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# Answers to Discussion Post Questions - Week 8

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```SOLUTIONS TO SUGGESTED PROBLEMS
E11.19
a.
Full capacity is the equivalent of 1,000,000 (\$5,000,000 &divide; \$5.00) units. At the current level of
70%, an additional 200,000 units would be within their total capacity (700,000 + 200,000 &lt; 1,000,000).
Variable cost per unit:
Direct materials and direct labour (\$2.00 + \$0.50)
\$2.50
Variable manufacturing overhead
1.00
Variable selling expenses
—
\$3.50
Selling price per unit: (\$3.50 + \$1.00)
\$4.50
Incremental revenue (200,000 units &times; \$4.50)
Incremental cost:
Variable cost (200,000 units &times; \$3.50 per unit)
Incremental income
\$900,000
700,000
\$200,000
Hardy Fiber should accept the CAF’s offer because it would increase net income by \$200,000.
Another approach to the solution: CAF’s payment of \$4.50 covers the relevant variable costs and
provides a margin of \$1 per unit. Therefore, incremental income from the sale would be \$200,000 (\$1 &times;
200,000 units).
b. Variable cost = \$2.00 + \$0.50 +\$1.00 + \$0.25 = \$3.75
If they could sell one million units at \$8, they should not accept the CAF’s offer because for every unit
they produce for the CAF at a \$1 contribution margin, they would have to give up \$4.25 (\$8.00 – \$3.75)
in contribution margin on a sale on the open market.
E11.20
a.
Number of units: 50,000
Make
Direct materials (\$4)
Direct labour (\$6)
Variable MOH (50% &times; \$6)
Fixed MOH*
Purchase price (\$13.50)
Total annual cost
\$200,000
300,000
150,000
50,000
—
\$700,000
Buy
\$ 50,000
675,000
\$725,000
Income
Increase
(Decrease)
\$200,000
300,000
150,000
—
(675,000)
\$(25,000)
*Fixed MOH would not have to be included in the analysis because it does not differ between the two
alternatives.
b.
They should not purchase the shades because it would cost them \$25,000 more than if they
made them.
c.
Yes, by purchasing the shades, a total cost saving of \$15,000 will result as shown below.
SOLUTIONS TO SUGGESTED PROBLEMS
Number of units: 50,000
Direct material (\$4)
Direct labour (\$6)
Variable MOH (\$3)
Fixed MOH
Purchase price (\$13.50)
Opportunity cost
Total annual cost
Make
\$200,000
300,000
150,000
50,000
—
40,000
\$740,000
Buy
\$ 50,000
675,000
\$725,000
Income
Increase
(Decrease)
\$200,000
300,000
150,000
—
(675,000)
40,000
\$15,000
E11.21
a. (1)
Direct materials
Direct labour
Variable overhead
Fixed overhead
Purchase price
Total annual cost
Make
Buy
\$ 700,000
—
600,000
—
200,000
—
500,000
\$ 100,000
—
1,600,000
\$2,000,000
\$1,700,000
Net Income
Increase
/(Decrease)
\$700,000
600,000
200,000
400,000
(1,600,000)
\$300,000
Yes. The offer should be accepted because net income will increase by \$300,000.
(2)
Direct materials
Direct labour
Variable overhead
Fixed overhead
Opportunity cost
Purchase price
Total annual cost
b.
Make
\$700,000
600,000
200,000
500,000
200,000
—
\$2,200,000
Buy
—
—
—
500,000
—
1,600,000
\$2,100,000
Net Income
Increase
(Decrease)
\$700,000
600,000
200,000
—
200,000
(1,600,000)
\$100,000
Yes. The offer should be accepted because net income will increase by \$100,000.
Qualitative factors include the possibility of laying off those employees that produced the robot
and the resulting poor morale of the remaining employees; maintaining quality standards;
ensuring that the supplier can increase/decrease their activity levels sufficiently to meet SY
Telc's activity levels should they grow/contract; and controlling the purchase price in the future.
SOLUTIONS TO SUGGESTED PROBLEMS
E11.22
Per unit selling price
Sell
Basic Kit
Per unit selling price
Costs:
Materials
Labour
Total costs
Incremental revenue
\$30
Process
Further
Stage 2 Kit
\$35
(14)
-0(14)
\$16
(14)
(9)
(23)
\$12
Net
Income
Increase
(Decrease
)
\$5
(9)
\$(4)
Josee should not carry the Stage 2 kits. The incremental revenue of \$5 does not cover the incremental
processing costs of \$9 (\$18 &times; 0.5 hours). Thus, she would be better off selling just the basic kits.
