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오후 7:46 Practice Test Review | CPA

Table 1 Solutions

Row 2: The focus on Lenard's decision of whether to make or buy Product X67, given Prime's offer to sell Product X67 at $25.00 per unit to
Lenard, should be on relevant costs, as well as costs that can be eliminated by buying the product (instead of making the product in-house).

Direct materials, direct labor, variable overhead, and avoidable fixed costs are all relevant costs. The per-unit cost total includes direct materials
of $7.20 ($360,000 / 50,000 units), direct labor of $12.00 ($600,000 / 50,000 units), variable overhead of $6.40 ($320,000 / 50,000 units), and
avoidable fixed overhead of $0.60 [$30,000 of Category A expenses (as shown in the Fixed Cost Assessment exhibit) / 50,000 units]. These total
to $26.20, which exceeds Prime's offer of $25.00 per unit. The division will, therefore, choose to buy the product from Prime because the cost to
buy is less than the entity's relevant costs to make the product.

Row 3: A 20 percent price cut on materials will reduce direct materials costs to $288,000 from $360,000, leading to a per-unit cost of direct
materials of $5.76. With all other costs remaining the same, Lenard's cost to make Product X67 becomes $24.76; this is less per unit than Prime's
$25.00 offer. The division will, therefore, choose to make the product in this scenario because its cost to make the product is less than its cost to
buy the product.

Row 4: Although a reduction of rental cost by 30 percent (see column B of Fixed Cost Assessment exhibit) is beneficial to Lenard, rental cost is
incurred regardless of the entity's decision to make or buy the product. The impact of (reduced) rental costs is considered an unavoidable cost
and is, therefore, not a relevant cost in the analysis of whether to make or buy Product X67 (i.e., there is no impact on the decision to make or
buy).

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Table 2 Solutions

Row 2: Based on the information provided in the internal email thread of the Engine Parts Division, Ben should recommend that Lenard sell
(and not process further) the product group including Parts A20, B36, and C92. (Note the controller has communicated that the decision to sell
or process further is to be applied to the three parts collectively, and not to each part singularly).

Incremental costs associated with producing all three parts total $4.65 ($2.25 for Part A20, $1.35 for Part B36, and $1.05 for Part C92). The
incremental revenue associated with all three parts is $4.55 ($2.45 for Part A20, which comes from an end sale price of $9.40 less the split-off
sale price of $6.95; $1.45 for Part B36, which comes from an end sale price of $7.20 less the split-off sale price of $5.75; and $0.65 for Part C92,
which comes from an end sale price of $3.95 less the split-off sale price of $3.30).

Because aggregate incremental costs of $4.65 exceed aggregate incremental revenue of $4.55 for the three parts collectively, and result in a net
loss of $0.10 if processing the parts further collectively, the decision will be to sell at the split-off point of $16.00 (collectively).

Row 3: Should the division continue to process further Parts A20, B36, and C92 (collectively), Lenard will need to sell the parts grouping for
$20.65 in order to break even. The breakeven sale amount is equal to the sum of the split-off point costs for the product grouping ($16.00) plus
the sum of the additional incremental costs ($4.65) the division would incur if processed further. ($16.00 + $4.65 = $20.65).

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Table 3 Solutions

Row 2: Under the current method of allocating fixed costs equally among lines A, B, and C, the operating loss for Line A is $6,000.00. Sales total
$185,000 (37,000 units × $5.00 per unit). Variable costs, which are 60 percent of sales for Line A, are $111,000. The contribution margin is
therefore $74,000 ($185,000 – $111,000). Fixed costs across all three lines are $240,000, and they are allocated equally across lines A, B, and C.
Therefore, fixed costs for Line A are $80,000 ($240,000 / 3 lines).

Under the current method of allocating fixed costs across all three lines (A, B, and C), these costs are unavoidable. As a result of reducing the
contribution margin by the allocated amount of fixed costs to Line A, ($74,000 – $80,000), Line A will realize a loss of $6,000.00.

Row 3: Assuming that fixed costs can be eliminated for Line A, the board will drop Line A. When performing marginal analysis, costs that can be
eliminated, such as the fixed costs for Line A (as indicated in the board's meeting minutes excerpt), are avoidable costs.

If the $80,000 in fixed costs associated with Line A are avoidable, the division should drop the segment. Although Line A has a positive
contribution margin of $74,000 when fixed costs are zero, the division will benefit more from a savings of $80,000 in costs no longer required to
support Line A rather than a lower profit amount of $74,000 to be realized if keeping Line A.

Row 4: Assuming that fixed costs are unavoidable for Line A, the board will keep Line A.

If the $80,000 in fixed costs are unavoidable, then these costs will still be incurred by the division. If Lenard drops Line A with these unavoidable
costs, the $80,000 in fixed costs currently allocated to Line A will then be reallocated to lines B and C (i.e., the costs remain). However, Lenard
will also lose the positive contribution margin of $74,000 (if dropping Line A). By keeping Line A, although the division effectively carries a loss
associated with Line A production in the amount of $6,000, Lenard is recovering $74,000 of the unavoidable fixed costs.

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