Exhibit cost 15,000$
Estimated increase in revenue over the next year 40,000
For the previous year, profit was as follows:
Revenue 212,500$
Less:
Design supplies 18,000$
Salary of Samantha Spade (owner) 82,000
Salary of Kim Bridesdale (full time employee) 56,000
Rent 19,000
Utilities 7,000
Depreciation of office equipment 4,000
Printing of advertising materials 800
Advertising in Middleton Journal 3,000
Travel expenses other than depreciation of autos 3,000
Depreciation of company cars 10,000 202,800
Net income 9,700$
Required
Variable cost rates based on revenue:
Design supplies
Travel expenses
Increase in revenue
Changes in costs:
*Increase in profit
*If formulas include proper cell references, no rounding will occur to the increases causing the calculations to be more accurate.
Should the company exhibit at the home show?
Exercise 7-4 Incremental Analysis
Calculate the impact of the exhibit on company profit.
Rustic Interiors, an interior design company, has experienced a drop in business due to an increase in
interest rates and a corresponding slowdown in remodeling projects. To stimulate business, the
company is considering exhibiting at the Middleton Home and Garden Expo. At the show, Rustic
Interiors will present a slide show on a PC, pass out brochures that are printed previously, (the
company printed more than needed), and show its portfolio of previous jobs. The following are
expected as a result of the exhibit:
What-if?
Consider the following after you have completed the requirements of E7-4.
At what cost will Rustic Interiors consider the Middleton Home and Garden Expo to be too
expensive? Explain.
Problem data follows:
Exhibit cost 15,000$
Estimated increase in revenue over the next year 40,000
For the previous year, profit was as follows:
Revenue 212,500$
Less:
Design supplies 18,000$
Salary of Samantha Spade (owner) 82,000
Salary of Kim Bridesdale (full time employee) 56,000
Rent 19,000
Utilities 7,000
Depreciation of office equipment 4,000
Printing of advertising materials 800
Advertising in Middleton Journal 3,000
Travel expenses other than depreciation of autos 3,000
Depreciation of company cars 10,000 202,800
Net income 9,700$
Required
Variable cost rates based on revenue:
Should the company exhibit at the home show?
Solution: Exercise 7-4 Incremental Analysis
Calculate the impact of the exhibit on company profit. Should the company exhibit at the home show?
Cost of exhibit space
Annual number of customers surveyed
7,600
Cost of survey if conducted by RBG Associates
$ 35,000
Mailing $17,500
Printing (done by Lester Print Shop) 6,000
Salary of Pat Fisher, part-time employee who stuffed envelopes
and summarized data when surveys were returned 2,080
Share of depreciation of computer and software used to track
survey responses and summarized results 1,200
Rent
Share of electricity/phone/etc. based on square feet of space
occupied by Pat Fisher vs. entire company 600
Total $27,380
Number of hours spent on survey by Pat Fisher 130
Required
What is the incremental cost of going outside versus conducting the survey as in the past?
Less cost savings:
Incremental cost of RGB providing the survey
Will Craig Knight accept the RBG offer?
Each year, Knight Motors surveys former and prospective customers regarding satisfaction and brand
awareness. For the current year, the company is considering outsourcing the survey to RBG
Associates, who have offered to conduct the survey and summarize results. Craig Knight, the
president of Knight Motors, believes that RBG will do a higher-quality job than his company has been
doing, but is unwilling to spend more than $10,000 above the current costs. The following amounts for
number of customers surveyed and the cost of the survey follow:
Exercise 7-5 Incremental Analysis
The head of bookkeeping for Knight has prepared the following summary of costs related to the
survey in the prior year.
Problem data follows:
Annual number of customers surveyed
7,600
Cost of survey if conducted by RBG Associates
$ 35,000
Costs related to the survey in the prior year.
Mailing $17,500
Printing (done by Lester Print Shop) 6,000
Salary of Pat Fisher, part-time employee who stuffed envelopes
and summarized data when surveys were returned 2,080
Share of depreciation of computer and software used to track
survey responses and summarized results 1,200
Rent
Share of electricity/phone/etc. based on square feet of space
occupied by Pat Fisher vs. entire company 600
Total $27,380
Number of hours spent on survey by Pat Fisher 130
Required
What is the incremental cost of going outside versus conducting the survey as in the past?
Solution: Exercise 7-5 Incremental Analysis
To be able to accommodate the group, Lillian will have to close the restaurant for dinner that night. On
a typical night, the following costs and other data are expected to be incurred:
a. Calculate the incremental profit or loss associated with accepting the New England Investments
group.
