Brief Exercise 118
Temple, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Temple for $350 each. Temple needs 500 clocks annually. Temple has provided the following unit costs for its commercial clocks:
Direct materials $ 70
Direct labour 80
Variable overhead 75
Fixed overhead (30% avoidable) 120
Prepare an incremental analysis which shows the effect of the make or buy decision.
Solution Brief Exercise 118
Net cost savings if commercial clock are bought $ 44,500
Brief Exercise 119
Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 1,000 baskets in production each month. The costs of making one basket is $7 for direct materials, $5 for variable manufacturing overhead, $4 for direct labour and $8 for fixed manufacturing overhead. The unit cost is based on the monthly production of 1,000 baskets. The company determined that 25% of the fixed manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $15 each, and can supply all the units it needs.
Prepare an incremental analysis to determine if Calc should buy the component from the supplier.
Solution Brief Exercise 119
Incremental cost to buy (1,000 x $15) ($15,000) Incremental cost savings:
DM ($7 x 1,000) +7,000
VOH ($5 x 1,000) +5,000
DL ($4 x 1,000) +4,000
FOH ($8 x 25% x 1,000) +2,000
Total savings to buy ($3,000)
OR
Make Buy
Incremental cost to buy (1,000 x $15) $15,000
Incremental costs to make: DM ($7 x 1,000) $7,000
VOH ($5 x 1,000) 5,000
DL ($4 x 1,000) 4,000
FOH 8,000 6,000
Incremental cost to buy $24,000 $21,000
Brief Exercise 120
Signa Corporation currently manufactures 17,000 staplers annually for its main product. The costs per stapler are as follows:
Direct materials $ 2.50
Direct labour 7.50
Variable overhead 3.00 Fixed overhead 8.00
Total $21.00
Darsel Company has contacted Signa with an offer to sell it 17,000 staplers for $19.00 each. $6 of the fixed overhead per unit is unavoidable. Prepare an incremental analysis for the make or buy decision.
Solution Brief Exercise 120
Incremental cost to buy ($19.00 x 17,000 staplers) ($323,000)
Incremental savings on direct materials ($2.50 x 17,000) +42,500 Incremental savings on direct labour ($7.50 x 17,000) +127,500
Incremental savings on variable MOH ($3.00 x 17,000) +51,000
Incremental savings on fixed MOH ([$8.00 - $6.00] x 17,000) +34,000
Incremental net cost to buy ($68,000)
Brief Exercise 121
Parrino has three product lines in its retail stores: books, DVDs, and music. The allocated fixed costs are based on revenue and are unavoidable. Results of the fourth quarter are presented below:
Books Music DVDs Total
Units sold 750 1,000 1,200 2,950
Revenue $22,500 $15,000 $9,600 $47,10
0 Variable departmental costs 12,000 8,000 5,000 25,000
Direct fixed costs 4,000 3,000 4,500 11,500
Allocated fixed costs 4,777 3,185 2,038
10,000
Net income (loss) $ 1,723 $815 ($1,938) $600
Demand of individual products is not affected by changes in other product lines. Prepare an incremental analysis of the effect of dropping the DVDs product line.
Solution Brief Exercise 121
Incremental revenue ($9,600)
Incremental savings on variable costs +5,000
Incremental savings on direct fixed costs +4,500 Incremental cost/decrease in profit to drop video line ($100)
Brief Exercise 122
Crisp has 4 product lines: sour cream, ice cream, yogurt, and butter. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are allocated.
Results of June follow:
Sour Cream
Ice
Cream Yogurt Butter Total
Units sold 2,000 500 400 200 3,100
Revenue $10,000 $20,000 $10,000 $20,000 $60,000
Variable departmental costs 6,000 13,000 4,200 4,800 28,000 Fixed costs 5,000 2,000 3,000 7,000 17,000 Net income (loss) ($1,000) $5,000 $2,800 $8,200 $15,000 Prepare an incremental analysis of the effect of dropping the sour cream product line.
Solution Brief Exercise 122
Incremental revenue ($10,000)
Incremental variable cost savings +6,000
Incremental fixed cost savings ($5,000 x .40) +2,000 Incremental decrease in profits if dropped
($2,000)
Brief Exercise 123
Sam Company makes 2 products, footballs and baseballs. Additional information follows:
Football s
Baseball s
Units 2,000 3,000
Sales $60,000 $25,000
Variable costs 24,000 13,750
Fixed costs 10,000 5,250
Net income $26,000 $6,000
Metres of leather per unit 1.25 0.25
Profit per unit $13.00 $2.00
Contribution margin per unit $18.00 $3.75
Assume that Sam is able to order an additional 2,000 metres of leather and wishes to maximize its income. Of the additional units it produces, at least 300 of each product are necessary for sales. How many units of each must be produced?
Solution Brief Exercise 123
Footballs Baseballs
Contribution margin per metre $18/1.25 = $14.40 $3.75/.25 = $15 Produce more baseballs since CM per constraint is more.
Footballs Baseballs
Minimum: 300 x 1.25 metre. = 375 metre. 300 footballs
Yards remaining for baseballs:
2,000 - 375 = 1,625 metres .
# of baseballs: 1,625/.25 metre = 6,500 baseballs
Brief Exercise 124
Hernandez, Inc. manufactures 5 models of picture frames, for a total of 12,000 frames per year.
The unit cost to produce a metal frame follows:
Direct Materials $ 4
Direct Labour 5
Variable Overhead 1
Fixed Overhead (60% unavoidable) 6
Total $16
A local company has offered to supply Hernandez the 12,000 metal frames it needs for $12 each.
Create an incremental analysis for the make or buy decision.
Solution Brief Exercise 124 Incremental cost to buy
($144,000) Incremental savings:
Direct materials savings +$48,000
Direct labour savings +60,000
Variable overhead savings +12,000
Fixed overhead savings - avoidable portion +28,800 Incremental savings if 'buy' decision is made $4,800
Brief Exercise 125
Myrna’s Mowing Ltd. cuts lawns. It has a riding lawnmower with a book value of $5,000, and a remaining useful life of 5 years. A new, more efficient lawnmower is available with a cost of
$15,000. The useful life of the new machine is also expected to be 5 years. Myrna estimates that the new machine will allow her to cut more lawns, and therefore increase revenue from $20,000 per year to $22,000, and reduce variable costs from $12,000 per year to $10,500. Prepare an analysis showing whether Myrna should retain the old mower, or buy new.
Solution Brief Exercise 125
Variable manufacturing costs (60,000) (52,500) 7,500
New machine cost (15,000)
Net savings over 5 years
$ 2,500
*For 5 years
Brief Exercise 126
Jamie has been accepted to a university in a city far from her home. She will need to rent an apartment, and has two choices. The first choice cost $1,000 per month, and is within walking distance of the university. The second apartment costs $925 per month, but Jamie will have to buy a bus pass in order to get to the university. The pass costs $100 per month. Jamie has been hired to work part time at a job that is a bus ride away from both apartments.
Identify which costs are relevant in the incremental analysis. What other factors should be considered?
Solution Brief Exercise 126
Since Jamie will have to buy a bus pass in both cases in order to get to her job, the $100 cost of the pass is not relevant. Accordingly, the only relevant costs given are the rent. The second apartment is $75 cheaper than the first, and therefore strictly from a cost perspective is the better choice. Other factors that need to be considered are the amount of time spent commuting, and how Jamie could use that time, and Jamie’s preference of which apartment she likes better.
Brief Exercise 127
Gladiator Company provided the following information concerning two products:
Contribution margin per unit – Product 12 $22 Contribution margin per unit – Product 43 $15 Machine hours required for one unit – Product 12 2.5 hours Machine hours required for one unit – Product 43 1.5 hours
Calculate the contribution margin per unit of limited resource for each product. Which product should Gladiator tell its sales personnel to ‘push’ to customers?
