Managerial Accounting: BAB240
Student Name: Asad Virk
Student Number:030 991 152
Professor Name: Michael Lindsay
Assignment No. 2 - Due – Wednesday, July 20, 2016: 150
Marks – 10%
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Problem 1 – 5 Marks
Calc, Inc. owns a machine that produces baskets for the gift packages the company
sells. The company uses 1,000 baskets in production each month. The costs of making
one basket is $7 for direct materials, $5 for variable manufacturing overhead, $4 for
direct labour and $9 for fixed manufacturing overhead. The unit cost is based on the
monthly production of 1,000 baskets. The company determined that 25% of the fixed
manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the
baskets for $15 each, and can supply all the units it needs.
a)
Prepare an incremental analysis to determine if Calc should buy the component
from the supplier.
Incremental cost to buy= 1000
×15=15000
Incremental Cost savings:
DM (7×1000)
7000
VOH (5×1000)
5000
DL
(4×1000)
4000
FOH (9×25%×1000)
2250
Additional cost to make=18250-15000=3250
Calc Inc should buy the component from the outside supplier because
it costs $3250 more to make it.
b)
What is the total savings or loss?
If Calc Inc buys the component from the supplier it is going to save $3250
Problem 2 – 5 Marks
Myrna’s Mowing Ltd. cuts lawns. It has a riding lawnmower with a book value of $6,000,
and a remaining useful life of 5 years. A new, more efficient lawnmower is available with
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a cost of $15,000. The useful life of the new machine is also expected to be 5 years.
Myrna estimates that the new machine will allow her to cut more lawns, and therefore
increase revenue from $20,000 per year to $22,000, and reduce variable costs from
$12,000 per year to $10,500.
a)
Prepare an analysis showing whether Myrna should retain the old mower, or buy
new.
Retain
Buy
Book value
6000
15000
Revenue
20000
22000
Variable costs
12000
10500
Change in variable costs=1500
Change in Revenue=2000’
Change in net income per year=3500
Change in net income for five years=17500
Cost to buy new one=15000-6000=9000
b)
What is the net savings or loss over 5 years?
Net savings or loss=17500-9000=8500
c) New info: If her lower variable cost with the new lawnmower increased by $500 every
year from $ 10,000 to $12,500 what should she do?
Change in variable costs for next five years =(12000-10500)+(12000-11000)+(12000-
11500)+(12000-12000)+(12000-12500)=2500
Change in Revenue for five years=10000
Change in net income= 7500
Cost to buy new one=9000
Hence, he should not buy a new one in this scenario
Problem 3 – 5 Marks
Cluck Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production
generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or
the chickens can be slaughtered in house and then sold for $2.25 each. It costs $55,000
more to turn the annual chicken crop into chicken meat.
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a)
What is a sunk cost? What is the sunk cost in this problem?
A sunk cost refers to a cost that has already been incurred and cannot be
recovered. The sunk cost in this question is the cost of producing the chickens.

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