Finn’s Seafood Restaurant has been approached by New England Investments, which wants to hold an
employee recognition dinner next month. Lillian Sumner, a manager of the restaurant provided the
following information concerning the event:
Exercise 7-6 Incremental Analysis and Opportunity Costs
Suppose that Finn’s Seafood Restaurant has also been approached by an engaged couple who
want to hold their wedding reception at Finn’s. The food costs are expected to be the same as
estimated for the New England event, however, beverage costs are expected to be $32 per person.
How much should Finn’s charge per person for the wedding reception event in order to earn a $15
profit per attendee?
Incremental costs:
Solution: Exercise 7-6 Incremental Analysis and Opportunity Costs
a. Calculate the incremental profit or loss associated with accepting the New England Investments
group.
Materials 35,000$
Labor to form ductwork 4,000
Labor to install ductwork 10,000
Misc. variable costs 1,500
Fixed costs allocated based on labor hours 3,000
Total costs 53,500$
Projected billing of Kerry Park for services
$ 68,000
Bradley is currently behind schedule on other projects which incurs costs as follows:
Late penalty per day
$ 1,200
Prefabricated ductwork cost 42,000$
Required
Should Bradley make the ductwork or buy it prefabricated?
Total cost
Do not buy
Prefabricated
Buy
Prefabricated
Difference
Materials
Labor to form ductwork
Labor to install ductwork
Miscellaneous variable costs
Fixed costs allocated
Penalty
For most construction projects, Bradley Heating and Cooling buys sheet metal and forms the metal
into heating/cooling ducts as needed. The company estimates the costs of making and installing
ductwork for Kerry Park shopping mall to be as follows:
Problem 7-4 Make-or-Buy Decision
The fixed costs relate to the company‘s building equipment, and office staff. Expected billings and
other costs pertaining to Kerry Park are:
Walt Bradley, the owner of Bradley Heating and Cooling, is considering ordering prefabricated
ductwork for the Kerry Park job, which includes the cost of sheet metal. The following cost is
expected:
If Walt buys the prefabricated ductwork, he’ll be able to reassign workers to another project and
avoid 5 days of late fees.
Problem data follows:
Materials 35,000$
Labor to form ductwork 4,000
Labor to install ductwork 10,000
Misc. variable costs 1,500
Fixed costs
allocated
3,000
Total costs 53,500$
Projected billing of Kerry Park for services
$ 68,000
Late penalty per day
$ 1,200
Prefabricated ductwork cost 42,000$
Required
Should Bradley make the ductwork or buy it prefabricated?
Solution Problem 7-4 Make-or-Buy Decision
Buy
Prefabricated
Difference
Do not buy
Prefabricated
Materials
Penalty
Selling price of ZylexB per gallon 17.00$
Selling price of ZylexA per gallon 11.00$
Minutes to manufacture a gallon of ZylexA 25
Additional minutes to manufacture a gallon of ZylexB 10
Cost per gallon of resources for manufacturing:
ZylexA
Additional
Cost – ZylexB
Material $2.00 $1.75
Labor 2.50 0.50
Variable overhead 2.25 1.10
Required
ZylexA
Mega Chemical Company produces ZylexA and a related product called ZylexB. ZylexB is made
from a based ZylexA plus additional ingredients. Financial information and resources required for
production for the two products follows:
Problem 7-8 Additional Processing Decision with a Production Constraint
Both products have been successful and demand for both products is strong and beyond the
company’s capacity. Since it takes additional time to manufacture ZylexB, the vice president of
production is trying to determine whether ZylexB should be produced.
Which product makes the largest contribution to company profit, given a capacity constraint
measured in terms of production time?
Incremental revenue of Zylex B
Incremental costs:
Incremental profit of ZylexB
Problem data follows:
Selling price of ZylexB per gallon 17.00$
Selling price of ZylexA per gallon 11.00$
Minutes to manufacture a gallon of ZylexA 25
Additional minutes to manufacture a gallon of ZylexB 10
Cost per gallon of resources for manufacturing:
ZylexA
Additional
Cost – ZylexB
Material $2.00 $1.75
Labor 2.50 0.50
Variable overhead 2.25 1.10
Required
ZylexA
11.00$
Which product makes the largest contribution to company profit, given a capacity constraint
measured in terms of production time?
Solution Problem 7-8 Additional Processing Decision with a Production Constraint
Selling price
Time to produce in minutes
Contribution margin per minute
Variable costs:
Contribution margin
Incremental revenue of Zylex B 6.00$
Incremental costs: