Solution 168 5 min Incremental revenue 10000 Incremental savings on variable

# Solution 168 5 min incremental revenue 10000

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Solution 168(5 min.) Incremental revenue \$(10,000) Incremental savings on variable costs +6,000 Incremental fixed cost savings (\$5,000 × .40) +2,000 Incremental decrease in profit if dropped \$ (2,000) BE 169 Harmark has three product lines in its retail stores: kites, wind socks, and flags. Results of the fourth quarter are presented below: Kites Wind Socks Flags Total Units sold 1,000 2,000 2,000 5,000 Revenue \$22,000 \$40,000 \$23,000 \$85,000 Variable departmental costs 15,000 22,000 12,000 49,000 Direct fixed costs 1,000 3,000 2,000 6,000 Allocated fixed costs 8,000 8,000 8,000 28,000 Net income (loss) \$ (2,000) \$ 7,000 \$ 1,000 \$ 6,000 The allocated fixed costs are unavoidable. Demand of individual products is not affected by changes in other product lines. InstructionsWhat will happen to profits if Harmark discontinues the Kites product line? Solution 169(5 min.) Incremental revenue \$(22,000) Incremental costs: Variable cost savings +15,000 Direct fixed cost savings +1,000 Drop in profits if discontinued \$ (6,000) BE 170 Dolls R Us sells three products in its retail stores: baby dolls, teenage dolls, and plush dolls. Results of the fourth quarter are below: Baby Dolls Teenage Dolls Plush Dolls Total Units sold 1,000 2,000 2,000 5,000 Revenue \$31,000 \$43,000 \$26,000 \$100,000 Variable departmental costs 22,000 24,000 13,000 59,000 Direct fixed costs 5,000 4,000 3,000 12,000 Allocated fixed costs 6,000 7,000 7,000 20,000 Net income (loss) \$ (2,000) \$ 8,000 \$ 3,000 \$ 9,000
Test Bank for ISV Managerial Accounting, Fourth Edition 7-36 BE 170(cont.)InstructionsDemand for individual products is not affected by changes in other product lines. Prepare an incremental analysis to determine if the baby dolls should be discontinued Solution 170(5 min.) Incremental revenue \$(31,000) Incremental costs: Variable cost savings +22,000 Direct cost savings +5,000 Drop in profits if discontinued \$ (4,000) EXERCISES Ex. 171 Smooth Brew Company manufactures cappuccino makers. For the first eight months of 2008, the company reported the following results while operating at 80% of plant capacity: Sales (50,000 units) \$9,000,000 Cost of goods sold 5,400,000 Gross profit 3,600,000 Operating expenses 2,400,000 Net income \$1,200,000 An analysis of costs and expenses reveals that variable cost of goods sold is \$95 per unit and variable operating expenses are \$35 per unit. In September, Smooth Brew receives a special order for 3,000 machines at \$135 each from a major coffee shop franchise. Acceptance of the order would result in \$2,000 of shipping costs but no increase in fixed expenses. Instructions(a) Prepare an incremental analysis for the special order. (b) Should Smooth Brew accept the special order? Justify your answer. Solution 171(1012 min.) (a) Net Income Reject Order Accept Order Increase (Decrease) Revenues \$ -0- \$405,000 \$405,000 Cost of Goods Sold -0- 285,000* (285,000) Operating Expenses -0- 107,000** (107,000) Net Income \$ -0- \$ 13,000 \$ 13,000 *Variable cost of goods sold = 3,000 × \$95 = \$285,000. **Variable operating expenses = 3,000 × \$35 = \$105,000 + \$2,000 = \$107,000.
Incremental Analysis 7-37Solution 171(cont.) (b) The incremental analysis shows that Smooth Brew should accept the special order because incremental revenues exceed incremental costs. This recommendation assumes that acceptance of the special order will not affect relations with existing customers.

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