ACCT 5283 - Chap 12 Exercises - Problems and Solutions -...

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ACCT 5283 Chapter 12 Differential Analysis: The Key to Decision Making Exercises and Problems
Exercise 12-2 Solution
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2. To give the administrator of the entire organization a clearer picture of the financial viability of each of the organization’sprograms, the general administrative overhead should not be allocated. It is a common cost that should be deducted from the total program segment margin. Following the format introduced in an earlier chapter for a segmented income statement, a better income statement would be: Total Home Nursing Meals on Wheels House-keeping Revenues ...........................$900,000 $260,000 $400,000 $240,000 Variable expenses ...............490,000 120,000 210,000 160,000 Contribution margin ............410,000 140,000 190,000 80,000 Traceable fixed expenses: Depreciation ....................68,000 8,000 40,000 20,000 Liability insurance .............42,000 20,000 7,000 15,000 Program administrators’ salaries .........................115,000 40,000 38,000 37,000 Total traceable fixed expenses .........................225,000 68,000 85,000 72,000 Program segment margins ... 185,000 $ 72,000 $105,000 $ 8,000 General administrative overhead .........................180,000 Net operating income (loss) . $ 5,000
Exercise 12-3 Solution1. Per Unit Differential Costs 15,000 units Make Buy Make Cost of purchasing .......................$20 $300,000 Direct materials ...........................$ 6 $ 90,000 Direct labor .................................8 120,000 Variable manufacturing overhead .. 1 15,000 Fixed manufacturing overhead, traceable1.................................2 30,000 Fixed manufacturing overhead, common ...................................0 0 Total costs ...................................$17 $20 $255,000 $300,000 Difference in favor of continuing to make the parts ......................$3 $45,000 1 Only the supervisory salaries can be avoided if the parts are purchased. The remaining book value of the special equipment is a sunk cost; hence, the $3 per unit depreciation expense is not relevant to this decision.
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Based on these data, the company should reject the offer and should continue to produce the parts internally. 2. Make Buy Cost of purchasing (part 1) ..........................$300,000 Cost of making (part 1) ...............................$255,000 Opportunity costsegment margin forgone on a potential new product line .................65,000 Total cost ...................................................$320,000 $300,000 Difference in favor of purchasing from the outside supplier ........................................$20,000 Thus, the company should accept the offer and purchase the parts from the outside supplier.

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