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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7-1

The correct order is:

1. Identify the problem and assign responsibility.


2. Determine and evaluate possible courses of action.
3. Make a decision.
4. Review results of the decision.

BRIEF EXERCISE 7-2

Net Income
Alternative Alternative Increase
A B (Decrease)
Revenues $160,000 $180,000 ($ 20,000)
Costs 100,000 125,000 (25,000)
Net income $ 60,000 $ 55,000 ($ 5,000)

Alternative A is better than Alternative B.

BRIEF EXERCISE 7-3

Net Income
Reject Accept Increase
Order Order (Decrease)
Revenues $0 $75,000 * ($ 75,000)
CostsVariable manufacturing 0 60,000 ** ( (60,000)
Shipping 0 6,000 *** ( (6,000)
Net income $0 $ 9,000 ($ 9,000)

The special order should be accepted.

*3,000 X $25
**3,000 X $20
***3,000 X $ 2

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-5
BRIEF EXERCISE 7-4

Net Income
Increase
Make Buy (Decrease)
Variable manufacturing costs $50,000 $ 0 $ 50,000
Fixed manufacturing costs 30,000 30,000 0
Purchase price 0 60,000 (60,000)
Total annual cost $80,000 $90,000 ($(10,000)

The decision should be to make the part.

BRIEF EXERCISE 7-5

Process Net Income


Sell Further Increase (Decrease)
Sales price per unit $62.00 $70.00 $8.00
Cost per unit
Variable 36.00 43.00 ( (7.00)
Fixed 10.00 10.00 0
Total 46.00 53.00 ( (7.00)
Net income per unit $16.00 $17.00 $1.00

The bookcases should be processed further because the incremental


revenues exceed incremental costs by $1.00 per unit.

BRIEF EXERCISE 7-6

The allocated joint costs are irrelevant to the sell or process further
decisions. If AB1 is processed further, the company will earn incremental
revenue of $50,000 ($150,000 $100,000) and only incur incremental costs of
$45,000. Therefore, the company should process AB1 further and sell AB2.
If XY1 is processed further, the company will earn incremental revenue of
$35,000 ($130,000 $95,000) but will incur incremental costs of $50,000.
Therefore, the company should sell XY1 rather than process it further.

7-6 Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 7-7
Net 4-Year
Income
Retain Replace Increase
Equipment Equipment (Decrease)
Variable manufacturing costs
for 4 years $3,000,000 $2,500,000 ($ 500,000
New machine cost (30,000) 300,000 ((300,000)
Sell old machine (30,000) 30,000
Total $3,000,000 $2,770,000 $ 230,000
The old factory machine should be replaced.

BRIEF EXERCISE 7-8

Net Income
Continue Eliminate Increase (Decrease)
Sales $200,000 $ 0 $(200,000)
Variable costs 180,000 0 (180,000)
Contribution margin 20,000 ( 0 (20,000)
Fixed costs 30,000 20,000) ( 10,000)
Net income ($ (10,000) $(20,000) $ (10,000)

The Big Bart product line should be continued because $20,000 of contribu-
tion margin will not be realized if the line is eliminated. This amount is
greater than the $10,000 savings of fixed costs.

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 7-1

Net Income
Reject Accept Increase (Decrease)
Revenues $ 0 $180,000 $180,000
Costs $ 0 138,000* (138,000)
Net income $ 0 $ 42,000 $ 42,000
*(6,000 X $20) + (6,000 X $3)

Given the results of the above analysis, Maize Company should accept the
special order.

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-7
DO IT! 7-2

(a)
Net Income
Make Buy Increase (Decrease)
Direct materials $ 30,000 $ 0 $ 30,000
Direct labor 42,000 0 42,000
Variable manufacturing
costs 45,000 0 45,000
Fixed manufacturing
costs 60,000 45,000 15,000
Purchase price 0 162,000 (162,000)
Total cost $177,000 $207,000 $ (30,000)

Given the results of the above analysis, Rubble Company will incur
$30,000 of additional costs if it buys the switches.

(b)
Net Income
Make Buy Increase (Decrease)
Total cost $177,000 $207,000 $(30,000)
Opportunity cost 34,000 0 34,000
Total cost $211,000 $207,000 $ 4,000
Yes, the answer is different: The analysis shows that net income will
be increased by $4,000 if Rubble Company purchases the switches.

