SOLUTION
Chapter 7 Waterways Continuing Problem
WCP7
Part 1
(a) Even though contribution margin per unit would be cut to $0.20 ($2.60 – 2.40) on the
additional units, Waterways would increase its profits by $3,000 to $59,000 (compared to
$56,000). It can handle the special order, but only by adding a shift.
Profit with no special order Unit profit $1.60
35,000 X $1.60 $56,000 a year
Reject Order
Accept Order
Net Income
Increase (Decrease)
Revenues
$0
$39,000
$39,000*
Costs
0
(36,000)
Net income
$0
$ 3,000
$ 3,000
*15,000 X $2.60
(b) Contribution margin per unit would be $0.80 and would increase profits by $1,600. This
special order would not bring on a need for an added shift and should, therefore, be
accepted.
Unit profit $0.80
$1,600
Reject Order
Accept Order
Net Income
Increase (Decrease)
Revenues
$0
$6,200*
$6,200
Costs
0
4,600**
(4,600)
Net income
$0
$1,600
$1,600
(c) Accepting both special orders would increase net income by $4,600. Currently,
Part 2
(a) The cost to make the units is $460,000 ($1.00 X 460,000 units).
The cost to purchase the units is $377,200 ($0.82 X 460,000).
However, the fixed cost that cannot be eliminated by buying the units amounts to
$92,000 ($0.20 X 460,000). The total cost of purchasing exceeds the total cost of
making by $9,200. The company should continue to make the fitting.
Income
Change
Make
Buy
Make Part
Buy Part
Net Income
Increase (Decrease)
Variable costs ($1.00 – 0.20)
$368,000*
$ 0
$ 368,000
Fixed costs ($0.20)
92,000**
92,000
0
Purchase price ($0.82)
$460,000
(b) (1) The opportunity cost is $1,380.
Cost of buying timer $ 6,330 (500 X $12.66)
(2) If Waterways adds that amount to the cost of making the small fitting, it still does not
bring the cost up to the total cost of buying the unit. Therefore, the company would
still be better off to make the small fittings and buy the timing units.
Make Part
Buy Part
Net Income
Increase (Decrease)
Variable costs ($1.00 – 0.20)
$368,000
$ 0
$ 368,000
Fixed costs ($0.20)
92,000
92,000
0
Part 3
Replacing the machine will result in a net loss. Waterways should keep the old machine for the
2 years remaining.
Retain
Machine
Replace
Machine
Net Income
Increase (Decrease)
Revenues
$442,000***
Production costs
New machine cost
$ (3,000)
*$8.50 X 50 units per day X 260 days X 2 years
**$6.50 X 50 units per day X 260 days X 2 years
Retain
Machine
Replace
Machine
Income
Change
Profits from machine for 2 years
$52,000*
$104,000
$ 52,000
Cost of new machine
$ (3,000)
Purchase price ($0.82)
(377,200)
$460,000
$ (9,200)
Opportunity cost
Total cost
$461,380
$ (7,820)