CHAPTER 7
SOLUTIONS TO PROBLEMS: SET B
PROBLEM 7-1B
(a)
Reject
Order
Accept
Order
Net Income
Increase
(Decrease)
Revenues (10,000 X $30)
Cost of goods sold
$0
0
$300,000
240,000
$ 300,000
( (240,000)
(1) Variable costs = $3,060,000 – $900,000 = $2,160,000;
(2) Variable costs = $360,000 – $180,000 = $180,000;
(b) Yes, the special order should be accepted because net income will be
(c) Unit selling price = $24 (variable manufacturing costs) + $2.50 (variable
(d) Nonquantitative factors to be considered are: (1) possible effect on
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)
$23,750
23,000
2,250
$ 0
0
0
($ 23,750
( 23,000
( 2,250
(b) The company should continue to make FIZBE because net income
(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)
(d) Nonfinancial factors include: (1) the adverse effect on employees
if FIZBE is purchased, (2) how long the supplier will be able to satisfy
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
(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
Additional costs for ShineBrite
140,000
Total costs
Gross profit
$210,000
(3) If the general-purpose cleaner is processed further overall company
profits will be $10,000 higher. Therefore, management made the
Costs
NPR
200,000
Additional costs for ShineBrite
300,000
Gross profit
$200,000
PROBLEM 7-3B (Continued)
(b)
Don’t Process
G-P Cleaner
Further
Process
G-P Cleaner
Further
Net Income
Increase
(Decrease)
PROBLEM 7-4B
(a)
Cost
$210,000
Accumulated depreciation
(42,000*)
Book value
168,000
Sales proceeds
Loss on sale
(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
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
Depreciation
Operating income
Less: Loss on old equipment
Net income
(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
equipment
58,000
PROBLEM 7-4B (Continued)
(d) MEMO
TO: Gene Simmons
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
$110,000 loss that would be experienced if we replace the old equipment
PROBLEM 7-5B
(a)
Division
III
Division
IV
Sales
Variable expenses
Cost of goods sold
$310,000
189,000
$170,000
140,400
(b)
(1)
Division III
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
Cost of goods sold
$ 76,000
81,000
$ 0
(40,500
$(76,000)
40,500
(2)
Division IV
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
Cost of goods sold
$(19,400)
(15,600)
$ 0
7,800
$19,400
7,800
Division III should be continued as contribution margin ($76,000) is
greater than the savings in fixed costs ($55,500) that would result from
PROBLEM 7-5B (Continued)
(c) PANDA 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
administrative
Total variable
$510,000
210,000
24,000
$400,000
200,000
40,000
$310,000
189,000
45,000
$1,220,000
599,000
109,000
(1) Division’s fixed cost of goods sold plus 1/3 of Division IV’s unavoid-
able fixed cost of goods sold [$156,000 X (100% – 90%) X 50% =
(2) Division’s fixed selling and administrative expenses plus 1/3 of
Division IV’s unavoidable fixed selling and administrative expenses
(d) Income from operations with Division IV of $129,000 (given) plus incre-