Solution Brief Exercise 127 Product 12: $22/2.5 hours = $8.80 Product 43: $15/1.5 hours = $10
Sales personnel should push product 43.
Brief Exercise 128
McIntosh Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of which McIntosh has the capacity to produce. McIntosh will incur extra shipping costs of $1.25 per bear. Determine the incremental income or loss that McIntosh Enterprises would realize by accepting the special order.
Solution Brief Exercise 128
Incremental revenue (8,000 x $14)
$112,000 Incremental variable costs ($12 x 8,000) (96,000) Incremental shipping costs ($1.25 x 8,000) (10,000) Incremental profit if special order accepted $6,000
Brief Exercise 129
Chuckie’s Chunks produces fudge candy. It costs $.0.20 to make each box in which the fudge is packaged. Of this cost, $0.12 is variable and $0.08 is fixed. A supplier offers to make the boxes for the fudge for $0.15 each. If the offer is accepted, Chuckie’s will save all variable costs but no
fixed costs. Chuckie’s uses 2,000 boxes per year. Prepare an incremental analysis showing the total effect on costs if the boxes are bought instead of manufactured.
Solution Brief Exercise 129
Incremental cost to buy (2,000 x $0.15)
($300) Incremental variable costs (2,000 x $0.12) 240
Incremental cost of buying ($ 60)
Brief Exercise 130
Harmark has three product lines in its retail stores: kites, wind socks, and flags. Results of the fourth quarter are presented below:
Kites Wind Socks Flags Total
Units sold 1,000 2,000 2,000 5,000
Revenue $22,000 $40,000 $23,000 $85,000
Variable departmental costs 15,000 22,000 12,000 49,000
Direct fixed costs 1,000 3,000 2,000 6,000
Allocated fixed costs 8,000 8,000 8,000 24,000
Net income (loss) ($2,000) $ 7,000 $ 1,000 $ 6,000
The allocated fixed costs are unavoidable. Demand of individual products is not affected by changes in other product lines. What will happen to profits if Harmark discontinues the ‘Kites’
product line?
Solution Brief Exercise 130
Incremental revenue ($22,000)
Incremental costs:
Variable costs savings +15,000 Direct fixed costs savings +1,000 Drop in profits if discontinued ($6,000)
Brief Exercise 131
Wood Chuck Furniture currently manufactures rocking chairs as its main product. Each chair uses one seat cushion and one back cushion with the following costs per set of cushions (one seat and one back):
Direct materials $ 1.00
Direct labour 10.00
Variable overhead 5.00
Fixed overhead 8.00
Total $24.00
Sherpert Company has contacted Wood Chuck with an offer to sell it 5,000 of sets of cushions for
$18.00 each. If Wood Chuck makes the cushions, $5 of the fixed overhead per unit will be allocated to other products. Should Wood Chuck make or buy the cushions?
Solution Exercise 131
Cost to make − costs to buy = incremental cost ($24 − $3) − $18 = $3 = incremental cost per set Incremental cost to make = $3 x 5,000 units = $15,000 Wood Chuck should buy to save $3 per set.
Brief Exercise 132
Cluck Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or the chickens can be slaughtered in house and then sold for $2.25 each. It costs $55,000 more to turn the annual chicken crop into chicken meat. If Cluck Farms slaughters the chickens, how much is incremental profit or loss? What should Cluck Farms do?
Solution Brief Exercise 132
Incremental revenues: ($2.25 - $1.00) x 60,000 chickens = $75,000 Incremental costs: given as $55,000
Incremental profits: $75,000 - $55,000 = $20,000 profit Cluck Farms should slaughter.
Brief Exercise 133
Dolls R Us sells three products in its retail stores: baby dolls, teenage dolls, and plush dolls.