DO IT! 7-3

Process Net Income


Sell Further Increase (Decrease)
Sales per unit $75 $100 $25
Cost per unit
Variable $40 $ 57 ($17)
Fixed 10 13 (3)
Total $50 $ 70 ($20)
Net income per unit $25 $ 30 $ 5
The tables should be processed further and Mesa Verde should finish the
tables because the incremental revenues exceed incremental costs by
$5 per unit.

7-8 Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
DO IT! 7-4

Net Income
Continue Eliminate Increase (Decrease)
Sales $500,000 $ 0 $(500,000)
Variable costs 370,000 0 370,000
Contribution margin 130,000 0 (130,000)
Fixed costs 150,000 38,000 112,000
Net income $ (20,000) $(38,000) $ (18,000)
The analysis indicates that Gator should not eliminate the gloves and mittens
line because net income would decrease $18,000.

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-9
SOLUTIONS TO EXERCISES
EXERCISE 7-1
1. False. The first step in managements decision-making process is identify
the problem and assign responsibility.
2. False. The final step in managements decision-making process is to
review the results of the decision.
3. True.
4. False. In making business decisions, management ordinarily considers
both financial and nonfinancial information.
5. True.
6. True.
7. False. Costs that are the same under all alternative courses of action do
not affect the decision.
8. False. When using incremental analysis, either costs or revenues or both
will change under alternative courses of action.
9. False. Sometimes variable costs will not change under alternative courses
of action, but fixed costs will.

EXERCISE 7-2

(a) Net Income


Reject Accept Increase
Order Order (Decrease)
Revenues ($4.80) $ 0 $24,000 $24,000
Materials ($0.50) 0 (2,500) (2,500)
Labor ($1.50) 0 (7,500) (7,500)
Variable overhead ($1.00) 0 (5,000) (5,000)
Fixed overhead 0 (6,000) (6,000)
Sales commissions 0 0 0
Net income $ 0 $ 3,000 $ 3,000
(b) As shown in the incremental analysis, Gruden should accept the special
order because incremental revenue exceeds incremental expenses by
$3,000.
(c) It is assumed that sales of the golf discs in other markets would not be
affected by this special order. If other sales were affected, Gruden would
have to consider the lost sales in making the decision. Second, if Gruden
is operating at full capacity, it is likely that the special order would be
rejected.

7-10 Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 7-3

(a) Net Income


Reject Accept Increase
Order Order (Decrease)
Revenues (15,000 X $7.60) $0 $114,000 ($114,000)
Cost of goods sold 0 78,000 (1) ( (78,000)
Operating expenses 0 30,000 (2) ( (30,000)
Net income $0 $ 6,000 ($ 6,000)

(1) Variable cost of goods sold = $2,600,000 X 70% = $1,820,000.


Variable cost of goods sold per unit = $1,820,000 350,000 = $5.20
Variable cost of goods sold for the special order = $5.20 X 15,000
= $78,000.

(2) Variable operating expenses = $840,000 X 75% = $630,000


$630,000 350,000 = $1.80 per unit
15,000 X $1.80 = $27,000
$27,000 + $3,000 = $30,000

(b) As shown in the incremental analysis, Leno Company should accept


the special order because incremental revenues exceed incremental
expenses by $6,000.

EXERCISE 7-4

Net Income
Reject Accept Increase
Order Order (Decrease)
Revenues $0 $1,187,500 (1) $1,187,500
Variable costs:
Direct materials 0 500,000 (500,000)
Direct labor 0 187,500 (187,500)
Variable overhead 0 250,000 (250,000)
Total variable costs 0 937,500 (937,500)
Net income $0 $ 250,000 $ 250,000
(1) [($2.00 + $0.75 + $1.00 + $1.00) X 250,000]

Klean Fiber should accept the Armys offer since it would increase net
income by $250,000.

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-11
EXERCISE 7-5

(a) Net Income


Increase
Make Buy (Decrease)
Direct materials (30,000 X $4.00) $120,000 $ 0 $ 120,000
Direct labor (30,000 X $5.00) 150,000 0 150,000
Variable overhead costs
($150,000 X 70%) 105,000 0 105,000
Fixed manufacturing costs 45,000 45,000 0
Purchase price (30,000 X $12.75) 0 382,500 ( (382,500)
Total annual cost $420,000 $427,500 ($ (7,500)
(b) No, Schopp Inc. should not purchase the shades. As indicated by the
incremental analysis, it would cost the company $7,500 more to pur-
chase the lamp shades.

