Study Probes

7/23/2019 Study Probes

1/64

Study Probes - Chapters 20

Problem 1 Tenchavez Company makes and sells 12,000 pairs of running shoes each year. The costof making one pair of these shoes is

Direct material $ 11

aria!le manufacturing overhead "

Direct la!or #

i%ed manufacturing overhead &

The fi%ed overhead costs are unavoida!le. Tenchavez allocates fi%ed overhead costs !ased on itsannual capacity of 1",000 pairs it is a!le to make. 'n overseas company recently offered to !uy (,000pairs of shoes at $21 per pair. )egular customers !uy shoes from Tenchavez at $(0 per pair. *o+much is incremental income if Tenchavez accepts the special order -hould Tenchavez accept sethe incremental approach to /ustify your ans+er.

aria!le cost $11 $" $# $20 per unit Tenchavez should accept.

ncremental revenue from special order 3(,000 % $214 $5(,000

ncremental cost to fill special order 3(,000 % $204 350,0004

ncremental income from accepting special order $ (,000

Problem 2 - Young Siding Co. produces computers, which sell for !00 each. " foreigndistribution wants to order 1,000 units at #00 a unit. Production costs per unit are$

Direct materials $60

Direct la!or 120aria!le overhead "0i%ed overhead 50

". %ow much is the rele&ant cost of producing one more computer'(ele&ant costs are incremental costs of ma)ing one unit.*0 + 120 + 0 20/ote that fied costs do not increase when one additional unit is produced.

. hat the effect on net income of accepting the special order' 3se the incrementalapproach.4ncremental re&enue 1,000 #00 #00,0004ncremental costs 1,000 20 520,00064ncrease of !0,000

Problem # - Scott, 4nc. has a capacity of producing #00,000 units a year and sells them at 27 aunit. "t present Scott is selling 20,000 units. " foreign distributor has offered to purchase!0,000 units at 20 a unit. 8ariable selling costs will be reduced by !09. :he sales managerdetermined that incremental costs of accepting the order are ;!!,000. Should Scott acceptthe order' 3se the incremental approach.

Yes, incremental profit is ,000.

4ncremental (e&enue !0,000 20 700,0004ncremental costs ;!!,0004ncremental profit 700,000 - ;!!,000 ,000

Problem ! - 4t costs (oy Company 1! of &ariable costs and of allocated fied costs toproduce a toy truc) that sells for #0. " buyer offers to purchase #,000 units at 17 each. (oy

[Type text] Page 1


2/64

has unused capacity. hat will occur to profits is the offer is accepted and produced' 3se theincremental approach.

ncremental increase in revenue 3(,0007$184 $"#,000ncremental increase in costs 3(,0007$1#4 3#2,0004ncremental increase in profits to accept $12,000

Problem - %and


3/64

ncremental revenue per +idget $150ncremental cost per +idget<

$80 3$22 % 24 $8 1(2ncremental profit per unit $ 28Total incremental profit $28 % #00 $11,200

Problem ;- =+eig, nc. produces !atches of chocolate chip cookiesatchCost

Direct materials $ 8.00Direct la!or (.00aria!le overhead 1.00i%ed common overhead #.00

"n outside supplier has offered to produce the coo)ies for 1! per batch. hat is theminimum amount that Aweig would sell additional batches of coo)ies if the company isunder capacity'

7 + # + 1 12B (ele&ant incremental. /ote that a&oidable means it is a cost that will not

be incurred if the product is bought instead of made, i.e., it is a cost sa&ings. :he directcosts are sa&ed as well. nly the costs that are different if the coo)ies are made insteadof bought are rele&ant.

Problem 7 - -ally ndustries can produce 100 units of a necessary component part +ith the follo+ingcosts< Direct ?aterials $(0,000 Direct @a!or 1(,000 aria!le 9verhead (2,000 i%ed 9verhead 12,000f -ally ndustries purchases the component e%ternally, $(,000 of the fi%ed costs can !e avoided. 't+hat e%ternal price for the 100 units is the company indifferent !et+een making or !uyingThe company is indifferent +hen the cost of making the part eAuals the cost of !uying the part, +hichis $&8,000oth costs and revenues that stay the same !et+een alternate courses of action +ill !e analyzed.

>. 9nly differential costs and differential revenues +ill !e analyzed.C. 9nly costs that differ !et+een alternate courses of action +ill !e analyzed. )evenues are notrelevant.D. 9nly costs relating to the decisions at hand are analyzed.Differential incremental relevant. ncremental analysis involves !oth incremental revenues andincremental costsGGonly items that differ !et+een alternatives.

(.hen deciding to accept a special order from a ne+ customer, +hich one of the follo+ing is notnecessary !y management

[Type text] Page 3


4/64

'. )eallocate overhead costs to additional products>. Consider the special orderHs impact on demand of other productsC. Determine +hether e%cess capacity is availa!leD. Determine product costs

'llocated costs, most often fi%ed costs, are unavoida!le, and therefore, not relevant, i.e., they +illcontinue to !e a cost regardless of +hat decision is made. 'll relevant 3incremental4 costs are ignoredin incremental analysis since they are not incremental. f demand of other products fall, the specialorder may not increase profits. f capacity is not availa!le to manufacture the special order, additional

costs +ill !e necessary, so the special order may not increase profits. -ince most product costs arevaria!le, determining their cost is necessary to incremental decisions such as special orders.

#.hich of the follo+ing is most often a differential cost'.Depreciation>.)entC.aria!le overheadD.i%ed overheadi%ed costs are rarely incremental since they do not differ !et+een alternatives.

". I >ookstore usually closes at "


5/64

ast design costs are sunk since they stay the same no matter if the one time order is accepted ornot.

6. hen there is e%cess capacity, it makes sense to accept a oneGtimeGonly special order for less than thecurrent selling price +hen

'. incremental revenues e%ceed incremental costs.>. additional fi%ed costs must !e incurred to accommodate the order.C. the company placing the order is in the same market segment as your current customers.D. it never makes sense.9nly direct costs are incremental.

