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The advertising expenses for the company as a whole

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The advertising expenses for the company as awhole would be $15,000 after the elimination of the National Division.Finally, half of the administrativeexpenses charged to the National Division would be eliminated if the division were sold.Required:(1)Prepare a revised income statement for the company as a whole for the month of January if theNational Division is eliminated to improve the credit rating.(2)Should the National Division be eliminated to improve profits?
326Chapter 21SOLUTION(1)Major League CompanyIncome StatementFor Month Ended January 31, 19--Sales.............................................................................................................................$ 112,500Cost of goods sold:Prime cost............................................................................................................$20,000Variable factory overhead.................................................................................15,000Fixed factory overhead......................................................................................40,500Total............................................................................................................75,500Gross profit................................................................................................................$37,000Other expenses:Sales commissions...............................................................................................$10,000Packing and shipping.........................................................................................9,000Advertising..........................................................................................................15,000Administrative....................................................................................................20,000Total............................................................................................................$54,000Operating loss............................................................................................................$(17,000 )Nonoperating income:Interest income...................................................................................................1,3331,333*Loss before taxes........................................................................................................$(15,667)*(200,000 x .08)12(2)No, the National Division should not be eliminated.The company will incur $10,667 less loss if the division iscontinued because the fixed overhead cannot be eliminated.
Differential Cost Analysis327PROBLEM5.Make-or-Buy Decision.TGIF Inc. manufactures party games.Most games are played on boards that arepurchased from an outside supplier at the cost of $1 each.The company uses 50,000 boards a year.Management requests that an analysis be made to determine the profitability of producing the boardsinternally.The materials required to manufacture each board cost $.15 per board.To print the game pattern and to gluethe pattern to the board includes a direct labor cost of $.20 per board.The company would also have to leasea board press costing $20,000 for a four-year lease.Presently, there is adequate space in the ProducingDepartment for the manufacture of 20,000 boards per year.If the company were to produce all of its boards internally, it would be necessary to cease its manufacture ofcheckers and to purchase these pieces from the outside, resulting in an additional $25,000 cost.Also, achecker caster costing $8,000 with a $4,000 book valuewould have to be scrapped without a salvage value.Required:Prepare a recommendation to management to aid in the make-or-buy decision for the game boards;use an analysis of the differential costs required for the manufacture of 20,000 and then 50,000 boards vs. thecost of purchasing each quantity from an outside supplier.SOLUTION20,00050,000BoardsBoardsCost to purchase from outside.................................................................................$ 20,000$ 50,000Manufacturing costs:Direct materials ($.15 per board).....................................................................$3,000$7,500Direct labor ($.20 per board)............................................................................4,00010,000Leasenew board press ($20,000/4 yrs.)........................................................5,0005,000Cost to purchase checkers from outside..........................................................--25,000Total............................................................................................................$12,000$47,500Differential profit (loss) from manufacturing........................................................$8,000$2,500The recommendation to management would be to make 20,000 game boards and purchase 30,000 from theoutside because it results in more differential profit than producing 50,000 boards.The cost of the checkercaster is irrelevant to the make-or-buy decision because it is a sunk cost.
328Chapter 21PROBLEM6.

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Term
Fall
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Tags
Cost Accounting, Fixed factory

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