(c) Yes, by purchasing the lamp shades, a total cost saving of $17,500 will
result as shown below.
Net Income
Increase
Make Buy (Decrease)
Total annual cost (above) $420,000 $427,500 $ (7,500)
Opportunity cost 25,000 0 (25,000)
Total cost $445,000 $427,500 $(17,500)

EXERCISE 7-6

(a) 1.
Net Income
Increase
Make Buy (Decrease)
Direct materials $1,000,000 $ 0 $ 1,000,000
Direct labor 800,000 0 800,000
Variable overhead 120,000 0 120,000
Fixed overhead 600,000 195,000 405,000
Purchase price 0 2,300,000 (2,300,000)
Total annual cost $2,520,000 $2,495,000 $ 25,000

Yes. The offer should be accepted as net income will increase by $25,000.

7-12 Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 7-6 (Continued)

2.
Net Income
Increase
Make Buy (Decrease)
Direct materials $1,000,000 $ 0 $ 1,000,000
Direct labor 800,000 0 800,000
Variable overhead 120,000 0 120,000
Fixed overhead 600,000 600,000 0
Opportunity cost 405,000 0 405,000
Purchase price 0 2,300,000 (2,300,000)
Totals $2,925,000 $2,900,000 $ 25,000

Yes. The offer should be accepted as net income would be $25,000 more.

(b) Qualitative factors include the possibility of laying off those employees
that produced the robot and the resulting poor morale of the remaining
employees, maintaining quality standards, and controlling the purchase
price in the future.

EXERCISE 7-7

(a) Net Income


Increase
Make Sails Buy Sails (Decrease)
Direct materials $100 $ 0 $ 100
Direct labor 80 0 80
Variable overhead 35 0 35
Purchase price 0 250 (250)
Total unit cost $215 $250 $ (35)

Gibbs should be making the sails, because they could save $35 per
unit or $42,000. The president was including the fixed overhead cost
in the calculation. Variable overhead = Total overhead ($100) Fixed
overhead ($78,000 1,200) = $35. This amount has been allocated, so
Gibbs will incur the cost whether or not they make the sails. This is an
example of an irrelevant cost, because it does not differ between the
two alternatives.

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-13
EXERCISE 7-7 (Continued)

(b) The best decision would be to rent out the space as shown below.
The differential savings would be $77,000 $42,000 = $35,000.

Net Income
Per Make Increase
(Based on 1,200 units) Unit Sails Buy Sails (Decrease)
Manufacturing cost $215 $258,000 $ 0 $ 258,000
Purchase price $250 0 300,000 (300,000)
Opportunity cost 77,000 0 77,000
Total annual cost $335,000 $300,000 $ 35,000

(c) Qualitative factors to consider would be (1) whether Gibbs will be able
to exercise control over the future price of the product (2) whether Gibbs
will be able to exercise control over the quality of the product and
(3) the potential for interruptions in the supply of the product.

EXERCISE 7-8

(a) Net Income


Increase
Make IMC2 Buy IMC2 (Decrease)
Direct materials $ 65.00 $ 0 $ 65.00
Direct labor 45.00 0 45.00
Material handling 6.50 0 6.50
Variable overhead 72.00* 0 72.00
Purchase price 0 200.00 (200.00)
Total unit cost $188.50 $200.00 $ (11.50)

*Variable overhead = 60% X ($126.50 6.50)

The unit should not be purchased from the outside vendor, as the per
unit cost would be $11.50 greater than if they made it.

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EXERCISE 7-8 (Continued)

(b) In order for Innova to make an accurate decision, they would have to
know the opportunity cost of manufacturing the other product. As
determined in (a), purchasing the product from outside would cost
$11,500 more (1,000 X $11.50). Innova would have to increase their
contribution margin by more than $11,500 through the manufacture of
the other product, before it would be economical for them to purchase
the IMC2 from the outside vendor.

(c) Qualitative factors to consider would be (1) quality of the component


(2) on-time delivery, and (3) reliability of the vendor.