Results of the 4th quarter are below:
Baby Dolls Teenage Plush Total
Units sold 1,000 2,000 2,000 5,000
Revenue $31,000 $43,000 $26,000 $100,000
Variable departmental costs 22,000 24,000 13,000 59,000
Direct fixed costs 5,000 4,000 3,000 12,000
Allocated fixed costs 6,000 7,000 7,000 20,000
Net income ($2,000) $ 8,000 $ 3,000 $ 9,000
Demand of individual products is not affected by changes in other product lines. Prepare an incremental analysis to determine if baby dolls should be discontinued.
Solution Brief Exercise 133
Incremental revenue ($31,000)
Incremental costs:
Variable costs savings +22,000
Direct fixed costs savings +5,000 Drop in profits if discontinued ($4,000)
Brief Exercise 134
The Compressed Air Company makes scuba tanks. The tanks have a regulator that requires the company to make a special valve. The cost to make this valve is as follows:
Direct materials $ 7.50
Direct labour 3.25
Variable manufacturing overhead 2.10 Fixed manufacturing overhead 1.10 Unit product cost $13.95
The company makes 10,000 tanks every year. An outside supplier has offered to sell the company the same valve at a cost of $12.50 per unit. By purchasing the valve the company will eliminate half of its fixed manufacturing overhead.
Calculate the relevant costs the company should consider before making the decision to purchase the valve from the outside supplier
Solution Brief Exercise 134
$13.95 x ($1.10 x ½) = $13.40
(Only half of the fixed manufacturing overhead is avoided. Therefore all other costs are relevant)
Brief Exercise 135
Winslow Industries makes large waste storage bins and sells them for $150 each. The manufacturing cost of each bin is as follows:
Direct material $50
Direct labour $40
Manufacturing overhead $20
The manufacturing overhead is 80% variable and 20% fixed. The company receives an order for 1,000 bins which will cost an additional $10 in shipping costs per bin. The company has sufficient excess capacity to produce the order.
Required:
Calculate the minimum price that Winslow should charge for each bin.
Solution Brief Exercise 135
Direct material $50
Direct labour 40
Manufacturing overhead ($20 x .8) 16
Shipping costs 10
Minimum selling price 116
EXERCISES
Exercise 136
Anheiser has three divisions: Bud, Wise, and Er. The results of May, 2012 are presented below:
Bud Wise Er Total
Units sold 5,000 7,000 4,000 16,000
Revenue $80,000 $60,000 $30,000 $170,000
Less variable costs 37,000 42,000 14,000 93,000 Less direct fixed costs 15,000 25,000 13,000 53,000 Less allocated fixed costs 3,125 4,375 2,500 10,000
Net income $24,875 ($11,375) $ 500 $14,000
All of the allocated costs will continue even if a division is discontinued. Anheiser allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Anheiser feels that it should be discontinued. Anheiser feels if the division is closed, that sales at the Bud division will increase by 30%, and that sales at the Er division will stay the same.
Instructions
a. Prepare an analysis showing the effect of discontinuing the Wise division.
b. Should Anheiser close the Wise division? Briefly indicate why or why not.
Solution Exercise 136 (10–12 min.)
Revenue = $80,000 x 130% = $104,000 Variable costs = $37,000 x 130% = $48,100 Allocation of total allocated fixed costs of $25,000:
To Bud: 6,500/(6,500 + 4,000) x $25,000 = $15,500 To Er: 4,000/(6,500 + 4,000) x $25,000 = $9,500
b. Yes. The profit increases by $4,900 ($18,900 - $14,000) when the division is eliminated.
Direct fixed costs and variable costs for the Wise division were relatively high compared to those for the Bud and Er divisions. The increase in sales by 30% of the Bud division was enough to offset the loss of the Wise division.
Exercise 137
Beyonce Company sells two items, peanuts and soybeans. The company is considering dropping soybeans. It is expected that sales of peanuts will increase by 30% as a result. Dropping
soybeans will allow the company to cancel its monthly rental of its bean shucker costing $50 a month. The other existing equipment will be used for additional production of peanuts. One
employee earning $2,000 per month can be terminated if soybean production is dropped.
