Managerial Accounting 1B Ch23

A company must decide between
scrapping or reworking units that do not pass inspection. The company has
15,000 defective units that cost $6.00 per unit to manufacture. The units can
be sold as is for $2.50 each, or they can be reworked for $4.50 each and then
sold for the full price of $9.00 each. If the units are sold as is, the
company will also be able to build 15,000 replacement units at a cost of
$6.00 each, and sell them at the full price of $9.00 each.

(1)

What is the incremental income
from selling the units as scrap?(Omit the
“$” sign in your response.)

Incremental income

$

(2)

What is the incremental income
from reworking and selling the units?(Omit
the “$” sign in your response.)

Incremental income

$

(3)

What must the company decide?

The units should not be reworked

Feist Co. expects to sell 200,000
units of its product in the next period with the following results.

Sales (200,000 units)

$

3,000,000

Costs and expenses

Direct
materials

400,000

Direct
labor

800,000

Overhead

200,000

Selling
expenses

300,000

Administrative
expenses

514,000

Total costs and
expenses

2,214,000

Net income

$

786,000

The company has an opportunity to
sell 20,000 additional units at $12 per unit. The additional sales would not
affect its current expected sales. Direct materials and labor costs per unit
would be the same for the additional units as they are for the regular units.
However, the additional volume would create the following incremental costs:
(1) total overhead would increase by 15% and (2) administrative expenses
would increase by $86,000.

Calculate the combined total net
income if the company accepts the offer to sell additional units at the
reduced price of $12 per unit. (Leave no
cells blank – be certain to enter “0” wherever required. Input all
amounts as positive values. Omit the “$” sign in your response.)

Santos Company currently
manufactures one of its crucial parts at a cost of $3.40 per unit. This cost
is based on a normal production rate of 50,000 units per year. Variable costs
are $1.50 per unit, fixed costs related to making this part are $50,000 per year,
and allocated fixed costs are $45,000 per year. Allocated fixed costs are
unavoidable whether the company makes or buys the part. Santos is considering
buying the part from a supplier for a quoted price of $2.70 per unit
guaranteed for a three-year period.

Calculate the total incremental
cost of making 50,000 units. (Omit the
“$” sign in your response.)

Total incremental cost

Calculate the total incremental
cost of buying 50,000 units. (Omit the
“$” sign in your response.)

Total incremental cost

Should the company continue to
manufacture the part, or should it buy the part from the outside supplier?

Cantrell Company has already
manufactured 20,000 units of Product A at a cost of $20 per unit. The 20,000
units can be sold at this stage for $500,000. Alternatively, the units can be
further processed at a $300,000 total additional cost and be converted into
4,000 units of Product B and 8,000 units of Product C. Per unit selling price
for Product B is $75 and for Product C is $50.

1.

Calculate the Incremental Net
Income (or loss) if processed further.(Negative
amount should be indicated by a minus sign. Omit the “$” sign in
your response.)

Incremental net income
(or loss)

2.

Indicate whether the 50,000 units
of Product A should be processed further or not.

Bethel Company owns a machine that
can produce two specialized products. Production time for Product TLX is two
units per hour and for Product MTV is five units per hour. The machine’s
capacity is 2,200 hours per year. Both products are sold to a single customer

who has agreed to buy all of the company’s output up to a maximum of 3,750
units of Product TLX and 2,000 units of Product MTV. Selling prices and
variable costs per unit to produce the products follow.

Product
TLX

Product
MTV

Selling price per unit

$

12.50

$

7.50

Variable costs per
unit

3.75

4.50

1.

Determine the company’s most
profitable sales mix.

Product TLX

Product MTV

2.

Determine the contribution margin
that results from that sales mix.(Do not
round your cost per unit rate, round your intermediate and final answer to
the nearest dollar amount. Omit the “$” sign in your response.)

Contribution margin

Home Decor Company’s management is
trying to decide whether to eliminate Department 200, which has produced
losses or low profits for several years. The company’s 2011 departmental
income statement shows the following.

In analyzing whether to eliminate
Department 200, management considers the following:

a.

The company has one office worker
who earns $1,200 per week, or $62,400 per year, and four sales clerks who
each earn $1,000 per week, or $52,000 per year.

b.

The full salaries of two
salesclerks are charged to Department 100. The full salary of one salesclerk
is charged to Department 200. The salary of the fourth clerk, who works
half-time in both departments, is divided evenly between the two departments.

c.

Eliminating Department 200 would
avoid the sales salaries and the office salary currently allocated to it.
However, management prefers another plan. Two salesclerks have indicated that
they will be quitting soon. Management believes that their work can be done
by the other two clerks if the one office worker works in sales half-time.
Eliminating Department 200 will allow this shift of duties. If this change is
implemented, half the office worker’s salary would be reported as sales
salaries and half would be reported as office salary.

d.

The store building is rented under
a long-term lease that cannot be changed. Therefore, Department 100 will use
the space and equipment currently used by Department 200.

e.

Closing Department 200 will
eliminate its expenses for advertising, bad debts, and store supplies; 70% of
the insurance expense allocated to it to cover its merchandise inventory; and
25% of the miscellaneous office expenses presently allocated to it.

Required:

1.

Complete the three-column report
that lists items and amounts for (a) the company’s total expenses (including
cost of goods sold)—in column 1, (b) the expenses that would be eliminated by
closing Department 200—in column 2, and (c) the expenses that will
continue—in column 3.(Leave no cells blank –
be certain to enter “0” wherever required. Omit the “$”
sign in your response.)

2.

Complete the forecasted annual
income statement for the company reflecting the elimination of Department 200
assuming that it will not affect Department 100’s sales and gross profit. The
statement should reflect the reassignment of the office worker to one-half
time as a salesclerk.(Input all amounts as
positive values. Omit the “$” sign in your response.)