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Lecture

Chapter 12 In Class Questions Solutions.pdf

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Department
Accounting
Course
ACCTG322
Professor
Trish Stringer
Semester
Winter

Description
In Class #12.1 – Dropping or Retaining a Segment Required If the Bath Department is dropped, what will be the effect on the operating income of the company as a whole? Contribution margin lost if the Bath Department is dropped: Lost from the Bath Department.....................................................$700,000....... Lost from the Kitchen Department (10% × $2,400,000).............................. 240,000 Total lost contribution margin.......................................................940,000............ Less avoidable fixed costs ($900,000 – $370,000).....................................530,000 Decrease in overall operating income................................................$410,000...... 1 In Class #12.2 – Make or Buy a Component Required 1: Assuming that the company has no alternative use for the facilities now be ing used to produce the thermostat, should the outside supplier’s offer be accepted? Show all computations. 1. Per Unit Differential unsis 15,000 Make Buy Make Buy Cost of purchasing........................................ $20 $300,000 Directmaterials..................................$ 6........ $ 90,000 Direlatbo...................................8........... 120,000 Variabmleanufacturogverhe................1 15,000 Fixed manufacturing overhead, traceable 1.... 2 30,000 Fixed manufacturing overhead, common ..... 0 0 0 0 Totcl..t.s.................................................. $1$20 $255,000 $300,000 Difference in favour of continuing to make the parts............................................$3....... $45,000 1Only the supervisory salaries can be avoided if the parts are purchased. The remaining book value of the special equipment is a sunk cost; hence, the $3 per unit depreciation expense is not relevant to this decision. Based on these data, the company should reject the offer and should continue to produce the parts internally. Required 2: Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segmen t margin of the new product would be $65,000 per year. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each? Show computations. 2. Make Buy Cost of purchasing (part 1) ................................................ $300,000 Cost of making (part 1)...........................................$255,000... Opportunity cost—segment margin forgone on a potential new product line...................................................65,000.... Totc...t........................................................................ $3$300,000 Difference in favour of purchasing from the outside supplier .................................................................$20,000... Thus, the company should accept the offer and purchase the parts from the outside supplier. 2 In Class #12.3 – Evaluating a Special Order Required: What effect would accepting this order have on the company’s operating income if a special price of $349.95 is offered per bracelet for this order? Should the special order be accepted at this price? Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision. Total Per bracelets 10 Unit Incrementa revenu........................................$349.95... $3,499.50 Incrementa closts: Variacblets: Dmia...t..l.s.........................43.00......1,430.00 Dl.r...t.r.........................................860.00.00 Varmiaanefactuvri................... 7.00 70.00 Special filigree..................................................6.00 60.00 Total variable cost..............................................$242.00 2,420.00 Fixed costs: Purchase of special tool..................................... 465.00 Total incremental cost............................................... 2,885.00 Incremental operating income .................................. $ 614.50 Even though the price for the special order is below the company's regular price for such an item, the special order would add to the company’s operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource.
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