10. Three +eeks ago, >rian -ch+an paid $(0 for a nonGrefunda!le ticket to tonightHs concert. Io+heHs !een invited to a party, too. *e canHt go to !oth, !ut the party sounds like more fun than theconcert. n deciding +hether to attend the concert or the party, +hich of the follo+ing is3are4 relevant

'. The $(0 cost of the ticket.>. *is grade on the 'ccounting test he took earlier today.C. The $"0 his roommate +ill pay him for the concert ticket.D. 'll of theseB. Ione of theseThe $(0 paid to !uy the ticket is a cost regardless if he goes to the concert or not. The test grade +illnot change regardless if he goes to the concert.

11.Fiven the follo+ing list of costs, +hich one should !e ignored in a decision to produce additionalunits of product for a factory that is operating at less than 100: capacity, and the additional !usiness+ill not use up the remainder of the plant capacity'. i%ed administrative e%penses>. aria!le factory overheadC. er hour cost of direct la!orD. aria!le selling e%pensesi%ed administrative costs are not avoida!le and as such, are not relevant to the decision. Theseamount +ill continue regardless if the company produces additional units or not.

12.' company +as evaluating the differences !et+een t+o copiers. hich one of the follo+ing +ould!e a Aualitative aspect of making the decision

'. The num!er of copies produced per minute is different.>. The dimensions of one of the printers reAuire purchasing a ne+ ta!le.C. The printers +ill collate output at different rates.D. The color of one of the printers matches the color of the computer it +ill !e attached to.Choosing a !lue versus a red copier does not change the cost. The other alternatives +ould affect thecost or production a!ility of the company.

1(.hich one of the follo+ing is an important assumption that is made +hen considering the decision

to accept an order at a special price'. There are no mi%ed costs.>. The company is not currently operating at full capacityC. 9verall economic gro+th +ill continue at historical rates.D. The company +ill continue to receive similar orders in the future.f a company has no capacity, it must incur additional fi%ed costs in order to accept the order.

1#. hich costs are al+ays incremental and relevant in decision analysis'. 'voida!le costs and opportunity costs>. Common fi%ed costs and avoida!le costsC. -unk costs and avoida!le costs

D. Common fi%ed costs and opportunity costs-unk costs are never relevant. Common fi%ed costs are most often unavoida!le so they are notincremental to the decision.

1". )elevant costs in accepting an order at a special price include all of the follo+ing e%cept'. Direct materials.>. Direct la!or.C. i%ed manufacturing overheadD.aria!le manufacturing overhead.

[Type text] Page 5


6/64

i%ed overhead costs continue.

15.'n e%ample of a Aualitative performance measure is'. increase in incremental revenues.>. opportunity costs.C. output per hour.D. +armth of the hospital staff.

1&. hy are sunk costs not considered relevant +hen choosing among alternatives'. F'' considers them to !e irrelevant.>. They remain the same among alternatives and do not add useful information for selecting analternative.C. They are avoida!le.D. They are considered future incremental costs.

18.nder +hat conditions might a manufacturing firm sell a product for less than its regular price'. hen the price offered for a shortGterm order is less than the contri!ution margin.>. f a firm has e%cess capacity that is sitting idle, and it can recover its incremental costs.C. hen a company +ants to o!tain greater market share, even if the differential costs e%ceed

differential revenue.D. f the incremental revenue e%ceeds the total varia!le costs.Iote that ans+er D does not consider ErelevantE varia!le costs.

16. hich of the follo+ing is an e%ample of a sunk cost'. Direct materials for products>. aria!le overhead for the current yearC. BAuipment depreciation for last yearD. uture costs that might !e saved-unk costs are those that cannot !e changed and already !een incurred.

Short "nswer Euestions"nswers can be found in chapters 20.t is much more !eneficial if you look up theans+ers in the chapter as you +ill get more insight !y reading the concept in conte%t ofthe chapter compared to if +ould provide you a one sentence ans+er. *ence, +ill notpost ans+ers to the follo+ing Auestions. f you +ant confirmation of your interpretation ofthe ans+er, feel free to ask.Chapter 201. hat is a special order decision2. nder +hat situations are special orders accepted re/ected

(. hat amounts are relevant and +hat amounts are not relevant in special orderdecision#. hat is meant !y the incremental approach in determining if a special order should !eaccepted". hy are fi%ed costs most often ignored +hen determining if a special order should !eaccepted5. s a special order decision long or shortGterm&. hat are Aualitative versus Auantitative considerations dentify some Aualitative considerations ofspecial order decisions.

8. hat role does capacity play in accounting for special order decisions

6. f a company is deciding +hether to accept a special order, +hat costs should !eincluded in determining the minimum pricing it +ill !e +illing to accept

This page +as last edited on -unday e!ruary 2(, 201# 02


7/64

Study Probes - Chapters 21 Solutions

Problem 1 - ?onk Company manufactures +idulators. atson Company has approached ?onk+ith a proposal to sell the company a component use in its +idulators at a price of $12,000 for #,000units. ?onk is currently making these components in its o+n factory. The follo+ing costs areassociated annually +ith this part of the process +hen #,000 units are produced. hat is the amount of avoida!le costs if ?onk !uys rather than makes the components$10,800 M from part ' a!oveN.the costs that can !e avoided if the alternative course of actionO!uyingOis taken.C. hich costs;amounts from a!ove are opportunity costs, if any$1,800......the rent savings are given up if the alternative actionGG!uyingGGis undertaken. Iote that thecost of the productsGG+hether !ought or made is still a EcostE for the company.D. -hould ?onk make or !uy the components >riefly /ustify your ans+er.

