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CSULB ACCT 310 - Demo 13-1 ANSWER

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Chapter 13 Demonstration Problem Solutions Page 1 Please send comments and corrections to me at [email protected] Demo 13-1 ANSWER The common fixed costs are irrelevant to the decision making. The following income statement isolates these irrelevant costs: System A System B Headset Total Sales: $45,000 $32,500 $8,000 $85,500 Less: Variable Expenses: -20,000 -25,500 -3,200 -48,700 Contribution Margin: $25,000 $ 7,000 $4,800 $36,800 Less: Direct Fixed Costs: -5,000 -13,000 -1,700 -19,700 Divisional Margin: $20,000 -$ 6,000 $3,100 $17,100 Common Fixed Costs: -11,000 Operating Profit: $ 6,100 We can now see that System B is reducing our Operating Profit by $6,000, and if we drop System B, then our Operating Profit should increase to $12,100. If you drop System B: System A Headset Total Sales: $45,000 $8,000 $55,500 Less: Variable Expenses: -20,000 -3,200 -23,200 Contribution Margin: $25,000 $4,800 $29,800 Less: Direct Fixed Costs: -5,000 -1,700 -6,700 Divisional Margin: $20,000 $3,100 $23,100 Common Fixed Costs: -11,000 Operating Profit: $12,100Chapter 13 Demonstration Problem Solutions Page 2 Please send comments and corrections to me at [email protected] Demo 13-2 ANSWER (1) Make Buy Raw Materials: $176,500 (55 x 1500)+(94 x 1000) $ 0 Direct Labor: 55,000 (22 x 2500) 0 Variable Manufacturing O/H: 12,500 (5 x 2500) 0 Fixed Manufacturing O/H: 50,000 (24,000 + 26,000) 0 Purchase Cost: ______0 (100x1500)+(132x1000) $282,000 Total Cost: $294,000 $282,000 You ignore the depreciation expense because it is a sunk cost. The equipment is going to be scraped it has no other value, its cost (the depreciation) has already been spent. (2) Qualitative Factors include (i) quality control on the purchased crowns, (ii) reliability of supplier, (iii) effect of a reduction in work force on labor relations, (iv) eliminates the ability to later produce their own crowns at a later date. (3) Make Buy Raw Materials: $176,500 (55 x 1500)+(94 x 1000) $ 0 Direct Labor: 55,000 (22 x 2500) 0 Variable Manufacturing Overhead: 12,500 (5 x 2500) 0 Fixed Manufacturing Overhead: 24,000 (24,000) 0 Purchase Cost: _____0 (100X1500)+(132X1000) $282,000 Total Cost: $268,000 $282,000 You ignore the depreciation expense because it is a sunk cost. We have no information of alternative use of the space being vacated by the lab.Chapter 13 Demonstration Problem Solutions Page 3 Please send comments and corrections to me at [email protected] (4) Make Buy Raw Materials: $176,500 (55 x 1500)+(94 x 1000) $ 0 Direct Labor: 55,000 (22 x 2500) 0 Variable Manufacturing Overhead: 12,500 (5 x 2500 0 Fixed Manufacturing Overhead: 24,000 (24,000) 0 Purchase Cost:: 0 (100X1500)+(132X1000) $282,000 Rental Income: _______0 -15,000 Total Cost:: $268,000 $267,000 Rather than showing the rental income as an opportunity cost which is added to the cost of the Make alternative, we treated the rental income as a reduction of the cost of the Buy alternative. (5) Make Buy Raw Materials: $353,000 (55 x 3000)+(94 x 2000) $ 0 Direct Labor: 110,000 (22 x 5000) 0 Variable Manufacturing Overhead: 25,000 (5 x 5000 0 Fixed Manufacturing Overhead: 50,000 (24,000+26,000) 0 Purchase Cost:: _______0 (100X3000)+(132X2000) $564,000 Total Cost:: $538,000 $564,000 We assumed that the Fixed Manufacturing Overhead Costs didn’t change. This alternative shows that the decision can change if the circumstances change. You decision making must take this into account.Chapter 13 Demonstration Problem Solutions Page 4 Please send comments and corrections to me at [email protected] Demo 13-3 ANSWER (1) Process 1 costs are incurred whether or not you sell Tyl or process it further and sell Tylenol. So the Process 1 costs are not relevant to our decision. The revenue and costs from selling Buff is also not relevant to our decision. Process 2 costs are incurred only if you process the Tyl into Tylenol, so they are relevant. Sell Process Revenue: $5,000 $ 7,500 Bag Cost: -15 (.75 x(500/25)) 0 Shipping Cost: -50 ((2500/25)x1.23) -123 (.1 x 500) Grinding & Tableting 0 (2.5 x 500) -1250 Bottling Cost: _____0 (.20 x 2500) -500 Operating Profit (Per 500lb) $ 4,935 $ 5,627 For each 500 pound lot of Tyl, you make $692 more by processing the Tyl rather than selling it in its raw state. We sell 265,000/500 = 530 lots of Tyl. Therefore we can make $692 x 530 = $366,760 more by processing the Tyl further. Demo 13-4 ANSWER (1) Kevin has excess capacity (he has capacity that he is not using). Therefore his fixed cost does not go up if he makes more units. Because the fixed costs are the same whether or not he takes the special order, the fixed costs are not relevant to the decision. You only have to consider the incremental revenue and costs:Chapter 13 Demonstration Problem Solutions Page 5 Please send comments and corrections to me at [email protected] Kevin's Decision: Don't Take Order Take Order Revenue: 0 $25,000 (10,000 x $2.50) Variable Costs 0 -21,000 (10,000 x $2.10) Fixed Costs: 0 _____-0 Operating Profit: 0 $ 4,000 Even though Ellen thinks that Kevin is breaking even on the special order, Kevin is actually making a profit from the special order. (2) Ellen's Decision: Don't Take Order Take Order Revenue: 0 $320,000 (10,000 x $32) Variable Costs 0 -260,000 (10,000 x26) Kevin's Components: -32,000 (10,000 x $3.20) Fixed Costs: 0 _____-0 Operating Profit: 0 $ 28,000 Even if Ellen doesn't get here price concession from Kevin, she will still make a profit on the special


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CSULB ACCT 310 - Demo 13-1 ANSWER

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