EXERCISE 7-9

Net Income
Sell Process Further Increase
(Basic Kit) (Stage 2 Kit) (Decrease)
Sales per unit $30 ( )$35( ) $(5)
Costs per unit
Direct materials $14 ( ) $ 7 (1) $(7)
Direct labor 0 ( ) 9 (2) (9)
Total $14 ( ) $16 ( ) $(2)

Net income per unit $16 ( ) $19 ( ) $(3)

(1) The cost of materials decreases because Rachel can make two Stage
2 Kits from the materials for a basic kit.

(2) The total time to make the two kits is one hour at $18 per hour or
$9 per unit.

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-15
EXERCISE 7-9 (Continued)

Rachel should carry the Stage 2 Kits. The incremental revenue, $5, exceeds
the incremental processing costs, $2. Thus, net income will increase by
processing the kits further.

EXERCISE 7-10

(a) Sales ($60,000 + $15,000 + $55,000) $ 130,000


Joint costs (100,000)
Net income $ 30,000

(b) Sales ($190,000 + $35,000 + $215,000) $ 440,000


Joint costs (100,000)
Additional costs ($100,000 + $30,000 + $150,000) (280,000)
Net income $ 60,000

(c)
Product 10 Product 12 Product 14
(1)
Incremental revenue $ 130,000 $ 20,000 $ 160,000
Incremental costs (100,000) (30,000) (150,000)
Incremental profit (loss) $ 30,000 $(10,000) $ 10,000
(1)
Sales value after further processing Sales value @ split-off point

Products 10 and 14 should be processed further and product 12 should be


sold at the split-off point.

(d) Sales ($190,000 + $15,000 + $215,000) $ 420,000


Joint costs (100,000)
Additional costs ($100,000 + $150,000) (250,000)
Net income $ 70,000

Net income is $10,000 ($70,000 $60,000) higher in (d) than in (b) because
product 12 is not processed further, thereby increasing overall profit $10,000.

7-16 Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 7-11

To determine whether each of the three joint products should be sold as is,
or processed further, we must determine the incremental profit or loss that
would be earned by each. The allocated joint costs are irrelevant to the
decision since these costs will not change whether or not the products are
sold as is or processed further.
Larco Marco Narco
Incremental revenue $100,000* $100,000 ** $395,000 ***
Incremental cost (110,000) (85,000 ) (250,000 )
Incremental profit (loss) $ (10,000) $ 15,000 $145,000
From this analysis we see that Marco and Narco should be processed further
because the incremental revenue exceeds the incremental costs, but Larco
should be sold as is.
*$300,000 $200,000 **$400,000 $300,000 ***$800,000 $405,000

EXERCISE 7-12

(a) The costs that are relevant in this decision are the incremental revenues
and the incremental costs associated with processing the material
past the split-off point. Any costs incurred up to the split-off point are
sunk costs, and therefore, irrelevant to this decision.
(b) Revenue after further processing:
Product D$60,000 (4,000 units X $15.00 per unit)
Product E$97,200 (6,000 units X $16.20 per unit)
Product F$45,200 (2,000 units X $22.60 per unit)
Revenue at split-off:
Product D$40,000 (4,000 units X $10.00 per unit)
Product E$69,600 (6,000 units X $11.60 per unit)
Product F$38,800 (2,000 units X $19.40 per unit)

D E F
Incremental revenue $20,000 $27,600 $ 6,400
Incremental cost (14,000) (20,000) (9,000)
Increase (decrease) in profit $ 6,000 $ 7,600 $(2,600)
Products D and E should be processed further.
(c) The decision would remain the same. It does not matter how the joint
costs are allocated because joint costs are irrelevant to this decision.

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-17
EXERCISE 7-13

(a) Cost $100,000


Accumulated depreciation (25,000*)
Book value 75,000
Sales proceeds 40,000
Loss on sale $ 35,000

*One years depreciation: ($100,000 $0) 4 years

(b)
Net Income
Retain Replace Increase
Scanner Scanner (Decrease)
Annual operating costs $315,000* $225,000** $ 90,000
New scanner cost 110,000 (110,000)
Old scanner salvage (40,000) 40,000
Total $315,000 $295,000 $ 20,000

*(3 years X $105,000)


**[3 years X ($105,000 $30,000)]

Yes. Benson Hospital should replace the old scanner because it will
result in a savings of $20,000 over the next four years.