Beyonce’s other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products is below:
Total Soybean
s Peanuts
Sales $40,00
0 $10,000 $30,000
Food materials 14,000 4,000 10,000
Direct labour 12,000 3,000 9,000
Equipment rental 1,600 700 900
Other allocated overhead 2,950 2,000 950 Operating income $9,450 $ 300 $9,150 Instructions
Prepare an incremental analysis to determine the financial effect of dropping soybean production.
Solution Exercise 137 (10–12 min.) Beyonce Company
Incremental Analysis
Incremental change in revenue:
Increase in peanut sales: $30,000 x 30% +$9,000
Decrease in soybean sales (10,000
)
Incremental decrease in revenue ($1,000)
Incremental change in variable costs:
Food materials: Increase in peanut costs: $10,000 x 30% (3,000) Decrease in soybean costs +4,000 Direct labour: Increase in peanut labour: $9,000 x 30% (2,700) Decrease in soybean labour +3,000
Incremental decrease in variable costs +1,300
Equipment rental reduction - soybean shucker +50 Incremental increase in profits if soybean production is dropped ($350)
Exercise 138
Turner, Inc. budgeted 10,000 widgets for production during 2012. Turner has capacity to produce 15,000 units. Fixed factory overhead is allocated using ABC. The following estimated costs were provided:
Direct material ($8/unit) $ 80,000
Direct labour ($20/hr. x 3 hrs./unit) 600,000 Variable manufacturing overhead ($5/unit) 50,000 Fixed factory overhead costs ($2/unit) 20,000
Total $750,000 Cost per unit = $75.00
Instructions
Answer each of the following independent questions:
a. Turner received an order for 3,000 units from a new customer in a country in which Turner has never done business. This customer has offered $73.50 per widget. Should Turner accept the order?
b. Turner received an offer from another company to manufacture the same quality widgets for
$72.50. Should Turner let someone else manufacture all 10,000 widgets and focus only on distribution?
Solution Exercise 138 (10–12 min.) a. Yes, it can make $1,500.
Incremental revenue per widget $73.50
Incremental cost per widget:
$8 + ($20 x 3) + $5 = 73.00
Incremental profit per unit $ 0.50
Total incremental profit = $0.50 x 3,000 = $1,500
b. Yes, Turner will save $5,000 if they are bought instead of made.
Cost to buy per widget $72.50
Cost to make per widget:
$8 + ($20 x 3) + $5 = 73.00 Incremental savings per widget if purchased $ 0.50 Total incremental savings if purchased = $0.50 x 10,000 = $5,000
Exercise 139
Paulsen Company produced and sold 7,000 units of product and is operating at 70% of plant capacity. Unit information about its product is as follows:
Sales Price $40
Variable manufacturing cost $25
Fixed manufacturing cost ($35,000 ÷ 7,000) 5 30
Profit per unit $10
The company received a proposal from a foreign company to buy 500 units of Paulsen
Company's product for $28 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of Paulsen Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. All fixed costs are allocated to individual products.
Instructions
Prepare a schedule reflecting an incremental analysis of this proposal. Indicate the effect the acceptance of this order might have on the company's income.
Solution Exercise 139 (7–9 min.) Paulsen Company
Incremental Analysis
Proposal to buy 500 units at $28
Net Income Reject Order Accept Order Increase (Decrease)
Revenues (500 × $28) $ -0- $ 14,000 $14,000
Variable costs (500 × $25) -0- (12,500) (12,500)
Net Income $ 1,500
Paulsen Company would increase its income by $1,500 in accepting the special order.
Exercise 140
Smooth Brew manufactures cappuccino makers. For the first eight months of 2012, the company reported the following operating results while operating at 80% of plant capacity:
Sales (120,000 units) $6,000,000 Cost of goods sold 3,600,000
Gross profit 2,400,000
Operating expenses 1,800,000
Net income $ 600,000
An analysis of costs and expenses reveals that variable cost of goods sold is $25 per unit and variable operating expenses are $10 per unit.
