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222 CH 7 HW Solutions 5th edition

222 CH 7 HW Solutions 5th edition - CHAPTER 7 Incremental...

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CHAPTER 7 Incremental Analysis Homework Solutions ANSWERS TO QUESTIONS (5, 7, 8, 12) 5. The relevant data in deciding whether to accept an order at a special price are the incremental revenues to be obtained compared to the incremental costs of filling the special order. 7. Opportunity cost may be defined as the potential benefit that may be obtained by following an alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income. 8. The decision rule in a decision to sell a product or to process it further is: Process further as long as the incremental revenue from the additional processing exceeds the incremental processing costs. 12. Net income will be lower if an unprofitable product line is eliminated when the product line is producing a positive contribution margin and its fixed costs cannot be avoided or reduced. SOLUTIONS TO DO IT! REVIEW EXERCISES (1, 2, 3, 4) DO IT! 7-1 Reject Accept Net Income Increase (Decrease) Revenues $ –0– $186,000 $186,000 Costs $ –0– 132,000 * (132,000 ) Net income $ –0– $ 54,000 $ 54,000 *(6,000 X $20) + (6,000 X $2) Given the results of the above analysis, Corn Company should accept the special order.
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DO IT! 7-2 (a) Make Buy Net Income Increase (Decrease) Direct materials $ 30,000 $ –0– $ 30,000 Direct labor 42,000 –0– 42,000 Variable manufacturing costs 45,000 –0– 45,000 Fixed manufacturing costs 60,000 40,000 20,000
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