managerial accounting

Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only) 7-5

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7-1

The correct order is:

1. Identify the problem and assign responsibility.2. Determine and evaluate possible courses of action.3. Make a decision.4. Review results of the decision.

BRIEF EXERCISE 7-2

AlternativeA

AlternativeB

Net IncomeIncrease

(Decrease)

RevenuesCostsNet income

$150,000 100,000$ 50,000

$185,000 125,000$ 60,000

($ 35,000) (25,000)$ 10,000

Alternative B is better than Alternative A.

BRIEF EXERCISE 7-3

RejectOrder

AcceptOrder

Net IncomeIncrease

(Decrease)

RevenuesCosts—Variable manufacturing

ShippingNet income

$0 0 0$0

$72,000 60,000 6,000$ 6,000

******

($ 72,000)( (60,000)( (6,000)($ 6,000)

The special order should be accepted.

*3,000 X $24**3,000 X $20

***3,000 X $ 2

nida

Stamp

7-6 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 7-4

Make Buy

Net IncomeIncrease

(Decrease)

Variable manufacturing costsFixed manufacturing costsPurchase price

Total annual cost

$45,000 30,000 –0– $75,000

$ –0– 30,000 50,000$80,000

$ 45,000 0 (50,000)

($ (5,000)

The decision should be to make the part.

BRIEF EXERCISE 7-5

SellProcessFurther

Net IncomeIncrease (Decrease)

Sales price per unitCost per unit

VariableFixed

TotalNet income per unit

$60.00

35.00 10.00 45.00$15.00

$70.00

43.00 10.00 53.00$17.00

$10.00

( (8.00) 0

( (8.00)$ 2.00

The bookcases should be processed further because the incrementalrevenues exceed incremental costs by $2.00 per unit.

BRIEF EXERCISE 7-6

The allocated joint costs are irrelevant to the sell or process furtherdecisions. If AB1 is processed further, the company will earn incrementalrevenue of $60,000 ($150,000 – $90,000) and only incur incremental costs of$50,000. Therefore, the company should process AB1 further and sell AB2.If XY1 is processed further, the company will earn incremental revenue of$40,000 ($130,000 – $90,000) but will incur incremental costs of $50,000.Therefore, the company should sell XY1 rather than process it further.


BRIEF EXERCISE 7-7

RetainEquipment

ReplaceEquipment

Net 4-YearIncomeIncrease

(Decrease)

Variable manufacturing costs for 4 yearsNew machine cost

Total

$2,400,00000,000,000$2,400,000

$2,000,000 250,000$2,250,000

($ 400,000)( (250,000)($ 150,000)

The old factory machine should be replaced.

BRIEF EXERCISE 7-8

Continue EliminateNet Income

Increase (Decrease)

SalesVariable costsContribution marginFixed costsNet income

$200,000 175,000 25,000 30,000($ (5,000)

$ –0– –0– ( –0– 20,000)$(20,000)

$(200,000) (175,000) (25,000) ( 10,000)$ (15,000)

The Big Bart product line should be continued because $25,000 of contribu-tion margin will not be realized if the line is eliminated. This amount isgreater than the $10,000 savings of fixed costs.

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 7-1

Reject AcceptNet Income

Increase (Decrease)Revenues $ –0– $186,000 $186,000Costs $ –0– 132,000* (132,000)Net income $ –0– $ 54,000 $ 54,000

*(6,000 X $20) + (6,000 X $2)

Given the results of the above analysis, Corn Company should accept thespecial order.


DO IT! 7-2

(a)

Make BuyNet Income

Increase (Decrease)Direct materials $ 30,000 $ –0– $ 30,000Direct labor 42,000 –0– 42,000Variable manufacturing costs 45,000 –0– 45,000Fixed manufacturing costs 60,000 40,000 20,000Purchase price –0– 165,000 (165,000)Total cost $177,000 $205,000 $ (28,000)

Given the results of the above analysis, Barney Company will incur$28,000 of additional costs if it buys the switches.

(b)

Make BuyNet Income

Increase (Decrease)Total Cost $177,000 $205,000 $(28,000)Opportunity cost 30,000 –0– 30,000Total cost $207,000 $205,000 $ 2,000

Yes, the answer is different: The analysis shows that net income willbe increased by $2,000 if Barney Company purchases the switches.

DO IT! 7-3

SellProcessFurther Net Inc/Dec

Sales per unitCost per unit

VariableFixed

Total

Net income per unit

$75

$39 10$49

$26

$99

$57 13$70

$29

$24

($18) (3)

($21)

$ 3

The tables should be process further or La Mesa should finish the tablesbecause the incremental revenues exceed incremental costs by $3.00 perunit.


DO IT! 7-4

Continue EliminateNet Income

Increase (Decrease)Sales $500,000 $ 0 $(500,000)Variable costs 375,000 0 375,000Contribution margin 125,000 0 (125,000)Fixed costs 150,000 40,000 110,000Net income $ (25,000) $(40,000) $ (15,000)

The analysis indicates that Lion should not eliminate that gloves and mittensline because net income would decrease $15,000.


SOLUTIONS TO EXERCISES

EXERCISE 7-1

1. False. The first step in management’s decision-making process is “identifythe problem and assign responsibility”.

2. False. The final step in management’s decision-making process is toreview the results of the decision.

3. True.4. False. In making business decisions, management ordinarily considers

both financial and nonfinancial information.5. True.6. True.7. False. Costs that are the same under all alternative courses of action do

not affect the decision.8. False. When using incremental analysis, either costs or revenues or both

will change under alternative courses of action.9. False. Sometimes variable costs will not change under alternative courses

of action, but fixed costs will.

EXERCISE 7-2

(a) RejectOrder

AcceptOrder Net Income Effect

Revenues ($4.75)Materials ($0.50)Labor ($1.50)Variable overhead ($1.00)Fixed overheadSales commissionsNet income

$ –0– –0– –0– –0– –0– –0–$ –0–

$23,750 (2,500) (7,500) (5,000) (5,000) –0– $ 3,750

$23,750 (2,500) (7,500) (5,000) (5,000)

–0– $ 3,750

(b) As shown in the incremental analysis, Gruner should accept the specialorder because incremental revenue exceeds incremental expenses by$3,750.

(c) It is assumed that sales of the golf discs in other markets would not beaffected by this special order. If other sales were affected, Gruner wouldhave to consider the lost sales in making the decision. Second, if Gruneris operating at full capacity, it is likely that the special order would berejected.


EXERCISE 7-3

(a)RejectOrder

AcceptOrder

Net IncomeIncrease

(Decrease)

Revenues (15,000 X $7.50)Cost of goods soldOperating expensesNet income

$0 0 0$0

$112,500 75,000 29,250$ 8,250

(1) (2)

($112,500)( (75,000)( (29,250)($ 8,250)

(1) Variable cost of goods sold = $2,500,000 X 70% = $1,750,000.Variable cost of goods sold per unit = $1,750,000 ÷ 350,000 = $5.Variable cost of goods sold for the special order = $5 X 15,000

= $75,000.

(2) Variable operating expenses = $875,000 X 70% = $612,500$612,500 ÷ 350,000 = $1.75 per unit

15,000 X $1.75 = $26,250$26,250 + $3,000 = $29,250

(b) As shown in the incremental analysis, Shandling Company should acceptthe special order because incremental revenues exceed incrementalexpenses by $8,250.

EXERCISE 7-4

RejectOrder

Accept Order

Net IncomeIncrease

(Decrease)Revenues $0 $900,000 (1) $900,000Variable costs:

Direct materials 0 400,000 (400,000)Direct labor 0 100,000 (100,000)Variable overhead 0 200,000 (200,000)Total variable costs 0 700,000 (700,000)

Net income $0 $200,000 $200,000

(1) [($2.00 + $0.50 + $1.00 + $1.00) X 200,000]

Tough Fiber should accept the Army’s offer since it would increase netincome by $200,000.


EXERCISE 7-5

(a)

Make Buy

Net IncomeIncrease

(Decrease)

Direct materials (30,000 X $5.00)Direct labor (30,000 X $6.00)Variable manufacturing costs ($180,000 X 70%)Fixed manufacturing costsPurchase price (30,000 X $15.50)

Total annual cost

$150,000 180,000

126,000 45,000 0$501,000

$ 0 0

0 45,000 465,000$510,000

$ 150,000180,000

126,000 0

( (465,000)($ (9,000)

(b) No, Swayze Inc. should not purchase the shades. As indicated by theincremental analysis, it would cost the company $9,000 more to pur-chase the lamp shades.

(c) Yes, by purchasing the lamp shades, a total cost saving of $26,000 willresult as shown below.

Make Buy

Net IncomeIncrease

(Decrease)

Total annual cost (above)Opportunity costTotal cost

$501,000 35,000$536,000

$510,000 0$510,000

$ (9,000) (35,000)$(26,000)

EXERCISE 7-6

(a) 1.

Make Buy

Net IncomeIncrease

(Decrease) Direct materials $ 800,000 $ –0– $ 800,000Direct labor 600,000 –0– 600,000Variable overhead 120,000 –0– 120,000Fixed overhead 500,000 200,000 300,000Purchase price 0 1,800,000 (1,800,000)Total annual cost $2,020,000 $2,000,000 $ 20,000

Yes. The offer should be accepted as net income will increase by $20,000.


EXERCISE 7-6 (Continued)

2.

Make Buy

Net IncomeIncrease

(Decrease) Direct materials $ 800,000 $ 0 $ 800,000Direct labor 600,000 0 600,000Variable overhead 120,000 0 120,000Fixed overhead 500,000 500,000 0Opportunity cost 300,000 0 300,000Purchase price 0 1,800,000 (1,800,000)

Totals $2,320,000 $2,300,000 $ 20,000

Yes. The offer should be accepted as net income would be $20,000 more.

(b) Qualitative factors include the possibility of laying off those employeesthat produced the robot and the resulting poor morale of the remainingemployees, maintaining quality standards, and controlling the purchaseprice in the future.

EXERCISE 7-7

(a) Net IncomeIncrease

Make Sails Buy Sails (Decrease)Direct material $100 $ 0 $ 100Direct labor 80 0 80Variable overhead 40 0 40Purchase price 0 260 (260)Total unit cost $220 $260 $ (40)

Harmon should be making the sails, because they could save $40 perunit or $48,000. The president was including the fixed overhead costin the calculation. Variable overhead = Total overhead ($100) – Fixedoverhead ($72,000 ÷ 1,200) = $40. But this amount has been allocated,so Harmon will incur the cost whether or not they make the sails. Thisis an example of an irrelevant cost, because it does not differ betweenthe two alternatives.



(b) The best decision would be to rent out the space as shown below.The differential savings would be $80,000 – $48,000 = $32,000.

Net IncomePer Make Increase

(Based on 1,200 units) Unit Sails Buy Sails (Decrease) Manufacturing cost $220 $264,000 $ 0 $ 264,000Purchase price $260 0 312,000 (312,000)Opportunity cost 80,000 0 80,000Total annual cost $344,000 $312,000 $ 32,000

(c) Qualitative factors to consider would be (1) whether Harmon will beable to exercise control over the future price of the product (2) whetherHarmon will be able to exercise control over the quality of the productand (3) the potential for interruptions in the supply of the product.

EXERCISE 7-8

(a) Net IncomeIncrease

Make IMC2 Buy IMC2 (Decrease) Direct material $ 65.00 $ 0 $ 65.00Direct labor 48.00 0 48.00Material handling 6.50 0 6.50Variable overhead 60.00* 0 60.00Purchase price 0 200.00 (200.00)Total unit cost $179.50 $200.00 $ (20.50)

*Variable overhead = 50% X ($126.50 – 6.50)

The unit should not be purchased from the outside vendor, as the perunit cost would be $20.50 greater than if they made it.



(b) In order for Interdesign to make an accurate decision, they wouldhave to know the opportunity cost of manufacturing the other product.As determined in (a), purchasing the product from outside would cost$20,500 more (1,000 X $20.50). Interdesign would have to increase theircontribution margin by more than $20,500 through the manufacture ofthe other product, before it would be economical for them to purchasethe IMC2 from the outside vendor.

(c) Qualitative factors to consider would be (1) quality of the component(2) on-time delivery, and (3) reliability of the vendor.

