RAUCH -CHP 25 Homework Problems.xlsx - HORNGREN'S...

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HORNGREN'S ACCOUNTING - Eleventh Edition Chapter 25: Short-Term Business Decisions Page 1 of 13 Chapter 25 Homework Problems (20 points total) You must complete all fields highlighted in this green Answers in red have been provided for you by the instructor Name: Rose Rauch E25-9 (1 point) Explain what is relevant and irrelevant to Jacobs’ dilemma. What should he do? Solution: Write narrative response below (use (ALT and ENTER 2x for paragraphs) The relevant information in this case is the cost of the new machinery and the increase in production if purchased. Even though Jacob is worried about the previous year's purchase, this is irrelevant. The previous purchase is also known as a "sunk cost" as it cannot be changed with future actions. Jacob's should perform a differential analysis to analize the operating income. If this analysis shows the purchase as a "win", the president will most likely not even be concerned with the irrelevant information.
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HORNGREN'S ACCOUNTING - Eleventh Edition Chapter 25: Short-Term Business Decisions Page 2 of 13 E25-11 (1 point) Requirements 1. 2. Solution: Requirement 1 Relevant variable costs: Direct Materials 39 Direct Labor 16 Variable Manufacturing Overhead 9 Total Relevant Variable Costs 64 Expected increase in revenue (25,000 pairs x $83 per pair) 2,075,000 Expected increase in variable manufacturing costs (25,000 pairs x $64 per pair) 1,600,000 Expected increase in operating income (25,000 pairs x $19 per pair) 475,000 show calculations above Write narrative answer below Requirement 2 Write narrative answer below How would accepting the order affect Tolman’s operating income? In addition to the special order’s effect on profits, what other (longer-term qualitative) factors should Tolman’s managers consider in deciding whether to accept the order? Tolman’s marketing manager, Peter Kyler, argues against accepting the special order because the offer price of $83 is less than Tolman’s $92 cost to make the sunglasses. Kyler asks you, as one of Tolman’s staff accountants, to explain whether his analysis is correct. What would you say? I would explain the possible issues. Operating costs and profits would increase. However, the decrease in price for the special order could present issues in the future for their regular priced sunglasses. Customers may start waiting for other offers, as most companies continue offering special orders so this could pose a problem for their already built customer base. Another component is, will the new customer that purchased the special ordr sunglasses turn into a regular customer or will they expect that same low price going forward. My response to Bing would be that his analysis is not taking into consideration the fixed manufacturing overhead that is calculated into the $92 regular cost so his analysis is incorrect and I would not suggest moving forward with his plan.
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