CHAPTER 26
SOLUTIONS TO EXERCISES—SET B
EXERCISE 26-1B
(a)
Reject
Order
Accept
Order
Fixed overhead
Sales commissions
(6,000)
Revenues
Materials ($0.75)
Labor ($1.20)
$ -0-
-0-
-0-
$19,000
(3,000)
(4,800)
EXERCISE 26-2B
(a)
Reject
Order
Accept
Order
Net Income
Increase
(Decrease)
89,000
Revenues (60,000 X $8.00)
Cost of goods sold
$0
0
$480,000
315,000
(1)
$ 480,000
((315,000)
(2) Variable operating expenses = $900,000 X 60% = $540,000;
$540,000 ÷ 400,000 = $1.35 per unit;
60,000 X $1.35 = $81,000;
$81,000 + $8,000 = $89,000.
EXERCISE 26-2B (Continued)
(b) As shown in the incremental analysis, Aiden should accept the special
order because incremental revenue exceeds incremental expenses by
$1,200.
EXERCISE 26-3B
(a)
Make
Buy
Net Income
Increase
(Decrease)
Direct materials (60,000 X $4.00)
Direct labor (60,000 X $6.00)
Variable manufacturing costs
$240,000
360,000
$ 0
0
$ 240,000
360,000
(b) No, Sun Inc. should not purchase the lamps. As indicated by the
incremental analysis, it would cost the company $24,000 more to purchase
the lamps.
(c) Yes, by purchasing the lamp shades, a total cost saving of $16,000 will
result as shown below.
Make
Buy
Net Income
Increase
(Decrease)
EXERCISE 26-4B
Sell
(Basic Kit)
Process Further
(Stage 2 Kit)
Net Income
Increase
(Decrease)
Total
Sales per unit
Costs per unit
Direct materials
$22.00
$10.00
($27.00
( ) $ 5.00 (1)
$ 5.00)
$(5.00)
(1) The cost of materials decreases because Linda can make two Stage 2 Kits
from the materials for a basic kit.
(2) The total time to make the two kits is one hour at $16 per hour or
$8 per unit.
EXERCISE 26-5B
Retain
Machine
Replace
Machine
Net Income
Increase
(Decrease)
0
Operating costs
$150,000
(1)
($120,000)
(2)
($ 30,000)
EXERCISE 26-6B
Continue
Eliminate
Net Income
Increase
(Decrease)
Net income (loss)
Sales
Variable expenses
Cost of goods sold
$ 98,200)
(55,000)
$ 0
( 0
$(98,200)
(55,000
EXERCISE 26-7B
(a) $34,000 + $61,000 – $40,000 = $55,000
(b)
Stunner
Double-Set
Total
Sales
Variable expenses
$320,000
160,000
$480,000
200,000
$800,000
360,000
**$65,000 + [($480,000 ÷ $800,000) X $310,000]
(c) As shown in the analysis above, El should not eliminate the Mega-
Power product line. Elimination of the line would cause net income to
EXERCISE 26-8B
(a)
AA
Year
Annual Net
Cash Flow
Cumulative Net
Cash Flow
1
$ 8,000
$ 8,000
BB
23,000 ÷ (28,500 ÷ 3) = 2.42 years
CC
Year Annual Net Cumulative Net
Cash Flow Cash Flow
1 $13,000 $13,000
Cash payback 2.10 years
$23,000 – 22,000 = $1,000
$1,000 ÷ $10,000 = .10
(b)
AA
BB
CC
Year
Discount
Factor
Net
Annual
Cash
Flow
Present
Value
Net
Annual
Cash
Flow
Present
Value
Net Cash
flow
Present
Value
3
.71178
Net present value
$ 2,900
(1) This total may also be obtained from Table 2: $9,500 X 2.40183 =
$22,817. Project CC is the only acceptable project. Project AA is
the least desirable.
EXERCISE 26-9B
(a) (1) Annual rate of return: $30,000 ÷ [($200,000 + $0) ÷ 2] = 30%.