In September, Smooth Brew received a special order for 5,000 machines at $40 each from a major coffee shop franchise. Acceptance of the order would result in $2,000 of shipping costs but no increase in fixed expenses.
Instructions
a. Prepare an incremental analysis for the special order.
b. Should Smooth Brew accept the special order? Justify your answer.
Solution Exercise 140 (10–12 min.)
a. Net Income
Reject Order Accept Order Increase (Decrease)
Revenues $ -0- $200,000 $200,000
Cost of Goods Sold -0- 125,000* (125,000)
Operating Expense -0- 52,000** (52,000)
Net Income $ -0- $ 23,000 $ 23,000
*Variable cost of goods sold = 5,000 × $25 = $125,000
**Variable operating expenses = 5,000 × $10 = $50,000 + $2,000 = $52,000
b. The incremental analysis shows that Smooth Brew should accept the special order because incremental revenues exceed incremental costs. This recommendation assumes that
acceptance of the special order will not affect relations with existing customers.
Exercise 141
Vincent Company supplies schools with floor mattresses to use in physical education classes.
Vincent has received a special order from a large school district to buy 500 mats at $40 each.
Acceptance of the special order will not affect fixed costs but will result in $800 of shipping costs.
For the first 6 months of 2012, the company reported the following operating results while operating at 80% capacity:
Sales (25,000 units) $1,250,000
Cost of goods sold 980,000
Gross profit 270,000
Operating expenses 170,000
Net income $ 100,000
Cost of goods sold was 80% variable and 20% fixed; operating expenses were 70% variable and 30% fixed.
Instructions
a. Prepare an incremental analysis for the special order.
b. Should Vincent Company accept the special order? Justify your answer.
Solution Exercise 141 (10–12 min.)
a. Net Income
Reject Order Accept Order Increase (Decrease)
Revenues $ -0- $20,000 $20,000
Cost of Goods Sold -0- 15,680 (15,680)
Operating Expense -0- 3,180 (3,180)
Net Income $ -0- $ 1,140 $1,140
Variable cost of goods sold = $980,000 × 80% = $784,000
Variable cost of goods sold per unit = $784,000 ÷ 25,000 = $31.36
Variable cost of goods sold for the special order = 500 × $31.36 = $15,680 Variable operating expenses = $170,000 × 70% = $119,000
Variable operating expenses per unit = $119,000 ÷ 25,000 = $4.76
Variable operating expenses for the special order = 500 × $4.76 = $2,380 + $800 = $3,180 b. The incremental analysis shows Vincent Company should accept the special order because
incremental revenues exceed incremental costs.
Exercise 142
Johnson Motors manufactured 500 gears that are used in its motors and incurred the following costs:
Direct materials $50,000
Direct labour 19,000
Variable manufacturing overhead 30,000 Fixed manufacturing overhead 20,000
$119,000
A supplier has offered to sell the gears to Johnson for $200 each. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the gears were purchased from the outside firm. If the gears are purchased from the supplier, Johnson has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $3,000.
Instructions
Prepare an incremental analysis report for Johnson Motors which can serve as informational input into this make or buy decision.
Solution Exercise 142 (10–12 min.)
Make Buy Increase (Decrease)
Direct materials $ 50,000 $ -0- $ 50,000
Direct labour 19,000 -0- 19,000
Variable manufacturing overhead 30,000 -0- 30,000
Fixed manufacturing overhead 20,000 20,000
-0-Purchase price (500 × $200) -0- 100,000 (100,000)
Total annual cost 119,000 120,000 (1,000)
Opportunity cost 3,000 -0- 3,000
Total cost $122,000 $120,000 $ 2,000
Income is expected to increase by $2,000 if the component part is purchased from the outside
Income is expected to increase by $2,000 if the component part is purchased from the outside