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% 1
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 2
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. 3
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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