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Ch.11- Solutions - Chapter11 BriefExercise112 1 No,.Ifthe ,...

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Chapter 11 Relevant Costs for Decision Making Brief Exercise 11-2  1. No, production and sale of the racing bikes should not be discontinued. If the  racing bikes were discontinued, then the net operating income for the company  as a whole would decrease by $11,000 each quarter: Lost contribution margin ....................................................... $(27,000) Fixed costs that can be avoided: Advertising, traceable ........................................................ $ 6,000 Salary of the product line manager ....................................   10,000           16,000     Decrease in net operating income for the company as a whole .................................................................................. $(11,000 ) The depreciation of the special equipment is a sunk cost and is not relevant to the  decision. The common costs are allocated and will continue regardless of  whether or not the racing bikes are discontinued; thus, they are not relevant to the  decision. Alternative Solution: Current  Total Total If  Racing  Bikes Are  Dropped Difference:  Net  Operating  Income  Increase or  (Decrease) Sales ............................................................... $300,000 $240,000 $(60,000) Variable expenses ..........................................   120,000           87,000         33,000     Contribution margin ......................................   180,000       153,000       (27,000     ) Fixed expenses: Advertising, traceable ................................ 30,000 24,000 6,000 Depreciation on special equipment* ............................................. 23,000 23,000 0 Salaries of product managers ..................... 35,000 25,000 10,000 Common allocated costs ............................       60,000         60,000                           0    Total fixed expenses ......................................   148,000       132,000           16,000     Net operating income .................................... $      32,000     $      21,000     $      (11,000     ) *Includes pro-rated loss on the special equipment if it is disposed of.
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Brief Exercise 11-2  2. The segmented report can be improved by eliminating the allocation of the  common fixed expenses. Following the format introduced in Chapter 10 for a  segmented income statement, a better report would be: Total Dirt  Bikes Mountain  Bikes Racing  Bikes Sales .................................................... $300,000 $90,000 $150,000 $60,000 Variable manufacturing and selling expenses ..........................................   120,000       27,000           60,000       33,000     Contribution margin ............................   180,000       63,000           90,000       27,000     Traceable fixed expenses: Advertising ...................................... 30,000 10,000 14,000 6,000 Depreciation of special equipment.. 23,000 6,000 9,000 8,000 Salaries of the product line managers ......................................       35,000       12,000           13,000       10,000     Total traceable fixed expenses ..........................................       88,000       28,000           36,000       24,000     Product line segment margin .............. 92,000 $35,000 $      54,000     $ 3,000 Common fixed expenses .....................       60,000     Net operating income .......................... $ 32,000
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Brief Exercise 11-3  1. Per Unit  Differential  Costs 15,000 units Make Buy Make Buy Cost of purchasing ......................................... $35 $525,000 Direct materials .............................................. $14 $210,000 Direct labor .................................................... 10 150,000 Variable manufacturing overhead ................. 3 45,000 Fixed manufacturing overhead, traceable 1 ..... 2 30,000 Fixed manufacturing overhead, common ......                                                                       Total costs ......................................................
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