EXERCISE 7-9

Sell(Basic Kit)

Process Further(Stage 2 Kit)

Net IncomeIncrease

(Decrease)

Sales per unitCosts per unit

Direct materialsDirect labor

Total

Net income per unit

$28

$14 0$14

$14

( )$35( )

( ) $ 7 (1)( ) 10 (2)( ) $17 ( )

( ) $18 ( )

$ (7)

$ (7) (10)$ (3)

$ (4)

(1) The cost of materials decreases because Lori can make two Stage2 Kits from the materials for a basic kit.

(2) The total time to make the two kits is one hour at $20 per hour or$10 per unit.



Lori should carry the Stage 2 Kits. The incremental revenue, $7, exceedsthe incremental processing costs, $3. Thus, net income will increase byprocessing the kits further.

EXERCISE 7-10

(a) Sales ($50,000 + $10,000 + $60,000) $120,000Joint costs 100,000Net income $ 20,000

(b) Sales ($190,000 + $35,000 + $220,000) $ 445,000Joint costs (100,000)Additional costs ($100,000 + $30,000 + $150,000) (280,000)Net income $ 65,000

(c)Product 12 Product 14 Product 16

Incremental revenue(1) $ 140,000 $ 25,000 $ 160,000Incremental costs (100,000) (30,000) (150,000)Incremental profit (loss) $ 40,000 $ (5,000) $ 10,000

(1)Sales value after further processing – Sales value @ split-off point

Products 12 and 16 should be processed further and product 14 should besold at the split-off point.

(d) Sales ($190,000 + $10,000 + $220,000) $ 420,000Joint costs (100,000)Additional costs ($100,000 + $150,000) (250,000)Net income $ 70,000

Net income is $5,000 ($70,000 – $65,000) higher in (d) than in (b) becauseproduct 14 is not processed further, thereby increasing overall profit $5,000.


EXERCISE 7-11

To determine whether each of the three joint products should be sold as is,or processed further, we must determine the incremental profit or loss thatwould be earned by each. The allocated joint costs are irrelevant to thedecision since these costs will not change whether or not the products aresold as is or processed further.

Sarco Barco Larco

Incremental revenueIncremental costIncremental profit (loss)

$100,000* 120,000$ (20,000)

$100,000 89,000$ 11,000

** $400,000 250,000$150,000

***

From this analysis we see that Barco and Larco should be processedfurther because the incremental revenue exceeds the incremental costs,but Sarco should be sold as is.

*$300,000 – $200,000 **$400,000 – $300,000 ***$800,000 – $400,000

EXERCISE 7-12

(a) The costs that are relevant in this decision are the incremental revenuesand the incremental costs associated with processing the materialpast the split-off point. Any costs incurred up to the split-off point aresunk costs, and therefore, irrelevant to this decision.

(b) Revenue after further processing:Product A—$45,000 (3,000 units X $15.00 per unit)Product B—$97,200 (6,000 units X $16.20 per unit)Product C—$43,200 (2,000 units X $21.60 per unit)

Revenue at split-off:Product A—$30,000 (3,000 units X $10.00 per unit)Product B—$69,600 (6,000 units X $11.60 per unit)Product C—$38,800 (2,000 units X $19.40 per unit)

A B C Incremental revenue $15,000 $27,600 $ 4,400Incremental cost 14,000 16,000 9,000Increase (decrease) in profit $ 1,000 $11,600 $(4,600)

Products A and B should be processed further.

(c) The decision would remain the same. It does not matter how the jointcosts are allocated because joint costs are irrelevant to this decision.


EXERCISE 7-13

(a) Cost $100,000Accumulated depreciation 20,000*Book value 80,000Sales proceeds 30,000Loss on sale $ 50,000

*One year’s depreciation: ($100,000 – $0) ÷ 5 years

(b)

Retain Scanner

Replace Scanner

Net IncomeIncrease

(Decrease) Annual operating costs $420,000* $312,000** $ 108,000New scanner cost 120,000 (120,000)Old scanner salvage (30,000) 30,000

Total $420,000 $402,000 $ 18,000

*(4 years X $105,000)**[4 years X ($105,000 – $27,000)]

Yes. Kinnaird Hospital should replace the old scanner because it willresult in a savings of $18,000 over the next four years.

