7 28 chapter 07 incremental analysis for short term

This preview shows page 28 - 32 out of 41 pages.

7-28
Chapter 07 - Incremental Analysis for Short-Term Decision Making PA7-9   Req. 1 Incremental Analysis of Make-or-Buy for Awnings: Make Buy Net income  increase (decrease) Direct materials $  70,000 $    70,000 Direct labor     50,000       50,000 Variable OH     40,000       40,000 Fixed OH     32,000 $  32,000 Purchase price   180,000   (180,000) Total  $192,000 $212,000   $(20,000) Req. 2 Old Camp should continue to manufacture the awnings because purchasing the  awnings will cost the company an additional $20,000. Req. 3 If Old Camp were able to produce net income of $22,000 from the released capacity, it should purchase the awnings as shown below: Make Buy Net income  increase (decrease) Total (from “b”) $ 192,000 $212,000 $ (20,000) Opportunity cost      22,000      22,000 Variable OH $ 214,000 $212,000  $    2,000 7-29
Chapter 07 - Incremental Analysis for Short-Term Decision Making ANSWERS TO GROUP B PROBLEMS PB7−1 Req. 1 The special-order would increase profit by $80, as shown below: Incremental revenue (80 x $65) $ 5,200 Incremental variable costs [80 x ($30 + $22 + $12)] (5,120 ) Incremental profit $ 80 An alternative way to answer this question is to compare the sales price of $65 to the variable cost per unit of $64 ($30 + $22 + $12). Since the offer price is greater than the variable cost per unit, each unit will add $1 in contribution margin ($65 - $64). Since fixed costs will not increase (because the company has excess capacity), the total increase in profit is $80 (80 units x $1 unit contribution margin). Req. 2 Yes, Greenview should accept the special-order since net income will increase by $80 if the order is accepted. Req. 3 Total profit would decrease by $400: Incremental revenue (100 x $60) $ 6,000 Incremental variable costs [100 x ($30 + $22 + $12)] ( 6,400 ) Incremental profit $( 400) An alternative way to answer this question is to compare the sales price of $60 to the variable cost per unit of $64 ($30 + $22 + $12). Since the offer price is less than the variable cost per unit, each unit will result in $4 less in contribution margin ($60 - $64). Since fixed costs will not increase (because the company has excess capacity), the total decrease in profit is $400 (100 units x $4 decrease in unit contribution margin). Req. 4 If Greenview was at full capacity, then the special-order sales price would have to be $99.00. At that price, Greenview is indifferent as to where it sells the units because the CM and short-term income generated by the units is the same. 7-30
Chapter 07 - Incremental Analysis for Short-Term Decision Making PB7−2 Req. 1 Relevant cost of making ($4 + $1 + $2 + ($3 x 30%)) x 1,000 $ 7,900 Relevant cost of buying ($9 x 1,000) 9,000 Differential cost of making versus buying $ 1,100 (favors making) Req. 2 All other things held constant, Greenview should continue to make the chair pads as the relevant cost of making ($7,900) is less than the cost of buying ($9,000). Req. 3 There would have to be more than $1,100 in additional profit generated from another product line for Greenview to be indifferent between making and buying the chair pads.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture