# 7 28 chapter 07 incremental analysis for short term

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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.