# ch07 - SOLUTIONS TO EXERCISESSET B EXERCISE 7-1B (a) Reject...

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SOLUTIONS TO EXERCISES—SET B EXERCISE 7-1B (a) Reject Order Accept Order Net Income Ef- fect Revenues Materials (\$0.50) Labor (\$1.20) Variable overhead (\$1.00) Fixed overhead Sales commissions Net income \$ -0- -0- -0- -0- -0- -0- \$ -0- \$19,000 (2,000) (4,800) (4,000) (5,000) -0- \$ 3,200 \$19,000 (2,000) (4,800) (4,000) (5,000) -0- \$ 3,200 (b) As shown in the incremental analysis, Henson should accept the special order because incremental revenue exceeds incremental expenses by \$3,200. (c) It is assumed that sales of the golf disc in other markets would not be affected by this special order. If other sales were affected. Henson would have to consider the lost sales in making the decision. Second, if Henson is operating at full capacity, it is likely that the special order would be rejected. EXERCISE 7-2B (a) Reject Order Accept Order Net Income Increase (Decrease) Revenues (60,000 X \$7.00) Cost of goods sold Operating expenses Net income \$0 0 0 \$0 \$420,000 294,000 89,000 \$ 37,000 (1) (2) \$ 420,000 ( (294,000) ( (89,000 ) \$ 37,000 (1) Variable cost of goods sold = \$2,800,000 X 70% = \$1,960,000. Variable cost of goods sold per unit = \$1,960,000 ÷ 400,000 = \$4.90. Variable cost of goods sold for the special order = \$4.90 X 60,000 = \$294,000. © 2008 For Instructor Use Only 7-1

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EXERCISE 7-2B (Continued) (2) Variable operating expenses = \$900,000 X 60% = \$540,000; \$540,000 ÷ 400,000 = \$1.35 per unit; 60,000 X \$1.35 = \$81,000; \$81,000 + \$8,000 = \$89,000. (b) As shown in the incremental analysis, Yenn Company should accept the special order because incremental revenues exceed incremental expenses by \$37,000. EXERCISE 7-3B Reject Order Accept Order Net Income Increase (Decrease ) Revenues \$0 \$1,000,000 (1) \$1,000,000 Variable costs: Direct materials 0 400,000 (400,000) Direct labor 0 100,000 (100,000) Variable overhead 0 200,000 (200,000 ) Total variable costs 0 700,000 (700,000 ) Net income \$0 \$ 300,000 \$ 300,000 (1) [(\$2.00 + \$0.50 + \$1.00 + \$1.50) X 200,000] Yes Miley should accept the Navy’s offer since it would increase net income by \$300,000. EXERCISE 7-4B (a) Make Buy Net Income Increase (Decrease) Direct materials (60,000 X \$4.00) Direct labor (60,000 X \$6.00) Variable manufacturing costs (\$360,000 X 50%) Fixed manufacturing costs Purchase price (60,000 X \$13.50) Total annual cost \$240,000 360,000 180,000 50,000 0 \$830,000 \$ 0 0 0 50,000 810,000 \$860,000 \$ 240,000 360,000 180,000 0 ( (810,000 ) ( \$ (30,000 ) © 2008 For Instructor Use Only 7-2
EXERCISE 7-4B (Continued) (b) No, Waverly Inc. should not purchase the lamps. As indicated by the incremental analysis, it would cost the company \$30,000 more to purchase the lamps. (c) Yes, by purchasing the lamp shades, a total cost saving of \$10,000 will result as shown below. Make

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## ch07 - SOLUTIONS TO EXERCISESSET B EXERCISE 7-1B (a) Reject...

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