Chapter_25_Solutions_7e - Chapter 25 Special Decisions and...

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Chapter 25 Special Decisions and Capital Budgeting Quick Check Answers: 1. a 3. d 5. c 7. d 9. a 2. b 4. b 6. a 8. c 10. d Explanations: 5. c. (1) (2) Make Buy Incremental costs to make: Ingredients $0.50 Direct labor 1.00 Incremental cost to buy $1.75 Incremental cost per loaf $1 .50 $1.75 7. d. $7,500 = $30,000 / 4 9. a. Present value of annuity of $120,000 for 5 years @12% = $120,000 × 3.605 $432,600 Cost of investment (500,000 ) Net present value $ (67,400 ) Chapter 25 Special Decisions and Capital Budgeting 121
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Short Exercises (5 min.) S 25-1 a. The price of the new printer is relevant . b. The price you paid for the old printer is irrelevant because it is a past (sunk) cost that cannot be changed, regardless of your decision. c. The trade-in value of the old printer is relevant . d. Paper costs are irrelevant because these costs will be the same with either the old printer or the new printer. e. The difference between the ink cartridges’ cost for the old printer and the ink cartridges’ cost for the new printer is relevant . Accounting 7/e Solutions Manual 122
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(5 min.) S 25-2 Relevant costs include direct materials of $7, direct labor of $3, and variable manufacturing overhead of $9. Fixed costs are irrelevant because the capacity used to produce the special order already has been paid for. Variable selling costs will not be incurred, so these costs are also irrelevant. Increase in revenue (1,000 × $20……... $20,000 Increase in expenses (1,000 × $19)…... 19,000 Increase in operating income…………. $ 1,000 Accept the special order. Chapter 25 Special Decisions and Capital Budgeting 123
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(5-10 min.) S 25-3 Gila Fashions should not drop any of the departments. The Men’s and Women’s Departments are earning income. While the Accessories Department appears to be losing money, even this department has a positive contribution margin. The Accessories Department is contributing $10,000 ($100,000 sales revenue $90,000 variable costs) toward covering fixed costs. These fixed costs include only building depreciation and utilities, and Gila Fashions intends to remain in the same building whether or not it drops any of the departments. Consequently, these fixed costs will remain the same whether or not Gila Fashions eliminates the Accessories Department. These fixed costs are therefore irrelevant in the decision whether to eliminate the Accessories Department. In sum, Gila Fashions should keep the Accessories Department because it contributes $10,000 per quarter toward covering the fixed costs. Furthermore, the Accessories Department might bring in customers who buy products in other departments. If so, eliminating the Accessories Department could reduce other departments’ profits. Accounting 7/e Solutions Manual 124
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(10 min.) S 25-4 If Gila Fashions can eliminate the fixed expenses assigned to a department by eliminating the department, then Gila Fashions should consider eliminating the Accessories Department.
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