10.24 Short Run.handout.inclass
LO1 Using Incremental Analysis
SE 2. Pices Corporation has assembled the following information related to the
purchase of a new automated postage machine:
Posen
Machine
Increase in revenue
Value Machine
$44,200
$49,300
Direct materials
12,200
12,200
Direct labor
10,200
10,600
Variable overhead
24,500
26,900
Fixed overhead (including
depreciation)
12,400
12,400
Increase in annual operating costs
Using incremental analysis and only relevant information, compute the difference in
favor of the Value machine.
LO2 Outsourcing Decision
SE 3. Marc Company assembles products from a group of interconnecting parts. The
company produces some of the parts and buys some from outside vendors. The
vendor for Part X has just increased its price by 35 percent, to $10 per unit for the first
5,000 units and $9 per additional unit ordered each year. The company uses 7,500
units of Part X each year. Unit costs if the company makes the part are as follows:
Direct materials
$3.50
Direct labor
2.00
Variable overhead
4.00
Variable selling costs for the assembled product 3.75
Should Marc continue to purchase Part X or begin making it?
LO3 Special Order Decision
SE 5. Hadley Company has received a special order for Product R3P at a selling price
of $20 per unit. This order is over and above normal production, and budgeted
production and sales targets for the year have already been exceeded. Capacity exists
to satisfy the special order. No selling costs will be incurred in connection with this
order. Unit costs to manufacture and sell Product R3P are as follows: direct materials,
$7.60; direct labor, $3.75; variable overhead, $9.25; fixed overhead, $4.85; variable
selling costs, $2.75; and fixed general and administrative costs, $6.75. Should Hadley
Company accept the order?
LO4 Segment Profitability Decision
SE 7. Peruna Company is evaluating its two divisions, North Division and South
Division. Data for North Division include sales of $530,000, variable costs of
$290,000, and fixed costs of $260,000, 50 percent of which are traceable to the
division. South Division’s efforts for the same period include sales of $610,000,
variable costs of $340,000, and fixed costs of $290,000, 60 percent of which are
traceable to the division. Should Peruna Company consider eliminating either
division? Is there any other problem that needs attention?
LO5 Sales Mix Decision
SE 8. Snow, Inc., makes three kinds of snowboards, but it has a limited number of
machine hours available to make them. Product line data are as follows:
Wood
Plastic
Graphite
Machine hours per unit
1.25
1.0
1.5
Selling price per unit
$100
$120
$200
Variable manufacturing cost per unit
$45
$50
$100
Variable selling costs per unit
$15
$26
$36
In what order should the snowboard product lines be produced?
LO6 Sell or Process-Further Decision
SE 9. Gomez Industries produces three products from a single operation. Product A
sells for $4 per unit, Product B for $6 per unit, and Product C for $10 per unit. When
B is processed further, there are additional unit costs of $3, and its new selling price is
$10 per unit. Each product is allocated $2 of joint costs from the initial production
operation. Should Product B be processed further, or should it be sold at the end of the
initial operation?
LO6 Sell or Process-Further Decision
SE 10. In an attempt to provide superb customer service, Richard V. Meats is
considering the expansion of its product offerings from whole hams and turkeys to
complete ham and turkey dinners. Each dinner would include a carved ham or turkey,
two side dishes, and six rolls or cornbread. The accountant for Richard V. Meats has
compiled the following relevant information:
Product
Sales Revenue if No
Additional Service
Ham
Sales Revenue if
Additional Processing
Processed Further Costs
$30
$50
$15
20
35
15
Turkey
A cooked, uncarved ham costs Richard V. Meats $20 to produce. A cooked, uncarved
turkey costs $15 to prepare. Use incremental analysis to determine which products
Richard V. Meats should offer.
LO1 Incremental Analysis
E 2. The managers of Lennox Company must decide which of two mill blade
grinders—Y or Z—to buy. The grinders have the same purchase price but different
revenue and cost characteristics. The company currently owns Grinder X, which it
bought three years ago for $15,000 and which has accumulated depreciation of $9,000
and a book value of $6,000. Grinder X is now obsolete as a result of advances in
technology and cannot be sold or traded in.
The accountant has collected the following annual revenue and operating cost
estimates for the two new machines:
Grinder Y Grinder Z
Increase in revenue
$16,000
$20,000
Direct materials
4,800
4,800
Direct labor
3,000
4,100
Variable overhead
2,100
3,000
Fixed overhead (depreciation
included)
5,000
5,000
Increase in annual operating costs
1. Identify the relevant data in this problem.
2. Prepare an incremental analysis to aid the managers in their decision.
3. Should the company purchase Grinder Y or Grinder Z?
LO2 Outsourcing Decision
E 3. One component of a radio produced by Audio Systems, Inc., is currently being
purchased for $225 per 100 parts. Management is studying the possibility of
manufacturing that component. Annual production (usage) at Audio is 70,000 units;
fixed costs (all of which remain unchanged whether the part is made or purchased) are
$38,500; and variable costs are $0.95 per unit for direct materials, $0.55 per unit for
direct labor, and $0.60 per unit for variable overhead.
Using incremental analysis, decide whether Audio Systems, Inc., should
manufacture the part or continue to purchase it from an outside vendor.
LO3 Special Order Decision
E 5. Antiquities, Ltd., produces antique-looking books. Management has just received
a request for a special order for 2,000 books and must decide whether to accept it.
Venus Company, the purchaser, is offering to pay $25.00 per book, which includes
$3.00 per book for shipping costs.
The variable production costs per book include $9.20 for direct materials, $4.00 for
direct labor, and $3.80 for variable overhead. The current year’s production is 22,000
books, and maximum capacity is 25,000 books. Fixed costs, including overhead,
advertising, and selling and administrative costs, total $80,000. The usual selling price
is $25.00 per book. Shipping costs, which are additional, average $3.00 per book.
Determine whether Antiquities should accept the special order.
LO4 Elimination of Unprofitable Segment Decision
E 8. Guld’s Glass, Inc., has three divisions: Commercial, Nonprofit, and Residential.
The segmented income statement for last year revealed the following:
Guld’s Glass, Inc.
Divisional Profit Summary and Decision Analysis
Commercial
Division
Nonprofit
Division
Residential
Division
Total
Company
Sales
$290,000
$533,000
$837,000
$1,660,000
Less variable costs
147,000
435,000
472,000
1,054,000
Contribution margin
$143,000
$ 98,000
$365,000
$ 606,000
Less direct fixed
costs
124,000
106,000
139,000
369,000
Segment margin
$ 19,000
($ 8,000)
$226,000
$ 237,000
Less common fixed
costs
Operating income
168,000
$ 69,000
1. How will Guld’s Glass, Inc., be affected if the Nonprofit Division is dropped?
2. Assume the elimination of the Nonprofit Division causes the sales of the
Residential Division to decrease by 10 percent. How will Guld’s Glass, Inc., be
affected if the Nonprofit Division is dropped?
LO4 Elimination of Unprofitable Segment Decision
E 9. URL Services has two divisions: Basic Web Pages and Custom Web Pages.
Ricky Vega, manager of Custom Web Pages, wants to find out why Custom Web
Pages is not profitable. He has prepared the reports that appear on the next page.
1. How will URL Services be affected if the Custom Web Pages Division is
eliminated?
2. How will URL Services be affected if the Design segment of Custom Web Pages
is eliminated?
3. What should Ricky Vega do? What additional information would be helpful to
him in making the decision?