?onk should make the components. There is an additional cost of $1,200 if ?onks !uys thecomponents. ncreases in costs are !ad choices in decision making !ecause the cost must !epassed on to the customer or a!sor!ed as lo+er profits !y the seller.

Problem 2 -:emple, 4nc. produces grandfather cloc)s and sells 100 per year.. Direct la!or, direct material, and varia!le overheadC. 'll costs allocated to the production process of the product that +ill not !e madeD. i%ed and varia!le manufacturing overhead

i%ed overhead must !e a!sor!ed !y the other divisions +ithin a company.

2.hich one of the follo+ing is a Aualitative advantage of making rather than !uying a component'. factory supervisorHs salaries>. opportunity costsC. delivery schedulesD. costs of transportationGinThe other costs are monetary.

(.9utsourcing'. is the acceptance of a special order.>. occurs +hen a companyHs avoida!le costs e%ceed its unavoida!le costs.C. costs are often called opportunity costs.D. decisions involves incremental revenues.B. is another name for !uying, in a make or !uy situation

'ns+er ' descri!es special orders.

#.@ake+ood ndustries is considering outsourcing a paintGspraying operation that is performed inmanufacturing auto parts. The company has painting eAuipment +ith a !ook value of $100,000. f theoperation is outsourced, the eAuipment +ill !e scrapped for an amount eAual to the cost of removingthe eAuipment. gnoring income ta%es, is the !ook value of $100,000 relevant to the outsourcingdecision

'. Pes, !ecause it can !e sold.>. Io, !ecause it is an incremental cost savings.C. Pes, !ecause it is a sunk cost.D. Io, !ecause it is not differential.

". hich costs are usually avoida!le in a makeGorG!uy decision'. Direct materials, direct la!or, and fi%ed and varia!le overhead>. Direct la!or, direct material, and varia!le overheadC. 'll costs allocated to the production process of the product that +ill not !e madeD. i%ed and varia!le manufacturing overhead

5. hat is the role of opportunity costs in a makeGorG!uy decision'. They are not considered !ecause they are sunk costs.>. They are al+ays incremental costs and should !e considered.C. They are avoida!le so should not !e considered in these decisions.D. They are irrelevant !ecause they never involve out of pocket e%penses in these decisions.

&.'n e%ample of a Aualitative performance measure is'. increase in incremental revenues.>. opportunity costs.

[Type text] Page 11


12/64

C. output per hour.D. +armth of the hospital staff.

8.' disadvantage of using an outside supplier is that'. they may !e a!le to produce a component at a lo+er cost.>. there is a loss of control over the production process.C. there may !e an opportunity to e%pand other parts of the company.D. the supplier assumes some of the risk of a do+nturn in !usiness activity.

The materials may not !e received on time, or may !e of poorer Auality.

6. hich costs are usually avoida!le in a makeGorG!uy decision'.Direct materials, direct la!or, varia!le overhead, and often a portion of fi%ed manufacturingoverhead>. 9nly direct materials, direct la!or, and varia!le overhead, and not fi%ed manufacturing overheadC. 'll the direct and allocated costs incurred to manufacture a productD. 9nly fi%ed manufacturing costs related to the product.

'llocated fi%ed costs are most often not avoida!le. -ince product costs include some allocated fi%edcosts, ans+er C cannot !e correct.

10.hich decision +ill involve no incremental revenues'.9utsourcing versus insourcing decision>. Drop a product lineC. 'ccept a special orderD. 'dditional processing decisionThis is the same as a make or !uy decision. 9nly incremental costs are concerned. The decisiondoes not affect the amount of revenue.

11. -unk costs'. are relevant.>. are differential.C. have future implications.

D. are ignored +hen evaluating alternatives.Differential means incremental.

12.or makeGorG!uy decisions, +hich items are relevant'. direct material costs and sunk costs>. incremental costs and opportunity costsC. differential costs and allocated fi%ed costsD. incremental costs and incremental revenues.There are never any incremental revenues +ith make or !uy decisions. -unk costs are neverrelevant. 'llocated fi%ed costs do not go a+ay +hen a make or !uy decision occurs.

1(.i%ed costs'. are al+ays incremental.>. can !e incremental or sunk.C. are al+ays sunk.D. are al+ays unavoida!le.-ome fi%ed costs are unavoida!le so they are sunk. 'voida!le fi%ed costs are relevant 3incremental4.

1#.hich one of the follo+ing is Aualitative information that management might evaluate in making adecisiona.9pportunity costs of a decision!.Contri!ution marginc. The effect on profit of a decisiond.The effect on employee morale of a decisionQualitative information involves no dollar amounts. There are dollar amounts associated +ithopportunity costs 3cost savings4, contri!ution margin 3sales less varia!le costs4, and the effect onprofit. Bmployee morale cannot !e Auantified ho+ever, its effect may !e an influence on managmentdecisions.

1".hat is insourcing '. The allocation of common fi%ed costs to different product lines

[Type text] Page 12


13/64

>. hat occurs +hen a companyHs avoida!le costs e%ceed its unavoida!le costs C. 'nother name for opportunity costs D. Decisions of +hether to accept a special order B. nternally manufacturing productsnsourcing is the EmakeE part of the make or !uy decision.

15.hich one of the follo+ing is a Aualitative advantage of making rather than !uying a component'. factory supervisorHs salaries

>. opportunity costsC. delivery schedulesD. costs of shipping goods into the companyHs o+n factory

'ns+ers ', >, and C are all Auantitative amounts +hich appear in !udgets. Delivery schedules are aconsideration of !uying instead of making since the timing of +hen components arrive can affectproduction.

1&.or makeGorG!uy decisions, +hich items are relevant'. incremental costs and incremental revenues.>. direct material costs and sunk costsC. differential costs and incremental revenuesD. differential costs and allocated fi%ed costsB. incremental costs and opportunity costsThere are no incremental revenues +ith make or !uy decisions, so ans+ers ' and C cannot !ecorrect. 'ns+er > is +rong !ecause sunk costs are never relevant since they cannot !e changed.