(2) Cash payback: $200,000 ÷ $60,000 = 3.33 years.
(b)
Item
Amount
Years
PV Factor
Present Value
EXERCISE 26-10B
(a)
Project
Investment
÷
(Income + Depreciation)
=
Internal
Rate of
Return
Factor
Closest
Discount
Factor
Internal
Rate of
Return
22A
$225,000
÷
($11,300 + $37,500)
=
4.601
4.62288
8%
EXERCISE 26-11B
(a) Project A: ($66,000 X 3.79079) – $260,000 = $(9,808)
Project B: ($80,000 X 4.86842) – $384,000 = $5,474
(b) Robinville should invest in Project B only. Project B is acceptable because
it has a positive net present value. Project A is unacceptable because it
has a negative net present value.
SOLUTIONS TO PROBLEMS—SET C
PROBLEM 26-1C
(a)
Reject
Order
Accept
Order
Net Income
Increase
(Decrease)
Revenues (7,000 X $35)
$0
$245,000
$ 245,000
(1) Variable costs = $3,600,000 – $810,000 = $2,790,000;
$2,790,000 ÷ 90,000 units = $31 per unit;
7,000 X $31 = $217,000.
(b) Yes, the special order should be accepted because net income will be
increased by $14,000.
(c) Unit selling price = $31 (variable manufacturing costs) + $2.00 variable
selling and administrative expenses + $3.00 net income = $36.00.
PROBLEM 26-2C
(a)
Make WISCO
Buy WISCO
Net Income
Increase
(Decrease)
Direct materials (8,000 X $4.75)
Direct labor (8,000 X $4.60)
Indirect labor (8,000 X $.45)
Utilities (8,000 X $.40)
$38,000
36,800
3,600
3,200
$ 0
0
0
0
($ 38,000
( 36,800
( 3,600
( 3,200
(b) The company should continue to make WISCO because net income
would be $6,650 less if WISCO were purchased from the supplier.
(c) The decision would be different. Because of the opportunity cost of
$8,000, net income will be $950 higher if WISCO is purchased as
shown below:
Make WISCO
Buy WISCO
Net Income
Increase
(Decrease)
Total annual cost
$86,300
$92,950
$(6,650)
PROBLEM 26-3C
(a)
Cost
$216,000
Accumulated depreciation
Book value
36,000*
180,000
(b)
(1)
Retain Old Equipment
Sales ($360,000 X 5 yrs.)
$1,800,000
Less costs:
Variable costs
$260,000
Fixed costs
150,000
Selling & administrative
Depreciation
815,000
Net income
$ 985,000
(2)
Replace Old Equipment
Sales
$1,800,000
Less costs:
Variable costs
$100,000
Fixed costs
40,000
Selling & administrative
Depreciation
625,000
Operating income
Less: Loss on old equipment
Net income
$1,045,000
(c)
Retain Old
Equipment
Replace Old
Equipment
Net Income
Increase
(Decrease)
Variable operating costs
$260,000
$100,000
$160,000
Fixed operating costs
150,000
40,000
110,000
New equipment cost
(260,000)
Salvage on old equipment
50,000
Totals
$410,000
$350,000
$ 60,000
PROBLEM 26-4C
(a)
Division
III
Division
IV
Sales
Variable expenses
Cost of goods sold
$280,000
189,000
$200,000
162,000
(b)
(1)
Division III
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
$ 70,000
$ 0)
$(70,000)
(2)
Division IV
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
$ (4,000)
$ 0)
$ 4,000
PROBLEM 26-4C (Continued)
(c) YEN MANUFACTURING COMPANY
CVP Income Statement
For the Quarter Ended March 31, 2017
Divisions
I
II
III
Total
Sales
Variable expenses
Cost of goods sold
Selling and
Fixed expenses
Cost of goods sold (1)
Selling and
administrative (2)
Total fixed
$490,000
255,000
48,000
39,000
$410,000
200,000
53,000
43,000
$280,000
189,000
84,000
17,000
$1,180,000
644,000
185,000
99,000
(2) Division’s fixed selling and administrative expenses plus 1/3 of
Division IV’s unavoidable fixed selling and administrative expenses
[$60,000 X (100% – 70%) X 50% = $9,000]. Each division’s share
is $3,000.