(c) As shown in (a) above, replacing the old scanner will result inreporting a loss of $50,000. Reluctance to report losses of this natureis the usual reason for not recognizing that a poor decision was madein the past. The remaining book value of the old scanner ($80,000) isa sunk cost. It will be deducted in the future, if the scanner is retained,or written off now if it is replaced. However, if it is replaced now, thatcost will be partially offset by the salvage value that Harmon iswilling to pay ($30,000).


EXERCISE 7-14

RetainMachine

ReplaceMachine

Net IncomeIncrease

(Decrease)

Operating costsNew machine costSalvage value (old)

Total

$120,000 0 0$120,000

(1) ($ 90,000)( 25,000)( (5,000)($110,000)

(2) ($ 30,000( (25,000)( 5,000)($ 10,000)

(1) $24,000 X 5.(2) $18,000 X 5.

The current machine should be replaced. The incremental analysis showsthat net income for the five-year period will be $10,000 higher by replacing thecurrent machine.

EXERCISE 7-15

Continue Eliminate

Net IncomeIncrease

(Decrease)SalesVariable costs

Cost of goods soldOperating expenses

Total variableContribution marginFixed costs

Cost of goods soldOperating expenses

Total fixedNet income (loss)

$100,000)

( 60,000) (25,000) (85,000) (15,000)

(16,500) (23,000) (39,500)$(24,500)

$( 0)

( 0) ( 0) ( 0) ( 0)

(16,500) (23,000) (39,500)$(39,500)

$(100,000)

(60,000) (25,000) (85,000) (15,000)

( 0) ( 0) ( 0)$ (15,000)

Mary is incorrect. The incremental analysis shows that net income will be$15,000 less if the Erie Division is eliminated. This amount equals thecontribution margin that would be lost through discontinuing the division.

(Note: None of the fixed costs can be avoided.)


EXERCISE 7-16

(a) $30,000 + $75,000 – $30,000 = $75,000

(b) Stunner Double-Set TotalSalesVariable expensesContribution marginFixed expensesNet income

$300,000 150,000 150,000

142,500*$ 7,500

$500,000 200,000 300,000 262,500**$ 37,500

$800,000 350,000 450,000 405,000$ 45,000

*$30,000 + [($300,000 ÷ $800,000) X $300,000]**$75,000 + [($500,000 ÷ $800,000) X $300,000]

(c) As shown in the analysis above, Nichols should not eliminate theMega-Power product line. Elimination of the line would cause net incometo drop from $75,000 to $45,000. The reason for this decrease in netincome is that elimination of the product line would result in the lossof $60,000 of contribution margin while saving only $30,000 of fixedexpenses.

EXERCISE 7-17

Calculation of contribution margin per unit:

A B C Selling price per unit $95 $78 $120Less: variable costs/unit 50 45 42Contribution margin/unit $45 $33 $ 78

Fixed costs = $22 X (8,000 + 20,000) = $616,000

Company profit with Products A and B:

A B Total Units sold 8,000 20,000

Sales revenue $760,000 $1,560,000 $2,320,000Less: Variable costs 400,000 900,000 $1,300,000Contribution margin $360,000 $ 660,000 1,020,000Less: Fixed costs 616,000Net profit $ 404,000



Company profit with Products A and C:

A C Total Units sold 8,800* 11,000

Sales Revenue $836,000 $1,320,000 $2,156,000Less: Variable costs 440,000 462,000 902,000Contribution margin $396,000 $ 858,000 1,254,000Less: Fixed costs 616,000Net profit $ 638,000

*Product A sales increase by 10%, (8,000 X 110%)

Yes they should introduce Product C since net profit would increase by$234,000 ($638,000 – $404,000).

EXERCISE 7-18

1. Irrelevant. Unavoidable costs will be incurred regardless of thedecision made.

2. Relevant.

3. Irrelevant. This is a sunk cost and all sunk costs are irrelevant.

4. Irrelevant. These are sunk costs.

5. Relevant.

6. Relevant.

7. Relevant.

8. Relevant.

9. Irrelevant. If there is no change in the direct materials charge regardlessof the decision made, the cost is irrelevant.

