Normal production is 50000 bicycles per year A supplier offers to make the

Normal production is 50000 bicycles per year a

This preview shows page 51 - 69 out of 72 pages.

Normal production is 50,000 bicycles per year. A supplier offers to make the bicycle seats at a price of $20 each. If the bicycle company accepts this offer, all variable
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manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. Instructions
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(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. (b) Should Moon Bicycle Company buy the seats from the outside supplier? Justify your answer.
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Solution 174 (15–20 min.) (a) Net Income Make Buy Increase (Decrease) Direct Materials (50,000 × $8) $ 400,000$ -0-$ 400,000
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Direct Labor (50,000 × $9) 450,000 -0-450,000 Variable Manufacturing Costs ($450,000 × 60%) 270,000 -0-270,000 Fixed Manufacturing Costs 30,00030,000-0- Purchase Price (50,000 × $20) -0-
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1,000,000 (1,000,000 ) Total annual cost $1,150,000 $1,030,000 $ 120,000 (b) The seats should be purchased from the outside supplier. As indicated, the company's net
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income would increase $120,000 by purchasing the seats. Ex. 175 United Chemical Corporation produces an oil- based chemical
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product which it sells to paint manufacturers. In 2008, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $11.00 per gallon. The costs per unit to manufacture a gallon
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of the chemical are presented below: Direct materials $6.00 Direct labor1.20 Variable manufacturing overhead .80 Fixed manufacturing overhead .60
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Total manufacturing costs $8.60 The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the
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following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can
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sell the paint at $15.00 per gallon. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company
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manufactures the paint. Solution 175 (15–20 min.) Net Income Sell Chemical Process
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Further Increase (Decrease) Sales price per unit $11.00 $15.00 $4.00 Cost per unit: Direct materials (A) 6.00 7.70(1.70) Direct labor (B)1.20 1.80 (.60) Variable manufacturing
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overhead (C).801.30 (.50) Fixed manufacturing overhead .60 . 60 Total 8.60 11.40 (2.80 ) Net income per unit $ 2.40 $ 3.60 $1.20
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Solution 175 (cont.) (A)$6.00 + $1.70 (B) $1.20 + $.60 (C) $.80 + $.50 Assuming the company sells all 40,000 gallons that it produces, the incremental net income would be
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$48,000 (40,000 gallons × $1.20).
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  • Net Income, Gersen, Dingle Company

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