(c) As shown in (a) above, replacing the old scanner will result in
reporting a loss of $35,000. Reluctance to report losses of this nature
is the usual reason for not recognizing that a poor decision was made
in the past. The remaining book value of the old scanner ($75,000) is
a sunk cost. It will be deducted in the future, if the scanner is retained,
or written off now if it is replaced. However, if it is replaced now, that
cost will be partially offset by the salvage value that Dyno is willing to
pay ($40,000).

7-18 Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 7-14

Net Income
Retain Replace Increase
Machine Machine (Decrease)
Operating costs $125,000 (1) ($100,000) (2) ($ 25,000
New machine cost 0 ( 25,000) ( (25,000)
Salvage value (old) 0 ( (6,000) ( 6,000
Total $125,000 ($119,000) ($ 6,000

(1) $25,000 X 5.
(2) $20,000 X 5.

The current machine should be replaced. The incremental analysis shows


that net income for the five-year period will be $6,000 higher by replacing the
current machine.

EXERCISE 7-15
Net Income
Increase
Continue Eliminate (Decrease)
Sales $100,000) $( 0) $(100,000)
Variable costs
Cost of goods sold ( 61,000) ( 0) (61,000)
Operating expenses (26,000) ( 0) (26,000)
Total variable (87,000) ( 0) (87,000)
Contribution margin (13,000) ( 0) (13,000)
Fixed costs
Cost of goods sold (15,000) (15,000) ( 0)
Operating expenses (24,000) (24,000) ( 0)
Total fixed (39,000) (39,000) ( 0)
Net income (loss) $(26,000) $(39,000) $ (13,000)

Judy is incorrect. The incremental analysis shows that net income will be
$13,000 less if the Huron Division is eliminated. This amount equals the
contribution margin that would be lost through discontinuing the division.

(Note: None of the fixed costs can be avoided.)

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-19
EXERCISE 7-16

(a) $30,000 + $70,000 $40,000 = $60,000

(b) Tingler Shocker Total


Sales $300,000 $500,000 $800,000
Variable expenses 150,000 200,000 350,000
Contribution margin 150,000 300,000 450,000
Fixed expenses 142,500* 267,500** 410,000
Net income $ 7,500 $ 32,500 $ 40,000
*$30,000 + [($300,000 $800,000) X $300,000]
**$80,000 + [($500,000 $800,000) X $300,000]
(c) As shown in the analysis above, Cawley should not eliminate the
Stunner product line. Elimination of the line would cause net income
to drop from $60,000 to $40,000. The reason for this decrease in net
income is that elimination of the product line would result in the loss
of $55,000 of contribution margin while saving only $35,000 of fixed
expenses.

EXERCISE 7-17

Calculation of contribution margin per unit:

C D E
Selling price per unit $95 $75 $115
Less: variable costs/unit 50 40 40
Contribution margin/unit $45 $35 $ 75

Fixed costs = $22 X (9,000 + 20,000) = $638,000

Company profit with Products C and D:

C D Total
Units sold 9,000 20,000

Sales revenue $855,000 $1,500,000 $2,355,000


Less: Variable costs 450,000 800,000 $1,250,000
Contribution margin $405,000 $ 700,000 1,105,000
Less: Fixed costs 638,000
Net income $ 467,000

7-20 Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only)
EXERCISE 7-17 (Continued)

Company profit with Products C and E:

C E Total
Units sold 9,900* 10,000

Sales revenue $940,500 $1,150,000 $2,090,500


Less: Variable costs 495,000 400,000 895,000
Contribution margin $445,500 $ 750,000 1,195,500
Less: Fixed costs 638,000
Net income $ 557,500

*Product C sales increase by 10%, (9,000 X 110%)

Yes they should introduce Product E since net profit would increase by
$90,500 ($557,500 $467,000).

EXERCISE 7-18

1. Irrelevant. Unavoidable costs will be incurred regardless of the


decision made.

2. Relevant.

3. Irrelevant. This is a sunk cost and all sunk costs are irrelevant.

4. Irrelevant. These are sunk costs.

5. Relevant.

6. Relevant.

7. Relevant.

8. Relevant.

9. Irrelevant. If there is no change in the direct materials charge regardless


of the decision made, the cost is irrelevant.

10. Relevant.

Copyright 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 7-21