'ns+er D is +rong !ecause allocated fi%ed costs are al+ays relevant. 9pportunity costs are al+aysrelevant. ncremental costs is another name for relevant and differential costs.

18. hich one of the follo+ing is nota disadvantage of outsourcing'. Quality control specifications and delivery schedules may not !e met.>. The outside supplier may raise prices significantly in the future.C. rofita!le product lines may !e dropped.D. Bmployee morale may suffer.

This has nothing to do +ith outsourcing 3make or !uy decisions4

16. hich one of the follo+ing is a disadvantage of !uying rather than making a component of acompanyHs product

'. Quality control specifications may not !e met.>. The outside supplier can often produce items at a lo+er cost than the company.C. nprofita!le product lines cannot !e eliminated.D. The supplier may use fe+er cost pools.The cost incurred and the num!er of cost pools used !y the outside supplier do not affect the pricethe !uyer +ill pay the outsider supplier.

20. ' company +as evaluating the differences !et+een t+o packaging machines. hich one of thefollo+ing +ould !e a Aualitative aspect of making the decision '. The num!er of products packaged per hour is different. >. 9ne machine is smaller allo+ing the company to lease out a portion of its facility. C. The machine +ill not pollute the environment.D. The machines +ill package products at different rates.There is no cost associated +ith environmental pollution 3assuming no fine is assessed.4 roducing adifferent num!er of products creates an effect on income. 'ns+er > is an opportunity cost.

21. hich of the follo+ing is one disadvantage of using an outside supplier'. The supplier may !e a!le to produce a component at a lo+er cost.

>. There is increased control over the production process.C. There may !e delays in acAuiring materials on time.D. The supplier assumes some of the risk of a do+nturn in !usiness activity.

'ns+er D is an advantage for the company since manufacturing is a risk a company takes +hen itproduces products that might not !e sold. 'ns+er ' is an advantage since this is a primary reasonthat a company +ould outsource. 'ns+er > is +rong !ecause outsourcing creates decreased, notincreased control.

[Type text] Page 13


14/64

Short Answer Questions

Answers can be found in chapters 21.t is much more !eneficial if you look up the ans+ersin the chapter as you +ill get more insight !y reading the concept in conte%t of the chaptercompared to if +ould provide you a one sentence ans+er. *ence, +ill not post ans+ersto the follo+ing Auestions. f you +ant confirmation of your interpretation of the ans+er,feel free to ask.

Chapter 21

1. hat is meant !y insourcing and outsourcing

2. +hat are Aualitative versus Auantitative advantages;disadvantages

(. hich of the follo+ing are relevant +ith outsourcing decisions opportunity cost, sunk cost,avoida!le, unavoida!le

#. hat conditions +ould make a company outsource instead of insource

". hat is the impact of soft !enefits;Aualitative issue and ho+ does it impact outsourcing decisions

5. hy are incremental revenues never relevant +ith outsourcing

&. hat cost savings often impact outsourcing decisions hat is the nature of varia!le versus fi%edoverhead costs

This page +as last edited on Tuesday -eptem!er 0#, 2012 0(


15/64

ncremental cost savings of opeyes CF- 10,000

ncremental cost savings of opeyes -L' cost ",000

ncremental varia!le cost of 9lives 3$5,0007#0:4 32,#004

ncremental sLa cost of 9lives 3$2,0007#0:4 38004

ncremental decrease in income if opeyes are discontinued 3$",8004

Problem 2 -Fordon Companysells t+o items, corn and !roccoli. The company is considering dropping corn.t is e%pected that sales of !roccoli +ill increase !y #0: as a result. Dropping corn +ill allo+ the company to

cancel its monthly rental of its corn shucker costing $100 a month. The other eAuipment +ill !e used for

additional production of !roccoli. 9ne employee earning $200 can !e terminated if corn production is dropped.

FordonHs other allocated costs areunavoida!le.The company rents all of its eAuipment. ' condensed,!udgeted monthly income statement +ith !oth products is !elo+roccoli

-ales $20,000 $8,000 $12,000

ood materials #,"00 2,000 2,"00

Direct la!or (,200 1,200 2,000

BAuipment rental 2,600 2,500 (00

9ther allocated overhead (,100 2,100 1,000

9perating income $5,(00 $ 100 $5,200

n good form, prepare anincremental analysisto determine the financial effect of dropping corn production.

ncremental change in revenue. dentify any nonGrelevant costs.

-ince the other 50: of fi%ed costs +ill !e incurred regardless of decision, they are not relevant.

Problem ;G Crisp has # product lines< milk, ice cream, yogurt, and !utter. The allocated fi%ed costs are !ased

on units sold and are unavoida!le.Demand of individual products is not affected !y changes in other product

lines.#0: of the fi%ed costs are direct, and the other 50: are allocated. )esults of Rune follo+utter

Total

nits sold

2,000

"00

#00

200

(,000

)evenue

$10,000

$20,000

$10,000

$20,000

[Type text] Page 19


20/64

$50,000

aria!le departmental costs

5,000

1(,000

#,200

#,800

28,000

i%ed costs

",000

2,000

(,000

&,000

1&,000

Iet income 3loss4

3$1,0004

$",000

$2,800

$8,200

$1",000

'. n good form, prepare anincremental analysisof the effect of dropping the milk product line.

ncremental revenue 3$10,0004

ncremental varia!le cost savings 5,000

ncremental fi%ed cost savings3",000 % .#04 2,000

ncremental decrease in profits 3$2,0004

>. >riefly state ho+ the cost allocation death spiral concept applies to this pro!lem.

The cost allocation death spiral occurs +hen a company drops a product line;division that has a loss.

?anagement may !elieve this +ill eliminate the loss, ho+ever, since the common fi%ed costs must !e

allocated and a!sor!ed !y other products, the total profit of the company declines. i.e., allocated fi%ed

costs cannot !e avoided.