10. Relevant.


SOLUTIONS TO PROBLEMS

PROBLEM 7-1A

(a)RejectOrder

AcceptOrder

Net IncomeIncrease

(Decrease)

Revenues (10,000 X $28)Cost of goods soldSelling and administrative expensesNet income

$0 0

0$0

$280,000 224,000

25,000$ 31,000

(1)

(2)

$ 280,000( (224,000)

( (25,000)$ 31,000

(1) Variable costs = $3,600,000 – $1,080,000 = $2,520,000;$2,520,000 ÷ 112,500 units = $22.40 per unit;10,000 X $22.40 = $224,000.

(2) Variable costs = $450,000 – $225,000 = $225,000;$225,000 ÷ 112,500 units = $2.00 per unit;10,000 X ($2.00 + $0.50) = $25,000.

(b) Yes, the special order should be accepted because net income willincrease by $31,000.

(c) Unit selling price = $22.40 (variable manufacturing costs) + $2.50 variableselling and administrative expenses + $4.10 net income = $29.

(d) Nonfinancial factors to be considered are: (1) possible effect on domesticsales, (2) possible alternative uses of the unused plant capacity, and(3) ability to meet customer’s schedule for delivery without increasingcosts.


PROBLEM 7-2A

(a)

Make WISCO Buy WISCO

Net IncomeIncrease

(Decrease)

Direct materialDirect laborIndirect laborUtilitiesDepreciationProperty taxesInsurancePurchase priceFreight and inspectionReceiving costs

Total annual cost

$33,600 30,100 3,010 2,800 3,000 700 1,500 0 0 0$74,710

$ 0 0 0 0 900 200 600 70,000 2,800 1,250$75,750

($33,600)( 30,100)( 3,010)( 2,800)( 2,100)( 500)( 900)( (70,000)( (2,800)( (1,250)($ (1,040)

(b) The company should continue to make WISCO because net incomewould be $1,040 less if WISCO were purchased from the supplier.

(c) The decision would be different. Because of the opportunity cost of$5,000, net income will be $3,960 higher if WISCO is purchased asshown below:

Make WISCO Buy WISCO

Net IncomeIncrease

(Decrease)

Total annual costOpportunity costTotal cost

$74,710 5,000$79,710

$75,750 0$75,750

$(1,040) (5,000)$(3,960)

(d) Nonfinancial factors include: (1) the adverse effect on employees ifWISCO is purchased, (2) how long the supplier will be able to satisfythe Sherrer Manufacturing Company’s quality control standards at thequoted price per unit, and (3) whether the supplier will deliver the unitswhen they are needed by Sherrer.


PROBLEM 7-3A

(a) (1) Table Cleaner Not Processed Further

Sales:FloorShine (600,000 ÷ 30) X $20 $400,000Table Cleaner (300,000 ÷ 30) X $25 250,000

Total revenue $650,000Costs:

CDG 210,000Additional costs of FloorShine 250,000

Total costs 460,000Gross profit $190,000

(2) Table Cleaner Processed Further

Sales:FloorShine $400,000Table Stain Remover (300,000 ÷ 30) X $18 180,000Table Polish (300,000 ÷ 30) X $18 180,000

Total revenue $760,000Costs:

CDG 210,000Additional costs of FloorShine 250,000TCP 100,000

Total costs 560,000Gross profit $200,000

(3) If the table cleaner is processed further overall company profits willbe $10,000 higher. Therefore, management made the wrong decisionby choosing to not process table cleaner further.


PROBLEM 7-3A (Continued)

(b) Don’t ProcessTable Cleaner Further

ProcessTable Cleaner Further

Net IncomeIncrease

(Decrease) Incremental revenue $250,000 $360,000 $110,000Incremental costs 0 100,000 (100,000)

Totals $250,000 $260,000 $ 10,000

When trying to decide if the table cleaner should be processed further intoTSR and TP, only the relevant data need be considered. All of the costs thatoccurred prior to the creation of the table cleaner are sunk costs and canbe ignored. The decision should be made by comparing the incrementalrevenue from further processing to the incremental costs.


