ACG 2071 Incremental Problems – Spring 2016
Class Assignment– 12 points participation SOLUTION
1. Bee Bakery incurs $118,800 of variable costs and $38,000 of fixed costs per year baking
various types of bread totaling 165,000 loaves. On the average, it has 15 remaining loaves
at the end of any day, totaling 4,380 loaves of unsold bread per year. The bakery currently
sells the unsold loaves to the homeless center for a total of $3,200 annually, or it can convert
these unsold loaves into 2,300 pounds of croutons at an added annual cost of $1,390. The
annual output of croutons can be sold to restaurants for $4,600.
Show the calculation of the incremental revenue. Circle your answer and a label of increase
or decrease indicating the effect on profit.
$4,600 - $3,200 = $1,400 incremental increase in profit
2. Taco Ted prepares and sells approximately 84,000 tacos each year. Its capacity is 94,000
tacos. The unit cost of making one taco at its current operating level follows:
Direct materials
$0.85
Variable manufacturing overhead
0.12
Direct labor
0.32
Fixed allocated manufacturing overhead
0.30
The Rotary Club has offered to buy 4,600 tacos at $1.60 each over the next year, if Taco Ted
agrees to deliver the tacos. Regular customers pay $2.40 per taco. Taco Ted has determined
the cost of delivering will be $25 per month or $300 per year. Show the calculation of the
total annual relevant cost of the special order. Circle your answer.
Incremental VC per unit:
DM
DL
VOH
Incremental VC per unit
Number of units
Total relevant VC
Incremental FC
Total relevant cost of the special order
$ 0.85
0.32
0.12
1.29
4,600
5,934
300
$6,234
3. Walkers has three product lines in its retail stores: shoes, boots, and sandals. The
allocated fixed costs are based on units sold and are unavoidable. Results of June follow:
Socks
Boots
Sandals
Total
Units sold
800
1,200
2,400
4,400
Revenue
$22,800
$30,400
$36,600
$89,800
Variable costs
13,600
13,200
16,800
43,600
Direct fixed costs
6,000
7,000
6,500
19,500
Allocated fixed costs
7,000
9,000
8,000
24,000
Net income (loss)
$(3,800)
$1,200
$ 5,300
$2,700
Demand of sandals is expected to increase by 16% as a result of dropping socks. Use a
single column incremental analysis approach to determine the incremental effect of dropping
socks. Show all calculations. Circle your answer and a label of increase or decrease
indicating the effect on profit.
Incremental revenue -socks
Incremental VC savings - socks
Incremental DFC savings - socks
Incremental revenue -sandals (16%*36,600)
Incremental VC - sandals (16%*16,800)
Incremental decrease in profit if socks are dropped
$(22,800)
13,600
6,000
5,856
(2,688)
$
(32)
4. March Rains produces several models of rain catchers. An outside supplier has offered to
produce the containers used for the rain catchers for $9.20 each. March Rains needs 3,100
containers annually. The company has provided the following unit costs for each rain catcher:
Direct materials
Direct labor
$2.40
4.05
Variable overhead
Fixed overhead (21% avoidable)
$1.40
3.00
Show the calculation of the total incremental cost savings. Circle your answer and a label
of increase or decrease indicating the effect on profit.
Incremental VC per unit:
DM
DL
VOH
Incremental VC per unit:
Incremental FC per unit
Incremental cost per unit
Number of units needed
Incremental cost savings
$
2.40
4.05
1.40
7.85
0.63
$ 8.48
3,100
$26,288
Increase in profit