PROBLEM 26-4C (Continued)
(d) MEMO
TO: James Carter
FROM: Student
SUBJECT: Relevant Data for Decision to Replace Old Equipment
When deciding whether or not to replace any old equipment, the analysis
should only include cost data relevant to the replacement decision. The
$130,000 loss that would be experienced if we replace the old equipment
with the newer equipment is related to a sunk cost, namely the cost of the
old equipment. Sunk costs are irrelevant in decision making.
PROBLEM 26-5C
(a) Project Red = $14,000 ÷ [($160,000 + $0) ÷ 2] = 17.5%.
Project White = $14,400 ÷ [($180,000 + $0) ÷ 2] = 16%.
Project Blue = $18,000 ÷ [($200,000 + $0) ÷ 2] = 18%.
(b) Project Red $160,000 ÷ [($14,000 + $32,000)] = 3.48 years
Project White
Net Annual Cash Flow
Cumulative Net Cash Flow
$54,000 ($18,000 + $36,000)
$53,000 ($17,000 + $36,000)
$ 54,000
$107,000
Project Blue
Year
Net Annual Cash Flow
Cumulative Net Cash Flow
1
2
$67,000 ($27,000 + $40,000)
$62,000 ($22,000 + $40,000)
$ 67,000
$129,000
PROBLEM 26-5C (Continued)
(c)
Project Red
Item
Amount
Years
PV Factor
Present
Value
Net Annual cash flows
Capital investment
Negative net present value
$46,000
1–5
3.35216
($ 154,199
(160,000)
($ (5,801)
Project White
Project Blue
Year
Discount
Factor
Net Annual
Cash
Inflow
PV
Net Annual
Cash
Inflow
PV
Total
171,040
198,119
1
2
.86957
.75614
$ 54,000
53,000
$ 46,957
40,075
$ 67,000
62,000
$ 58,261
46,881
(d)
Project
Annual
Rate of Return
Cash Payback
Net
Present Value
Red
White
Blue
2
3
1
3
2
1
2
3
1
PROBLEM 26-6C
(a)
(1)
Annual
Net Income
(2)
Annual
Cash Flow
Sales
Expenses
Drivers’ salaries
Out-of-pocket expenses
*$129,600*
* 67,500
* 30,100
$ 129,600
(67,500)
(30,100)
(b) (1) Annual rate of return = $2,000 ÷
($80,000 +0)
2
= 5.0%.
(2) Cash payback period = $80,000 ÷ $32,000 = 2.5 years.
(d) The computations show that the commuter service is not a wise in-
vestment for these reasons: (1) annual net income will only be $2,000,
PROBLEM 26-7C
(a)
(1) Option A
Cash
Flows
X
11% Discount
Factor
=
Present
Value
Capital investment
Present value of net annual cash flows
a$ 40,000
X
5.14612
=
($205,845)
(2) The internal rate of return can be approximated by finding the discount
rate that results in a net present value of approximately zero. This is
accomplished with a 12% discount rate.
Cash
Flows
X
12% Discount
Factor
=
Present
Value
Present value of net annual cash flows
a$ 40,000
X
4.96764
=
($198,706)
(1) Option B
Cash
Flows
X
11% Discount
Factor
=
Present
Value
$ 35,805
Present value of net annual cash flows
b$52,000
X
5.14612
=
$267,598
PROBLEM 26-7C (Continued)
(2) Internal rate of return on Option B is 15%, as calculated below:
Cash
Flows
X
15% Discount
Factor
=
Present
Value
Capital investment
Present value of net annual cash flows
Present value of cost to rebuild
b$52,000
0
X
X
4.48732
.57175
=
=
$233,341
0