TUTORIAL DECISION MAKING Question 1 Carter Company manufactures cappuccino makers.

For the first eight months of 1999 the company reported the following operating results while operating at 80% of plant capacity: Sales (500,000 units) Cost of goods sold Gross profit Operating expenses Net income RM75,000,000 45,000,000 30,000,000 24,000,000 RM 6,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is RM80 per unit and variable operating expenses are RM30 per unit. In September, Carter Company receives a special order for 40,000 machines at RM120 each from a major coffee shop franchise. Acceptance of the order would result in RM10,000 of shipping costs but no increase in fixed expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Carter Company accept the special order? Justify your answer. Solution : a. Incremental analysis Special order price Variable cost = (RM120 x 40,000units) [(RM80+30)x 40,000 units] RM10,000 = RM390,000 b. Accepted the special order due to incremental in net income by RM390,0000. Question 2 Company has the capacity to produce 15,000 tires each month. Current regular production and sales are 10,000 tires per month at a selling price of RM15 each. Based on this level of activity, the following unit costs are incurred: Direct materials...................................... RM5.00 Direct labor............................................. RM3.00 Variable manufacturing overhead........... RM0.75 Fixed manufacturing overhead............... RM1.50 Variable selling expense......................... RM0.25 The fixed costs, both manufacturing and administrative, are constant in total within

the relevant range of 10,000 to 15,000 tires per month. The Company has received a special order from a customer who wants to pay a reduced price of RM10 tires. There would be no selling expense in connection with this special order. And, this order would have no effect on the company's other sales. Required & Solution:

i. Calculate the avoidable costs based on the current production level = RM9 per
unit x 10,000 units = RM90,000 at current level of production.

ii. Calculate the relevance cost per unit based on the current production level =
RM9.00 per unit

iii. Compute the companys operating income for the month if the company
accepts the special order is for 4,000 tires this month = (RM10 RM9) x 4,000 tires = RM4,000 incremental income.

iv. Compute the companys operating income for the month if the company
accepts the special order is for 6,000 tires this month = (RM10 RM9) x 6,000 tires = RM6,000 incremental income

Question 3 Benson Company produced and sold 20,000 units of product and is operating at 80% of plant capacity. Unit information about its product is as follows: Sales Price Variable manufacturing cost Fixed manufacturing cost (RM300,000 20,000) Profit per unit RM45 15 RM70 60 RM10

The company received a proposal from a foreign company to buy 4,000 units of Benson Company's product for RM50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of Benson Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company's income. Solution: Special order price Variable cost Any other costs (RM50 RM45) x 4,000 units = RM20,000 Therefore accept the special order due to incremental in net income RM20,000

Question 4 The MJ Digital Racquet makes wheels that it uses in the production of tennis racket. MJ Digital's costs to produce 1,000 racquets annually are: Direct materials........................... RM30,000 Direct labor................................. RM50,000 Variable overhead....................... RM20,000 Fixed overhead............................ RM70,000 If the racquets are purchased from the outside supplier, RM15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for RM45,000 per year. An outside supplier has offered to sell MJ Digital similar racquets for RM12.50 per racquet. Requirement and solution:

a.

Calculate the monthly avoidable costs (costs that will no longer be incurred) total If MJ Digitals Racquet accepts the offer from the outside supplier = (RM30,000 + RM50,000 + RM20,000 + RM15,000) / 12 months = RM9,583.33 per month. Compute monthly operating income if MJ Digitals Racquet purchases 1,000 components from the outside supplier per month = RM45,000 (RM12.5 x 1,000 units) = RM32,500 / 12month = RM2,708.33 per month Compute the maximum price that MJ Digitals Racquet should be willing to pay the outside supplier? = (RM30,000 + RM50,000 + RM20,000 + RM45,000) / 1,000 units = RM14.5 per unit.

b.

c.