7 Chapter Homework Assignment Answer/Review Sheet
EXERCISES
E4. LO 1 In this solution, supplies and travel are assumed to vary with revenue. Supplies as a percent of revenue $15,000 $201,000 Travel as a percent of revenue $2,000 $201,000
0.0746 0.0100
Increase in revenue $36,000 Less: Cost of exhibit space 12,000 Increase in supplies (.0746 $36,000) 2,686 Increase in travel (.0100 $36,000) 360 Increase in profit $20,954 The company should exhibit at the show since the impact on profit is positive. E6. LO 1, 2, 4 a. The incremental profit is $410 as follows: Revenue $65 150 $ 9,750 Less cost of unprepared food and beverage $42 150 6,300 3,450 Lost revenue $50 160 Cost savings for food and beverage $31 160 Loss profit Net
(8,000) 4,960 ( 3,040) $ 410
72
b. As indicated above, the opportunity cost of accepting the New England group is $410. c. The restaurant should consider the fact that it may hurt its business with "regulars" who are turned away due to the closure. This could have serious long-term effects. E7. LO 1. 2 b, c, d, f, g, and i. E9. LO 2 a. False b. False c. True E10. LO 2 d, f, g, and h. E11. LO 1 Incremental benefit (cost) of completing the phone: Price $125.00 Material (12.00) Direct Labor (13.00) Variable overhead (10.00) Benefit $ 90.00 Incremental benefit of selling partially completed phone: Price $100.00 the The company will be better off by $10 per phone if the company sells partially completed units. d. False e. True f. False
73
E18. LO 1 Selling price per unit Less variable costs per unit: Direct material Direct labor Variable overhead Contribution margin per unit Times number of incremental units
$15.00 $3.00 1.00 .25
4.25 10.75 8,000 86,000 40,000 $46,000
Incremental profit before cost of additional worker Less cost of additional worker Financial impact of hiring additional worker
PROBLEMS
P1. LO 1 and General Ethics Extrapolating from the information provided, a $1,125,000 incremental profit will be generated even if sales are only $6,000,000: Incremental sales Less cost of goods sold 3.5 8 $6,000,000 Less cost of TV ads Net $6,000,000 2,625,000 2,250,000 $1,125,000
Still, it would be unethical for Joan to bias her estimate of incremental sales simply because she "knows" (or thinks she knows) that the president will not go for the ads unless the revenue estimate is biased upwards. Joan wasn't hired to provide biased information to the president--she was hired to provide honest estimates that the president can use to make decisions. It may be that the president knows of some incremental costs (including opportunity costs) of which Joan is unaware, and that's the reason the president wants a high revenue figure. In this case, Joan's bias may actually lead to a decline in shareholder value.
74
P3. LO 1, 4 a. Incremental Cost Analysis Cost of outsourcing payroll function Cost savings (avoidable if outsource payroll function): Payroll clerk salary Payroll processing software updates Payroll tax update seminar costs Excess cost of outsourcing payroll $8,00 0 975 1,000 $16,00 0
(9,975) $6,025
The company will spend $16,000 year a outsourcing payroll. By outsourcing payroll, the company would pay $6,025 more per year than it costs to carry out this function in-house. b. The company should consider the impact on employee morale if the payroll function is outsourced. If payroll were outsourced, the payroll clerk would be laid off. Other employees in the company may begin to wonder if they will be laid off as well, so there could be a decrease in morale in the future. P6. LO 1, 2 Incremental cost of purchasing containers (100,000 packages $1.75) Cost savings: Direct material (.10 $6.50 100,000) Direct labor (.2 $3.50 100,000) Variable overhead* (.15 $1 100,000) Leased space savings Supervisor salary Net benefit
$175,000
$65,000 70,000 15,000 15,000 70,000
235,000 $ 60,000
The company should purchase the containers--there is an expected net benefit
75
of $60,000. *Fixed overhead is $2 per package ($200,000 100,000 packages). Therefore, variable overhead is $1 ($3 total overhead - $2 fixed overhead). P12. a. Yards of carpet Sales Less variable costs Less fixed costs Profit (loss) LO 1, 2 Standard 30,000 $450,000 270,000 206,250* ($ 26,250) Deluxe 50,000 Total 80,000
$1,000,000 $1,450,000 600,000 870,000 343,750** 550,000 $ 56,250 $ 30,000
* (30 80) x $550,000 = $206,250 ** (50 80) x $550,000 = $343,750 Deluxe 50,000 $1,000,000 600,000 550,000 ($ 150,000)
b. Yards of carpet Sales Less variable costs Less fixed costs Profit (loss)
c. In many if not most cases, common costs will not be reduced when a product or product line is dropped. The costs are simply "passed on" to the remaining products, which may in turn appear unprofitable.
76
P15.
LO 3 a. Allocation based on weight:
Type Weight (lbs.) Percent
Salmon Halibut Flounder Salmon Revenue (12,000 lbs. $6.00) Cost (.24 $72,000) Profit Halibut Revenue (18,000 lbs. $4.00) Cost (.36 $72,000) Profit Flounder Revenue (20,000 lbs. $2.00) Cost (.40 $40,000) Profit
12,000 18,000 20,000 50,000
24% 36% 40% 100%
$72,000 17,280 54,720
72,000 25,920 46,080
40,000 8,696 31,304 $118,956
Total profit ($54,720 + $46,080 + $11,200)
77
b.
Allocation based on relative sales value: Type Salmon Halibut Flounder Sales Value $72,000 72,000 40,000 $184,000
* Some rounding error exists
Percent 39.130% 39.130% 21.739% 100.000% *
Salmon Revenue (12,000 lbs. $6.00) Cost (.39130 $72,000) Profit Halibut Revenue (18,000 lbs. $4.00) Cost (.39130 $72,000) Profit Flounder Revenue (20,000 lbs. $2.00) Cost (.21739 $72,000) Profit Total profit ($43,826 + $43,826 + $24,348)
$72,000 28,174 43,826
$72,000 28,174 43,826
$40,000 15,652 24,348 $112,000
78
c. Incremental revenue Revenue of paste (10,000 lbs. $4) Original revenue of flounder (20,000 lbs. $2) Incremental revenue Incremental cost Net incremental cost
$40,000 40,000 0 8,000 ($8,000)
Given that there is a net incremental cost of $8,000, Robert should not convert the flounder into fish paste. Note that the joint costs allocated to the fish are not relevant to the analysis. These costs are not incremental costs. They exist whether or not the flounder is converted into fish paste.