ACG 4361
Handout #3A – Incremental Analysis
Spring 2016
Problem 1
Landers makes two models of wrenches. The revenue and cost information for the two wrenches appear in the
table below:
2,000
3,000
Number of wrenches
Pro
Basic
Sales revenue
$40,000
$16,000
Variable costs
18,000
4,000
Fixed costs
15,000
8,000
Profit
$ 7,000
$ 4,000
Profit per wrench
$3.50
$1.33
CM per wrench
$11.00
$4.00
Pounds of aluminum
1.2
0.5
Due to a trucking strike, only 2,190 pounds of aluminum will be available during June. Each pound of aluminum
costs $1.40. Landers needs to make at least 300 of each size to stay competitive and can sell all it makes each
month.
A. Which model is the most ‘profitable’ to produce given the limited material supply? Explain why you selected
this rationale on which to make your decision.
B. How many of each size should Landers produce to maximize profits?
Updated December 26, 2015
Problem 2 LanPro has three product lines in its retail stores: rakes, hoes, and shovels. The company’s tax rate
is 30%. Results of the 3rd quarter are presented below:
Rakes
Hoes
Shovels
Total
Units sold
1,000
2,000
2,000
5,000
Revenue
$44,000 $80,000 $46,000 $170,000
Variable departmental costs
30,000
44,000
24,000
98,000
Direct fixed costs
2,000
6,000
4,000
12,000
Allocated fixed costs
15,000
14,000
5,000
34,000
Income before taxes
($3,000) $ 16,000 $ 13,000
$26,000
A. In good form, prepare a single column incremental analysis to determine the change in net income
dropping rakes assuming that demand of other products is expected to remain the same if rakes are dropped.
.
B. Use your results to part A to show the calculation of LanPro’s new profit if rakes are dropped.
C. If rakes are dropped, and demand of hoes is expected to increase by 1% as a result of dropping rakes, what
is the change in profit as a result?
Updated December 26, 2015
Problem 3 Hanover, Inc. produces several models of bicycles. An outside supplier has offered to produce the
tire rims for $11 each. Hanover needs 3,500 rims annually. Hanover has provided the following unit costs for
tire rims:
Direct materials
$3.00
Direct labor
5.00
Variable overhead
2.00
Fixed overhead (74% unavoidable)
4.00
If Hanover outsources, it can lease its warehouse to an adjoining business that is willing to pay $2,000
annually for the facility use.
A. In good form, prepare a single column incremental analysis to show the effect of the make or buy
decision.
B. Name the two primary qualitative considerations in an outsourcing decision.
Updated December 26, 2015
Problem 4 Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly
production costs for 1,000 units are as follows:
Direct materials
$ 20,000
Direct labor
5,000
Variable overhead costs
15,000
Fixed overhead costs
10,000
Total costs
$50,000
It is estimated that 15% of the fixed overhead costs assigned to TE456 will no longer be incurred if the
company purchases TE456 from the outside supplier. Donald's Engine Company can purchase the part from
an outside supplier at $42.50 per unit.
A. If Donald's Engine Company accepts the offer from the outside supplier, how much are avoidable
costs?
B. Prepare a single column incremental analysis for the decision.
C. What is the maximum price that Donald's Engine Company should be willing to pay the outside
supplier?
D. What are the two biggest qualitative considerations QT should ponder as it relates to the decision?
Updated December 26, 2015
Problem 5 Pet Crunch makes and sells dog snacks to national distributors for $4.35 per package. The
following cost data per bag of snacks are based on a normal production of 12,000 bags produced each year.
Direct materials
$1.60
Direct labor
0.32
Factory overhead (70% variable)
1.40
Pet Crunch has received a special order for a sale of 2,500 bags of snacks for an overseas customer. The
customer is willing to pay $2.80 per bag, but also wants its logo imprinted on the bag. The logo imprint will cost
$0.20 per bag.
A. Show the calculation of the minimum price to charge per unit if capacity is 18,000 bags annually.
B. Show the calculation of the opportunity cost per unit if capacity is 13,000 bags.
C. Show the calculation of the minimum price to charge per unit if capacity is 13,000 bags annually.
D. Prepare an incremental analysis in good form assuming the capacity is 13,000 bags.
Updated December 26, 2015
Problem 6 A & B Manufacturing is approached by a European customer to fulfill a one-time-only special order
for 500 units of a product similar to one offered to domestic customers. The following per unit data apply for
annual sales to regular customers when 3,000 units are produced and sold:
Direct materials
$66
Direct labor
30
Variable manufacturing support
48
Fixed manufacturing support
104
Total manufacturing costs
248
Markup (40%)
99
Targeted selling price
$347
The markup exists to cover a $12 per unit variable selling and admin cost, $12,000 of fixed selling and admin
costs, and the balance to profit. A & B Manufacturing has a capacity of 3,200 units per year.
a. How much is the full cost of the product per unit at capacity?
b. How much is the contribution margin per unit at capacity?
c. For A and B Manufacturing, what is the minimum acceptable relevant selling price of each unit for the
one-time-only special order?
e. Suppose the customer wanted the order of 500 units to be delivered each year for three years. What is
the minimum acceptable selling price per unit if the company has available capacity?
Updated December 26, 2015