleaner (250,000 ÷ 20) X $20
250,000
Total revenue
$700,000
Costs
NPR
200,000
Additional costs for ShineBrite
300,000
Total costs
500,000
Gross profit
$200,000
(2)
General-Purpose is Processed Further
Sales
ShineBrite (750,000 ÷ 25) X $15
$450,000
Premium Cleaner (250,000 ÷ 20) X $16
200,000
Premium Stain Remover (250,000 ÷ 20) X $16
200,000
Total revenue
$850,000
Costs
NPR
200,000
Additional costs for ShineBrite
300,000
PST
140,000
Total costs
640,000
Gross profit
$210,000
cleaner further.
PROBLEM 7-3B (Continued)
(b)
Don’t Process
G-P Cleaner
Further
Process
G-P Cleaner
Further
Net Income
Increase
(Decrease)
Incremental revenue
$250,000
$400,000
$150,000
Incremental costs
0
140,000
(140,000)
Totals
$250,000
$260,000
$ 10,000
PROBLEM 7-4B
(a)
Cost
$210,000
Accumulated depreciation
(42,000*)
Book value
168,000
Sales proceeds
(58,000)
Loss on sale
$110,000
*$210,000 ÷ 5 years = $42,000
(b) (1)
Retain Old Equipment
Revenues ($360,000 X 4 yrs.)
$1,440,000
Less costs:
Variable costs
$200,000
Fixed costs
120,000
Selling & administrative
180,000
Depreciation
168,000
668,000
Net income
$ 772,000
(2)
Replace Old Equipment
Revenues
$1,440,000
Less costs:
Variable costs
$ 48,000
Fixed costs
20,000
Selling and administrative
180,000
Depreciation
250,000
498,000
Operating income
942,000
Less: Loss on old equipment
110,000
Net income
$ 832,000
(c)
Retain Old
Equipment
Replace Old
Equipment
Net
Income
Increase
(Decrease)
Variable costs
$200,000
$ 48,000
$152,000
Fixed costs
120,000
20,000
100,000
New equipment
cost
250,000
(250,000)
Salvage on old
.
(58,000)
58,000
equipment
Totals
$320,000
$260,000
$ 60,000
PROBLEM 7-4B (Continued)
(d) MEMO
TO: Gene Simmons
FROM: Student
When deciding whether or not to replace any old equipment, the analysis
should only include cost data relevant to the replacement decision. The
$110,000 loss that would be experienced if we replace the old equipment
expensed under either alternative, making it irrelevant.
PROBLEM 7-5B
(a)
Division
III
Division
IV
Sales
Variable expenses
Cost of goods sold
Selling and administrative
Total variable expenses
Contribution margin
$310,000
189,000
45,000
234,000
$ 76,000
$170,000
140,400
49,000
189,400
($ (19,400)
(b)
(1)
Division III
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
Cost of goods sold
Selling and administrative
Total fixed expenses
Income (loss) from operations
$ 76,000
81,000
30,000
111,000
($(35,000)
$ 0
(40,500
15,000
55,500
$(55,500)
$(76,000)
40,500
15,000
55,500
$(20,500)
(2)
Division IV
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
Cost of goods sold
Selling and administrative
Total fixed expenses
Income (loss) from operations
$(19,400)
(15,600)
21,000)
36,600)
$(56,000)
$ 0
7,800
10,500
18,300
$(18,300)
$19,400
7,800
10,500
18,300
$37,700
Division III is eliminated.
Division IV should be eliminated because it is producing negative con–
tribution margin ($19,400). Income from operations will increase $37,700
by discontinuing this division.
PROBLEM 7-5B (Continued)
(c) PANDA COMPANY
CVP Income Statement
For the Quarter Ended March 31, 2014
Divisions
I
II
III
Total
Sales
Variable expenses
Cost of goods sold
Selling and
administrative
Total variable
expenses
Contribution margin
Fixed expenses
Cost of goods sold (1)
Selling and
administrative (2)
Total fixed
expenses
Income (loss) from operations
$510,000
210,000
24,000
234,000
276,000
92,600
39,500
132,100
$143,900
$400,000
200,000
40,000
240,000
160,000
52,600
43,500
96,100
$ 63,900
$310,000
189,000
45,000
234,000
76,000
83,600
33,500
117,100
$ (41,100
)
$1,220,000
599,000
109,000
708,000
512,000
228,800
116,500
345,300
$ 166,700
$7,800]. Each division’s share is $2,600.
(2) Division’s fixed selling and administrative expenses plus 1/3 of
BYP 7-1 DECISION-MAKING AT CURRENT DESIGNS
Situation #1
calculations:
Reject Order
Accept Order
Net Income
Increase (Decrease)
Revenues
$0
$25,000*
$25,000
Costs
0
(19,000)**
(19,000)
Net Income
$0
$ 6,000
$ 6,000
*(100 X $250)
**(($80 + $60 + $20) X 100) + ($1,000 + $2,000)
operating at full capacity, would be the lost contribution margin from
regular sales given up in order to fulfill the special order. Alternatively,
rather than reject the special order, it might consider temporarily expand–