Problem 7 -? CompanyEs market for the ?odel 5# has changed significantly, and -? has had to drop theprice per unit from $25" to $12". There are some units in the +ork in process inventory that have costs of $1"0

[Type text] Page 20


21/64

per unit associated +ith them. -? could sell these units in their current state for $100 each. t +ill cost -?

$10 per unit to complete these units so that they can !e sold for $12" each. hich of the follo+ing is the

amount of sunk costs in this pro!lem

$1"0 per unit

T+o costs are not relevant since the profits remain the same regardless if -? is dropped or not. The original

selling price of $25" does not make the company more or less profita!le. The $1"0 cost e%ists regardless of

the decision made. *o+ever, a sunk cost is an amount incurred for +hich it is too late to change. The previous

selling price is not a EcostE.

Problem * *u%ley -ports Company sells logo sports merchandise and does custom screen printing. Theyare trying to decide +hether or not to continue screen printing. The follo+ing information is availa!le for the

segments. 'ssume that all direct fi%ed costs could !e avoided if a segment is dropped and that the total

common fi%ed costs +ould remain unchanged if the screen printing +ere dropped.

-creen rinting 'pparel -ales

-ales $120,000 $#20,000aria!le costs &2,000 220,000Contri!ution margin #8,000 200,000Direct fi%ed costs (2,000 &0,000

'llocated common fi%ed costs 20,000 &0,000Iet income 3$#,0004 $50,000

'ssume that more space +ill !e allocated to apparel sales if screen printing is dropped. This +ill allo+ apparel

sales to increase !y 2":. hat is the impact on profits of the proposed change

ncremental revenue G screen 3$120,0004ncremental revenue G apparel 32":7$#20,0004 10",000

ncremental savings;3costs4<

C G screen printing &2,000 C G apparel 32":7$220,004 3"",0004 Direct C (2,000ncremental increase in profits $(#,000

Problem 10.Tison Company produces t+o products, clips and !inders. The cost of producing ",000 of each is$22,000. Clips are currently sold for $1.2" each +hile !inders are sold for $2.00 each. The company has

determined it could sell !inders for a total of $15,2"0 if it stamps IC'' logos on the !inder covers. Bach logostamp reAuires a royalty payment of $1.10 each.In good formin the ans+er !o% !elo+, create an incrementalanalysis for Tison to determine if it should stamp IC'' logs on the !inders. 3Do not include e%traneous

information; calculations inside the ans+er !o%.4 @a!el line items respectively.

4ncremental analysis Calculations here$

ncremental revenue $5,2"0$15,2"0 M 3$2.007",0004

$5,2"0

$1.107",000 $","00

ncremental costs<

@ogo stamps 3","004

ncremental increase in profit if processed further $&"0

[Type text] Page 21


22/64

Problem 11Carra!a Company gathered the follo+ing data a!out the t+o products that it

produces< ncremental revenue $12,000 G $11,000 $1,000

ncremental loss $1,000 G $2,000 3$1,0004

Problem 12?)C, nc. manufactures +heels for its golf carts. >ecause a ne+ assem!ly mechanism is no+availa!le, the company has ",#00 partially completed +heels +ith direct material costs totaling $5,&"0, direct

la!or totaling $2,(00, and manufacturing overhead totaling $1.#0 per unit of +hich 50: is varia!le. They can

!e sold for $#.00 per unit Sas is.H ?)C is considering adding a ceramic pot and silk flo+ers to each +heel and

selling the +heels as decorative pots for $".&" each. The total cost of the added materials and la!or +ould !e

$&,(00 plus an additional $0.20 of varia!le overhead for each unit. n good form in the ans+er !o% !elo+,

create an incremental analysis for the decision. @a!el line items respectively.

al analysis$ Calculations$

l revenue $6,#"0 3$.00G$".&"47",#00

l costs<

l materials and la!or 3&,(004

l 9* 31,0804 $0.207",#00

l increase in profit if processed further $1,0&0

Problem 1#. Ielson Company has inventory on hand +ith a production cost of $18,000. Due to technological

changes, the inventoryHs scrap value is only $&,000. The inventory could !e sold for $15,000 if modified at an

additional cost of $10,000.I F99D 9)? in the !o% !elo+, create anincremental analysisto decide ifIelson should modify the inventory as proposed. Clearly la!el line items and totals as +e did in class.

4ncremental analysis$ Calculations$

ncremental revenue $6,000 $15,000 G $&,000

ncremental cost 310,0004

ncremental decrease in profit if processed further 3$1,0004

[Type text] Page 22


23/64

Problem 1! Race Company manufactures a num!er of products from the same ra+ material. Costs to

process the The ' units is a total $10,000 per month. roduct ' could !e sold asGis for $18,000 per

month or it can !e further processed at a cost of $6,000 per month and then sold for $2",000. hat

should Race Company do -upport +ith computations.


ncremental revenue $&,000 $2",000 G $18,000



Do not process product ' further !ecause its profit declines !y $2,000

Problem 1*ankers Company manufactures a num!er of products from the same ra+ material. Costs toprocess roduct (( total $10,000 per month. roduct (( could !e sold asGis for $18,000 per month or it

can !e further processed at a cost of $6,000 per month and then sold for $25,000. repare an

incremental anallysis in good form.

