Chapter 7 Variable Costing A Decision-Making Perspective(FILEminimizer)

Chapter 7 Variable Costing A Decision-Making Perspective(FILEminimizer)

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Unformatted text preview: Exercises: Set B 1 EXERCISES: SET B E7-1B Henson Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is: Materials $ 10,000 Labor 24,000 Variable overhead 20,000 Fixed overhead 50,000 Total $104,000 Henson also incurs 5% sales commission ($0.35) on each disc sold. Wood Corporation offers Henson $4.75 per disc for 4,000 discs. Wood would sell the discs under its own brand name in foreign markets not yet served by Henson. If Henson accepts the offer, its fixed overhead will increase from $50,000 to $55,000 due to the purchase of a new im- printing machine. No sales commission will result from the special order. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Henson accept the special order? Why or why not? (c) What assumptions underlie the decision made in part (b)? E7-2B Yenn Company manufactures toasters. For the first 8 months of 2009, the company re- ported the following operating results while operating at 75% of plant capacity. Sales (400,000 units) $4,000,000 Cost of goods sold 2,800,000 Gross profit 1,200,000 Operating expenses 900,000 Net income $ 300,000 Cost of goods sold was 70% variable and 30% fixed. Operating expenses were 60% variable and 40% fixed. In September, Yenn Company receives a special order for 60,000 toasters at $7 each from Cepeda Company of Mexico City. Acceptance of the order would result in $8,000 of shipping costs but no increase in fixed operating expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Yenn Company accept the special order? Why or why not? E7-3B Miley Fiber Company is the creator of B-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. B-Go has become very popu- lar as an undergarment for sports activities. Operating at capacity, the company can produce 1,000,000 undergarments of B-Go a year. The per unit and the total costs for an individual gar- ment when the company operates at full capacity are as follows. Per Undergarment Total Direct materials $2.00 $2,000,000 Direct labor 0.50 500,000 Variable manufacturing overhead 1.00 1,000,000 Fixed manufacturing overhead 1.25 1,250,000 Variable selling expenses 0.25 250,000 Totals $5.00 $5,000,000 The U.S. Navy has approached Miley Fiber and expressed an interest in purchasing 200,000 B-Go undergarments for personnel in extremely warm climates. The Navy would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. In addition, the Navy has agreed to pay an additional $1.50 per undergarment to cover all other costs and pro- vide a profit. Presently, Miley Fiber is operating at 70 percent capacity and does not have any other potential buyers for B-Go. If Miley Fiber accepts the Navy’s offer, it will not incur any vari- able selling expenses related to this order....
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Chapter 7 Variable Costing A Decision-Making Perspective(FILEminimizer)

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