URL Services
Segmented Income Statement
For the Year Ended December 31
Basic Web
Pages (1,000
units)
Service revenue
Custom Web
Pages (200
units)
Total Company
$200,000
$150,000
$350,000
Direct professional labor:
design
$ 32,000
$ 80,000
$112,000
Direct professional labor:
install
30,000
4,000
34,000
Direct professional labor:
maintain
15,000
36,000
51,000
Total variable costs
$ 77,000
$120,000
$197,000
Contribution margin
$123,000
$ 30,000
$153,000
Less variable costs
Less direct fixed costs
Depreciation on computer
equipment
$ 6,000
$ 12,000
$ 18,000
Depreciation on servers
10,000
20,000
30,000
Total direct fixed costs
$ 16,000
$ 32,000
$ 48,000
Segment margin
$107,000
($ 2,000)
$105,000
Less common fixed costs
Building rent
$ 24,000
Supplies
1,000
Insurance
3,000
Telephone
1,500
Website rental
500
Total common fixed costs
$ 30,000
Operating income
$ 75,000
Custom Web Pages Division
URL Services
Segment Profitability Decision
Incremental Analysis
Design
Install
Maintain
Total
Service revenue
$60,000
$25,000
$65,000
$150,000
Less variable costs
80,000
4,000
36,000
120,000
Contribution margin
($20,000)
$21,000
$29,000
$ 30,000
Less direct fixed
costs
6,000
13,000
13,000
32,000
Segment margin
($26,000)
$ 8,000
$16,000
($ 2,000)
LO5 Scarce Resource Usage
E 10. EZ, Inc., manufactures two products that require both machine processing and
labor operations. Although there is unlimited demand for both products, EZ could
devote all its capacities to a single product. Unit prices, cost data, and processing
requirements follow:
Product E
Product Z
Unit selling price
$70
$230
Unit variable costs
$30
$90
Machine hours per unit
0.4
1.4
Labor hours per unit
2.0
6.0
Next year, the company will be limited to 160,000 machine hours and 120,000 labor
hours. Fixed costs for the year are $1,500,000.
1. Compute the most profitable combination of products to be produced next year.
2. Prepare an income statement using the contribution margin format for the product
volume computed in 1.
LO5 Sales Mix Decision
E 11. Grady Enterprises manufactures three computer games. They are called Rising
Star, Ghost Master, and Road Warrior. The product line data are as follows:
Rising Star
Ghost Master
Road Warrior
Current unit sales demand
20,000
30,000
18,000
Machine hours per unit
2.0
1.0
2.5
Selling price per unit
$24.00
$18.00
$32.00
Unit variable manufacturing costs
$12.50
$10.00
$18.75
Unit variable selling costs
$6.50
$5.00
$6.25
The current production capacity is 110,000 machine hours.
1. Which computer game should be manufactured first? Which should be
manufactured second? Which last?
2. How many of each type of computer game should be manufactured and sold to
maximize the company’s contribution margin based on the current production
activity of 110,000 machine hours? What is the total contribution margin for that
combination?
LO6 Sell or Process-Further Decision
E 13. H & L Beef Products, Inc., processes cattle. It can sell the meat as sides of beef
or process it further into final cuts (steaks, roasts, and hamburger). As part of the
company’s strategic plan, management is looking for new markets for meat or meat
by-products. The production process currently separates hides and bones for sale to
other manufacturers. However, management is considering whether it would be
profitable to process the hides into leather and the bones into fertilizer. The costs of
the cattle and of transporting, hanging, storing, and cutting sides of beef are $125,000.
The company’s accountant provided these data:
Product Sales Revenue if Sold at Sales Revenue if Sold
Split-Off
After Further Processing
Additional Processing
Costs
Meat
$100,000
$200,000
$80,000
Bones
20,000
40,000
15,000
Hides
50,000
55,000
10,000
Should the products be processed further? Explain your answer.
LO6 Sell or Process-Further Decision
E 14. Six Star Pizza manufactures frozen pizzas and calzones and sells them for $4
each. It is currently considering a proposal to manufacture and sell fully prepared
products. The following relevant information has been gathered by management:
Product
Pizza
Calzone
Sales Revenue if
No Additional
Processing
Sales Revenue if Processed
Further
Additional Processing
Costs
$4
$8
$5
4
10
5
Use incremental analysis to determine which products Six Star should offer.