PROBLEM 7-4A

(a) Cost $120,000Accumulated depreciation 20,000*

Book value 100,000Sales proceeds (25,000)

Loss on sale $ 75,000

*$120,000 ÷ 6 years = $20,000

(b) (1) Retain Old ElevatorSales ($240,000 X 5 yrs.) $1,200,000Less costs:

Variable costs ($35,000 X 5) $175,000Fixed costs ($23,000 X 5) 115,000Selling & administrative 145,000*Depreciation 100,000 535,000

Net income $ 665,000

*($29,000 X 5)

(2) Replace Old ElevatorSales $1,200,000Less costs:

Variable costs ($12,000 X 5) $ 60,000Fixed costs ($8,400 X 5) 42,000Selling and administrative 145,000Depreciation 180,000 427,000

Operating income 773,000Less: Loss on old elevator 75,000Net income $ 698,000

(c)Retain

Old ElevatorReplace

Old Elevator

Net IncomeIncrease

(Decrease)Variable operating costs $175,000 $ 60,000 $ 115,000Fixed operating costs 115,000 42,000 73,000New elevator cost 180,000 (180,000)Salvage on old elevator . (25,000) 25,000

Totals $290,000 $257,000 $ 33,000



(d) MEMO

TO: Sam Solomon

FROM: Student

SUBJECT: Relevant Data for Decision to Replace Old Elevator

When deciding whether or not to replace any old equipment, the analysisshould only include cost data relevant to the replacement decision. The$75,000 loss that would be experienced if we replace the old elevator withthe newer model is related to a sunk cost, namely the cost of the oldelevator. Sunk costs are irrelevant in decision making.

The loss occurs when comparing the book value of the old elevator to thecash proceeds that would be received. The book value of $100,000 wouldbe deducted as depreciation expense over the next five years if the elevatorwere retained. If the elevator is replaced with the newer model the bookvalue will be expensed in the current year, less the cash proceeds receivedon disposal. Therefore, the $100,000 book value will be expensed undereither alternative, making it irrelevant.


PROBLEM 7-5A

(a) Division I Division II

SalesVariable costs

Cost of goods soldSelling and administrative

Total variable expensesContribution margin

$250,000

140,000 26,000 166,000

($ 84,000)

$200,000

170,100 42,000 212,100$ (12,100)

(b) (1)

Division I Continue Eliminate

Net IncomeIncrease

(Decrease)

Contribution margin (above)Fixed costs


Total fixed expensesIncome (loss) from operations

$(84,000)

(60,000) (39,000) (99,000)$(15,000)

$( 0)

(30,000) (19,500) (49,500)$(49,500)

$(84,000)

30,000 19,500 49,500$(34,500)

(2)

Division II Continue Eliminate

Net IncomeIncrease

(Decrease)

Contribution margin (above)Fixed costs


Total fixed expensesIncome (loss) from operations

$(12,100)

(18,900( 18,000( 36,900$(49,000)

$( 0)

( 9,450) ( 9,000) (18,450)$(18,450)

$12,100

( 9,450 ( 9,000 18,450$30,550

Division II should be eliminated as its negative contribution margin is$12,100. Income from operations would increase $30,550 if Division IIis eliminated.

Division I should be continued because it is producing positive con-tribution margin of $84,000. Income from operations will decrease$34,500 by discontinuing this division.



(c) MORENO MANUFACTURING COMPANYCVP Income Statement

For the Quarter Ended March 31, 2011

Divisions

I III IV Total

SalesVariable costs


Total variable costs

Contribution marginFixed costs

Cost of goods sold (1)Selling and administrative (2)

Total fixed costs

Income (loss) from operations

$250,000

140,000

26,000

166,000 84,000

63,150

42,000

105,150

$(21,150)

$500,000

240,000

30,000

270,000 230,000

63,150

33,000

96,150

$133,850

$400,000

187,500

30,000

217,500 182,500

65,650

23,000

88,650

$ 93,850

$1,150,000

567,500

86,000

653,500 496,500

191,950

98,000

289,950

$ 206,550

(1) Division’s fixed cost of goods sold plus 1/3 of Division II’sunavoidable fixed cost of goods sold [$189,000 X (100% – 90%) X50% = $9,450]. Each division’s share is $3,150.

(2) Division’s fixed selling and administrative expense plus 1/3 ofDivision II’s unavoidable fixed selling and administrative expenses[$60,000 X (100% – 70%) X 50% = $9,000]. Each division’s shareis $3,000.

(d) Income from operations with Division II of $176,000 (given) plusincremental income of $30,550 from eliminating Division II = $206,550income from operations without Division II.

Documents

managerial accounting