E11.23
a. Sales (\$50,000 + \$10,000 + \$60,000) \$120,000
Less: Joint costs
100,000
Net income
\$20,000
b. Sales (\$190,000 + \$35,000 + \$220,000)
Joint costs
Additional costs (\$100,000 + \$30,000 + 150,000)
Net income
c.
\$445,000
(100,000)
(280,000)
\$ 65,000
Product 12 Product 14 Product 16
Revenue of final product
\$190,000
\$35,000
\$220,000
Revenue at split-off
50,000
10,000
60,000
Incremental revenue
140,000
25,000
160,000
Less: Incremental costs
100,000
30,000
150,000
Incremental profit (loss)
\$40,000
\$(5,000)
\$10,000
Products 12 and 16 should be processed further and product 14 should be sold at the split-off point.
d. Sales (\$190,000 + \$10,000 + \$220,000)
Joint costs
Additional costs (\$100,000 + \$150,000)
Net income
\$420,000
(100,000)
(250,000)
\$ 70,000
Net income is \$5,000 (\$70,000 – \$65,000) higher in d. than in b. because Product 14 is not processed
further, thereby increasing overall profit by \$5,000.
SOLUTIONS TO SUGGESTED PROBLEMS
E11.24
Sarco
\$310,000
200,000
110,000
100,000
\$10,000
Revenue of final product
Revenue at split-off
Incremental revenue
Less: Incremental costs
Incremental profit (loss)
Barco
\$380,000
300,000
80,000
89,000
\$(9,000)
Larco
\$800,000
500,000
300,000
250,000
\$ 50,000
From this analysis we see that Sarco and Larco should be processed further because the incremental
revenue exceeds the incremental costs, but Barco should be sold as is.
E11.26
Total operating costs
Retain
Replace
Net Income
Computer Computer Increase
(Decrease)
\$125,0001 \$100,0002
\$25,000
New computer cost
25,000
(25,000)
Salvage for old computer
(6,000)
6,000
Total
\$125,000 \$119,000
\$ 6,000
1
(5 years &times; \$25,000)
2
(5 years &times; \$20,000)
The current computer should be replaced. The incremental analysis shows that net income for the fiveyear period will be \$6,000 higher by replacing the current computer.
E11.27
Continue
Sales
Variable costs (\$70,000 + \$15,000)
Contribution margin
Fixed costs (\$6,470 + \$28,600)
Net income (loss)
\$96,200
85,000
11,200
35,070
\$(23,870)
Eliminate
\$ -0-0-035,070
\$(35,070)
Net Income
Increase
(Decrease)
\$(96,200)
85,000
(11,200)
-0\$(11,200)
Nicole is incorrect.
The incremental analysis above shows that net income will be \$11,200 less if the Erie Division is
eliminated.
This amount equals the contribution margin that would be lost through discontinuing the division.
Note that none of the fixed costs can be avoided, and therefore the amount does not differ between
alternatives, making fixed costs irrelevant.
SOLUTIONS TO SUGGESTED PROBLEMS
P11.49B
a.
Number of units: 40,000
Make
Buy
Net Income
Increase
(Decrease)
\$120,000
112,500
9,500
(240,000)
(20,000)
(10,000)
9,000
\$(19,000)
Direct material (\$3.00)
\$120,000
—
Direct labour (2,500 &times; 3 &times; \$15)
112,500
—
1
Manufacturing costs
9,500
—
Purchase price (\$6.00)
—
\$240,000
Freight costs (\$0.50)
—
20,000
Receiving clerk
—
10,000
Opportunity cost (6,000 &times; \$1.50)
9,000
—
Total annual cost
\$251,000
\$270,000
1
(\$6,000 + \$1,500 + \$2,000)
Dunham should continue to make the part because net income would be \$19,000 less if it is purchased
from the supplier.
b.
The decision would not be different. The opportunity cost of \$15,000, will not cover the loss of
\$19,000 if the part is purchased as shown below:
Net Income
Increase
Make
Buy
(Decrease)
Total annual cost (from a)
\$251,000
\$270,000
\$(19,000)
Opportunity cost
15,000
—
15,000
Total annual cost
\$266,000
\$270,000
\$(4,000)
c. Non-financial factors include: (1) the adverse effect on employees if the part is purchased, (2)
how long the supplier will be able to satisfy the company’s quality control standards at the
quoted price per unit, and (3) whether the supplier will deliver the units when they are needed.
d.
E12.18
ROCHE AND YOUNG, CPAs
Service Revenue Budget
For the Year Ending December 31, 2022
Quarters
Auditing:
1
2
3
4
Billable hours
2,200
1,600
2,000
2,400
8,200
\$60
\$60
\$60
\$60
\$60
\$132,000
\$96,000
\$120,000
\$144,000
\$492,000
Rate
Total revenue
Year
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