-ell product (( asGis !ecause its incremental costs +ill e%ceed incremental revenues !y $1,000.


ncremental revenue $8,000 $25,000 G $18,000



Problem1 oodPou looring produced (,000 yards of its economyGgrade carpet. n the coloring process, there +as a

pigment defect and the resulting color appeared to !e faded. The carpet normally sells for $18 per yard, +ith $8 of

varia!le cost per yard and $# of fi%ed cost per yard assigned to the carpet. The company realizes that it cannot sell the

carpet for $18 per yard through its normal channels, unless the coloring process is repeated. The incremental cost of the

process is $# per yard. *arryEs -alvage is +illing to !uy the carpet in its current faded condition for $12 per yard. -hould

oodPou repeat the coloring process or sell the carpet to *arryEs -alvage and +hat is the !enefit

4ncremental analysis$

Calculations$

ncremental revenue

$18,000

3$18G $1247(,000

ncremental cost

312,0004

$#7(,000

[Type text] Page 23


24/64

ncremental increase in profit if processed further

$5,000

)epeat coloring 3proicess further4 and sell to *arryEs -alvage for a $5,000 incremental profit

Dultiple Choice Euestions

1.' company +ants to kno+ if it should sell no+ or process further. nder +hat conditions should the company

process further rather than sell no+

'. f incremental revenues are greater than the cost incurred to date of the original units

>.f varia!le processing costs e%ceed fi%ed processing costs

C. f there are only incremental varia!le costs, and no incremental revenue.

D.f there are no opportunity costs

B.Ione of the a!ove.

The cost incurred to date is a sunk cost and is not relevant since it is the same no matter if the product is sold

as is or processed further. 'ns+er C +ould result in a greater loss if processed further since an increase in

costs +ithout an increase in revenue creates a !igger loss.

2. n deciding +hether or not to process a product further or sell it as is, +hich of the follo+ing is a relevant

cost

'.-unk cost

>.ncremental cost

C.Roint cost

D.rrelevant cost

'll incremental costs are relevant.

(.Tucson urniture Company makes chairs, ta!les, and !eds from small pine logs +hich have !een peeled of

!ark. 9nce a chair is constructed, it receives a +a% finish. Io finish is applied to the ta!les and !eds. The cost

of the +a% finish is a3n4

'. -unk cost.

>. ncremental cost

C. ?arketing cost.

D. eriod cost.

#.hat is the cause of the cost allocation death spiral

[Type text] Page 24


25/64

'.Iot realizing that +hen a department that appears to !e unprofita!le is dropped, the common fi%ed costsare not incremental.

>.' company decides to !uy a product instead of making it, and the supplier is una!le to meet the demand ona timely !asis.

C.'llocations of /oint costs are made only to profita!le products.

D.aria!le costs rise +hen sales decline, causing a decline in profits.

". r!y, nc.Hs market for the ni!ulators has changed significantly, and r!y has had to drop the priceper unit from $100 to $80. There are some units in the +ork in process inventory that have costs of

$5" per unit associated +ith them. r!y could sell these units in their current state for $50 each. t +ill

cost r!y $10 per unit to complete these units so that they can !e sold for $80 each. hich of the

follo+ing is a sunk cost in this pro!lem

'. $100 former price

>. $80 current priceC. $5" price for partially completed units

D. $10 cost to complete units

5.f an unprofita!le product is eliminated,

'.net income +ill al+ays increase.

>. varia!le e%penses of the eliminated product +ill have to !e a!sor!ed !y other segments.

C. fi%ed e%penses allocated to the eliminated segment +ill not likely !e avoida!le.

D. the company +ill lose it opportunity costs.

The other divisions;products +ill have to a!sor! these costs.

&. hich of the follo+ing is not relevant +hen considering +hether or not to drop a product

'.The contri!ution margin

>.Qualitative factors

C.The potential impact on demand for other products

D. 'llocated common costs

8. hat is the cause of the cost allocation death spiral

'.t is caused !y not realizing that +hen a department that appears to !e unprofita!le is dropped, thecommon fi%ed costs that had !een allocated to that department are not avoida!le.

>.t is caused !y a company that manufacturing its products, rather than !uying them.

C.t is caused !y not considering avoida!le costs in a product dropping decision.

[Type text] Page 25


26/64

D.t is caused !y accepting special orders for a sales price that is less than the contri!ution margin

per unit.

hile ans+ers >, C, and D are possi!le happenings for a company, they are not the cause of the cost

allocation death spiral

6.hich of the follo+ing is relevant information in a decision +hether old eAuipment presently !eing

used should !e replaced !y ne+ eAuipment

a.The cost of the old eAuipment

!.The salvage value of the old eAuipment

c. The !ook value of the old eAuipment

d.The accumulated depreciation of the old eAuipment

-alvage value is relevant since this is the amount the eAuipment +ill !ring into the company if sold.

The other three amounts remain the same regardless if the machine is replaced or not.

10. hen a department or product line is dropped, the fi%ed costs +hich had !een allocated to that

department

'.are eliminated.

>.!ecome avoida!le costs.

C.are allocated to the remaining departments or product lines.

D.!ecome opportunity costs.

'llocated costs are spread out to the products;divisions that use the costs. f a product is eliminated, those

costs continue and must !e reallocated over the remaining products;lines. nless specifically implied, allocated

fi%ed costs are never eliminated, so they are not incremental. 'voida!le means they are eliminated, +hich is

not the case 3they could !e called unavoida!le.4

11. hich of the follo+ing costs are al+ays incremental and relevant in decision analysis

'. opportunity costs and fi%ed costs>. avoida!le costs and opportunity costs

C. differential costs and unavoida!le costs

D. sunk costs and avoida!le costs

-unk costs are already spent and cannot !e changed no matter +hat alternative is chosen. navoida!le costs

continue no matter +hat decision is made. -ome fi%ed costs are avoida!le and some are unavoida!le.

Differential relevant incremental.

Short "nswer Euestions

"nswers can be found in chapters 22 and 2#.t is much more !eneficial if you look up

the ans+ers in the chapter as you +ill get more insight !y reading the concept in conte%t

of the chapter compared to if +ould provide you a one sentence ans+er. *ence, +ill not

[Type text] Page 26


27/64

post ans+ers to the follo+ing Auestions. f you +ant confirmation of your interpretation of

the ans+er, feel free to ask.

