80559_TUT 1 CHAP 1_QUES.docx - Tutorial 1 Incremental Analysis QUESTION 1(ORDER AT SPECIAL PRICE Hup Seng Enterprises produces giant stuffed bears Each

80559_TUT 1 CHAP 1_QUES.docx - Tutorial 1 Incremental...

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Tutorial 1 - Incremental Analysis QUESTION 1 (ORDER AT SPECIAL PRICE) Hup Seng Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of which Hup Seng has the capacity to produce. Hup Seng will incur extra shipping costs of $1 per bear. Instructions Determine the incremental income or loss that Hup Seng Enterprises would realize by accepting the special order. Reject Accept Net Income increase (decrease) Revenue $ - $ 112,000.00 $ 112,000.00 Cost $ - $ 104,000.00 ($ 104,000.00) Net income $ - $ 8,000.00 $ 8,000.00 8000 units * $ 4 = $112,000 8000 units * ($ 12 + $ 1) = $ 104,000 Net income increase RM 8000, if the company accept the order. Decision is to accept the order. QUESTION 2 (ORDER AT SPECIAL PRICE) Felter Company produced and sold 50,000 units of product and is operating at 70% of plant capacity. Unit information about its product is as follows: Sales price $ 70 Variable manufacturing cost $ 45 Fixed manufacturing cost ($500,000 ÷ 50,000) 10 55 Profit per unit $ 15 The company received a proposal from a foreign company to buy 10,000 units of Felter Company's product for $50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of Felter Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company's income. Reject Accept Net Income Increase (decrease) Revenue $ - $ 500,000.00 $ 500,000.00 Cost $ - $ 450,000.00 ($ 450,000.00) Net income $ - $ 50,000.00 $ 50,000.00 10,000 units * $ 50 = $ 500,000 10,000 units * $ 45 = $ 450,000 Net income increase RM 50000, if the company accept the order Decision is to accept the order.
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QUESTION 3 (MAKE OR BUY DECISION) Adam Sdn. Bhd. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Adam for $420 each. Adam needs 1,200 clocks annually. Adam has provided the following unit costs for its commercial clocks: Direct materials $100 Direct labor 140 Variable overhead 80 Fixed overhead (40% avoidable) 150 Instructions a) Prepare an incremental analysis which shows the effect of the make-or-buy decision. b) Prepare an incremental analysis to determine what Adam should do if the released productive capacity can be used to generate an additional income of $50,000. (a) Make Buy Net Income Increase (decrease) Direct Materials $ 120,000.00 $ - $ 120,000.00 Direct Labor $ 168,000.00 $ - $ 168,000.00 Variable Overhead $ 96,000.00 $ - $ 96,000.00 Fixed Overhead $ 180,000.00 $ 108,000.00 $ 72,000.00 Purchase Price $ - $ 504,000.00 ($ 504,000.00) Total Cost $ 564,000.00 $ 612,000.00 -$ 48,000.00 1200 units * $100 = $ 120,000 1200 units * $140 = $ 168,000 1200 units * $80 = $ 96,000 1200 units * $150 = $ 180,000 $180,000 * 0.6 = $ 108,000 1200 units * $420 = $ 504,000 Net income will decrease, if the company buy it Decision is to make the own clock. Make Buy Net Income Increase (decrease) Total Cost $ 564,000.00 $ 612,000.00 -$ 48,000.00 Opportunity Cost $ 50,000.00 $ - $ 50,000.00 Total Cost $ 614,000.00 $ 612,000.00 $ 2,000.00 Net Income will increase, if the company buy it.
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QUESTION 4 (MAKE OR BUY DECISION) Boston Corporation owns a machine that produces baskets for the gift packages the company sells. The company uses 900 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor, and $5 for fixed manufacturing overhead. The unit cost is based on the monthly production of 900
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  • Consumer Division, Southern Division

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