1.

Accept a special order: 168

Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable
costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14
each, of which Pederson has the capacity to produce. Pederson will incur extra shipping
costs of $1 per bear.

Instructions
Determine the incremental income or loss that Pederson Enterprises would realize by
accepting the special order.

2. Make or buy component parts or finished products. 169

Notson, Inc. produces several models of clocks. An outside supplier has offered to
produce the commercial clocks for Notson for $420 each. Notson needs 1,200 clocks
annually. Notson has provided the following unit costs for its commercial clocks:
Direct materials $100
Direct labor 140
Variable overhead 80
Fixed overhead (40% avoidable) 150

Instructions
Prepare an incremental analysis which shows the effect of the make-or-buy decision.

3. Sell or process further them further 174

Paola Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production
generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or
the chickens can be slaughtered in house and then sold for $2.75 each. It costs $65,000
more to turn the annual chicken crop into chicken meat.

Instructions
If Paola Farms slaughters the chickens, determine how much incremental profit or loss it
would report. What should Paola Farms do?

4. Repair, retain, or replace equipment 175

Elmdale Company has a machine that affixes labels to bottles. The machine has a book
value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more
efficient machine is available at a cost of $300,000 that will have a 5-year useful life with
no salvage value. The new machine will lower annual variable production costs from
$520,000 to $410,000.
Instructions
Prepare an analysis showing whether the old machine should be retained or replaced.
5. Eliminate an unprofitable business segment or product 176
Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. Demand of
individual products is not affected by changes in other product lines. 30% of the fixed
costs are direct, and the other 70% are allocated. Results of June follow:
Sour Cream Ice Cream Yogurt Butter Total
Units sold 2,000 500 400 200 3,100
Revenue $10,000 $20,000 $10,000 $20,000 $60,000
Variable departmental costs 6,000 13,000 4,200 4,800 28,000
Fixed costs 5,000 2,000 3,000 7,000 17,000
Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $15,000

Instructions
Prepare an incremental analysis of the effect of dropping the sour cream product line.