Chapter 22

1. hat conditions +ould cause a company to process a product further or sell asGis

2. hat Aualitative issues may impact sell or process further decisions

(. *o+ are incremental revenue determined for process further decisions incremental costs

#. *o+ are costs incurred up to the decision point handled hy

Chapter 2#

1. hat conditions +ould cause a company to drop a product line or keep it

2. hat Aualitative issues may impact keep or drop decisions

(. *o+ are incremental revenue determined for keep or drop decisions incremental costs

#. hat are common costs 'llocated costs

#. hy are allocated costs considered irrelevant for keep or drop decisions

". hat are direct fi%ed costs and ho+ do they affect keep or drop decisions

5. hat is the cost allocation death spiral and ho+ does it apply to keep or drop decisions

This page +as last edited on Tuesday -eptem!er 0#, 2012 0(


28/64

units of the component. 'n outside supplier has offered to sell Coleman this component for $18 per unit and

can supply all the units it needs.

'. f Coleman !uys the component from the outside supplier instead of making it, ho+ much +ill net income

change -hould Coleman make or !uy the component se the incremental approach to /ustify your ans+er.

-ince net income decreases, Coleman should continue making the component.

aria!le cost $& $5 $# $1&

ncremental cost savings from not making component 31,800 % $1&4 $(0,500ncremental cost of !uying component 31,800 % $184 3(2,#004

ncremental decrease in net income due to !uying component $31,8004

>. -uppose Coleman could rent the machine to another company for $",000 per year. *o+ +ould your

response change to part ' se the incremental approach to /ustify your ans+er.

-ince net income increases, the company should choose to !uy the components.

ncremental cost savings from not making component 31,800 % $1&4 $(0,500

ncremental 'nnual rent from machine ",000

ncremental Cost of !uying component 31,800 % $184 3(2,#004

ncremental ncrease in net income due to !uying component $(,200

Problem 2 - Tenchavez Company makes and sells 12,000 pairs of running shoes each year. The cost ofmaking one pair of these shoes is

Direct material $ 11

aria!le manufacturing overhead "

Direct la!or #i%ed manufacturing overhead &

The fi%ed overhead costs are unavoida!le. Tenchavez allocates fi%ed overhead costs !ased on its annual

capacity of 1",000 pairs it is a!le to make. 'n overseas company recently offered to !uy (,000 pairs of shoes

at $21 per pair. )egular customers !uy shoes from Tenchavez at $(0 per pair.

*o+ much is incremental income if Tenchavez accepts the special order -hould Tenchavez accept se the

incremental approach to /ustify your ans+er.aria!le cost $11 $" $# $20 per unit

Tenchavez should accept.

ncremental revenue from special order 3(,000 % $214 $5(,000

ncremental cost to fill special order 3(,000 % $204 350,0004

ncremental income from accepting special order $ (,000

Problem # - >rislin Company makes and sells t+o products, 9lives and opeyes. The income statement forthe prior year, 2001, +as as follo+srislinEs fi%ed costs are unavoida!le and are allocated to products on the !asis of sales revenue. f opeyesare dropped, sales of 9lives are e%pected to increase !y #0 percent ne%t year.

[Type text] Page 28


29/64

'. se the incremental approach to determine if opeyes should !e dropped.

ncremental revenue 3$15,0007 #0:4 of 9lives $ 5,#00ncremental revenue of opeyes 32#,0004

ncremental cost savings of opeyes CF- 10,000

ncremental cost savings of opeyes -L' cost ",000

ncremental varia!le cost of 9lives 3$5,0007#0:4 32,#004ncremental sLa cost of 9lives 3$2,0007#0:4 38004

ncremental decrease in income if opeyes discountinued 3$",8004

Problem ! -?onk Company manufactures +idulators. atson Company has approached ?onk +ith aproposal to sell the company a component use in its +idulators at a price of $12,000 for #,000 units. ?onk is

currently making these components in its o+n factory. The follo+ing costs are associated annually +ith this

part of the process +hen #,000 units are producedud, ise, and Br. )esults of ?ay, 200( are

presented !elo+ud ise Br Totalnits sold (,000 ",000 2,000 10,000)evenue $&0,000 $"0,000 $#0,000 $150,000

@ess varia!le costs (2,000 25,000 15,000 ,000

@ess direct fi%ed costs 1#,000 16,000 12,000 #",000

@ess allocated fi%ed costs 5,000 10,000 #,000 20,000

Iet income $18,000 3$",0004 $ 8,000 $21,000

The varia!le costs are directly attri!uta!le to the products produced for the specific departments. 'll

of the allocated costs +illcontinue even if a division is discontinued. 'nheiser allocates indirect fi%ed

[Type text] Page 30


31/64

costs !ased on the num!er of units to !e sold. -ince the ise division has a net loss, 'nheiser feels

that it should !e discontinued. 'nheiser feels if the division is closed, that sales at the >ud division +ill

increase !y 20:, and that sales at the Br division +ill stay the same.

'. repare an incremental analysis sho+ing the effectof discontinuing the ise division on the

remainingdivisions.

>udncremental revenue

20%*$70,000 - $50,0003$(5,0004

ncremental varia!le costs savings

20%*32,000 - $26,000 19,600

ncremental direct fi%ed costs saved 16,000

ncrease increase in profit if discontinued $2,500

>. -hould 'nheiserclose the ise division >riefly indicate +hy or +hy not.

Pes. The profit increases !y $2,500 +hen the division is eliminated. Direct fi%ed costs and varia!le

costs for the ise division +ere relatively high compared to those for the >ud and Br divisions. The increase in

sales !y 20: of the >ud division +as enough to offset the loss of the ise division.

Problem GFordon Companysells t+o items, corn and !roccoli. The company is considering dropping corn.t is e%pected that sales of !roccoli +ill increase !y #0: as a result. Dropping corn +ill allo+ the company to

cancel its monthly rental of its corn shucker costing $100 a month. The other eAuipment +ill !e used for

additional production of !roccoli. 9ne employee earning $200 can !e terminated if corn production is dropped.

FordonHs other allocated costs areunavoida!le.The company rents all of its eAuipment. ' condensed,!udgeted monthly income statement +ith !oth products is !elo+roccoli

-ales $20,000 $8,000 $12,000

ood materials #,"00 2,000 2,"00

Direct la!or (,200 1,200 2,000

BAuipment rental 2,600 2,500 (00

9ther allocated overhead(,100 2,100 1,000

[Type text] Page 31


32/64

9perating income $5,(00 $ 100 $5,200

n good form, prepare anincremental analysisto determine the financial effect of dropping corn production.

ncremental change in revenue. Differential costs are $2 per unit.

Cost to make G cost to !uy $11 G $6 $2 per unit

Problem 21 -' company uses 10,000 units of art ' in producing its products. ' supplier offers to

make art ' for $&0. ?a% Company has relevant costs of $80 a unit to manufacture art '. There

is e%cess capacity. *o+ much is the opportunity cost of !uying art ' from the supplier

Zero. Opportunity costs are the value of benets forgone by selecting one alternative

over another. There are no opportunity costs in this problem.

Problem 22 -Temple, nc. produces several models of grandfather clocks. 'n outside supplier has offered toproduce the economy clocks for Temple for $("0 each. Temple needs 1,200 clocks annually. Temple has

provided the follo+ing unit costs for its economy model. dentify any nonGrelevant costs.

-ince the other 50: of fi%ed costs +ill !e incurred regardless of decision, they are not relevant.

Problem 2 --ally ndustries can produce 100 units of a necessary component part +ith the follo+ing costso+ling -hoes 'thletic -hoes >oots

-ales $120,000 $#20,000 $(50,000

C 5#,000 220,000 1#0,000

C? "5,000 200,000 220,000

Direct C #0,000 &0,000 60,000

'llocated C 20,000 &0,000 50,000

I 3$#,0004 $50,000 $&0,000

f !o+ling shoes are dropped, +hat +ould happen to the overall net income -upport +ith incremental

analysis.

t +ould decrease !y $15,000.

ncremental )evenue 3$120,0004

ncremental C savings $5#,000

ncremental Direct C savings $#0,000

4ncremental decrease in profits 3$15,0004

Problem !0 - ?enlo -hoe Company is trying to decide +hether or not to continue making !o+ling shoes.The follo+ing information is availa!le for the segments. 'ssume that all direct fi%ed costs could !e avoided if a

segment is dropped and that the total common fi%ed costs +ould remain unchanged if the !o+ling shoes +ere

dropped.

>o+ling -hoes 'thletic -hoes >oots

[Type text] Page 51


52/64

-ales $120,000 $#20,000 $(50,000C 5#,000 220,000 1#0,000C? "5,000 200,000 220,000Direct C #0,000 &0,000 60,000

'llocated C 20,000 &0,000 50,000I 3$#,0004 $50,000 $&0,000

'ssume that !oots normally sell for $60 per pair. 'n e%porter has approached ?enlo a!out !uying 1,000 pairs

of !oots for a oneGtime e%port deal for $80 per pair. $(.00 per unit of the normal varia!le cost could !e avoided

on this sale, !ut ?enlo +ould have to pay a fi%ed cost $#,000 to have the !oots shipped. ?enlo has capacity toproduce this order, and no regular sales +ill !e affected. -hould ?enlo accept this order -upport +ith an

incremental analysis.

Pes, profits +ill increase !y $##,000.

X of !oots sold $(50,000;$60 #,000

ncremental cost per unit $1#0,000;#,000 $("

ncremental revenue 3$80 % 1,0004 $80,000ncremental C 3$(" G $(4 % 1,000 3(2,0004

ncrease in fi%ed costs #,000ncremental increase in profits $##,000

Problem !1 >ar>Que *eaven has three product lines in its stores< ri!s, chicken, and !eef. )esults of ?ay are

presented !elo+C. *alo received an offer from a suppler to manufacture the same Auality !earings at $81

each. The space currently occupied !y the manufacturing facility could !e leased out for $20,000 per year if

the supplier provides the !earings. The follo+ing estimated costs +ere providedoots

-ales $120,000 $#20,000 $(50,000C 5#,000 220,000 1#0,000C? "5,000 200,000 220,000Direct C #0,000 &0,000 60,000

'llocated C 20,000 &0,000 50,000I 3$#,0004 $50,000 $&0,000f !o+ling shoes are dropped, +hat +ould happen to overall net income

ncremental revenue 3$120,0004ncremental C savings $5#,000

ncremental direct C savings $#0,000

ncremental decrease in profits 3$15,0004

Problem 0?enlo -hoe Company is trying to decide +hether or not to continue making !o+ling shoes. Thefollo+ing information is availa!le for the segments. 'ssume that all direct fi%ed costs could !e avoided if a

segment is dropped and that the total common fi%ed costs +ould remain unchanged if the !o+ling shoes +eredropped.

>o+ling -hoes 'thletic -hoes >oots

-ales $120,000 $#20,000 $(50,000C 5#,000 220,000 1#0,000C? "5,000 200,000 220,000Direct C #0,000 &0,000 60,000

'llocated C 20,000 &0,000 50,000I 3$#,0004 $50,000 $&0,000

'ssume that !oots normally sell for $60 per pair. 'n e%porter has approached ?enlo a!out !uying 1,000 pairs

of !oots for a oneGtime e%port deal for $80 per pair. $(.00 per unit of the normal varia!le cost could !e avoidedon this sale, !ut ?enlo +ould have to pay a fi%ed cost $#,000 to have the !oots shipped. ?enlo has capacity to

produce this order, and no regular sales +ill !e affected. f ?enlo accepts this order

Documents

Study Probes