Problem 1 - Coleman Company owns a machine that produces a component for the How much is incremental income if Tenchavez

ncome if Tenchavez accepts the special order? Should

products the company makes and sells. The company uses 1,800 units of this Tenchavez accept? Use the incremental approach to justify your answer.
component in production each year. The costs of making one unit of this component are Variable cost = $11 + $5 + $4 = $20 per unit
Direct material $7 Tenchavez should accept.
Variable manufacturing overhead 6 Incremental revenue from special order (3,000 x $21) $63,000
Direct labor 4 Incremental cost to fill special order (3,000 x $20) (60,000)
Fixed manufacturing overhead 5 Incremental income from accepting special order $ 3,000

The fixed overhead costs are unavoidable, and the unit cost is based on the present
annual usage of 1,800 units of the component. An outside supplier has offered to sell Problem 3 - Brislin Company makes and sells two products, Olives and Popeyes. The
Coleman this component for $18 per unit and can supply all the units it needs. income statement for the prior year, 2001, was as follows:
Olives Popeyes
A. If Coleman buys the component from the outside supplier instead of making it, how Sales $16,000 $24,000
much will net income change? Should Coleman make or buy the component? Use the Variable cost of goods sold 6,000 10,000
incremental approach to justify your answer. Manufacturing contribution margin $10,000 $14,000
Since net income decreases, Coleman should continue making the component. Fixed production 5,000 7,000
Variable cost = $7 + $6 + $4 = $17 Variable selling and administration 2,000 5,000
Incremental cost savings from not making component (1,800 x $17) $30,600 Fixed selling and administration 1,000 3,000
Incremental cost of buying component (1,800 x $18) (32,400) Net income $2,000 ($1,000)
Incremental decrease in net income due to buying component $(1,800) Brislin's fixed costs are unavoidable and are allocated to products on the basis of sales
revenue. If Popeyes are dropped, sales of Olives are expected to increase by 40
percent next year.
B. Suppose Coleman could rent the machine to another company for $5,000 per year.
How would your response change to part A? Use the incremental approach to justify A. Use the incremental approach to determine if Popeyes should be dropped.
your answer.
Since net income increases, the company should choose to buy the components. Incremental revenue ($16,000* 40%) of Olives $ 6,400
Incremental revenue of Popeyes (24,000)
Incremental cost savings from not making component (1,800 x $17) $30,600
Incremental cost savings of Popeyes CGS +10,000
Incremental Annual rent from machine 5,000 Incremental cost savings of Popeyes S&A cost +5,000
Incremental Cost of buying component (1,800 x $18) (32,400) Incremental variable cost of Olives ($6,000*40%) (2,400)
Incremental Increase in net income due to buying component $3,200 Incremental s&a cost of Olives ($2,000*40%) (800)

Incremental decrease in income if Popeyes discountinued ($5,800)

Problem 2 - Tenchavez Company makes and sells 12,000 pairs of running shoes each
year. The cost of making one pair of these shoes is
Problem 4 - Monk Company manufactures widulators. Watson Company has
Direct material $ 11
approached Monk with a proposal to sell the company a component use in its widulators
Variable manufacturing overhead 5 at a price of $12,000 for 4,000 units. Monk is currently making these components in its
Direct labor 4 own factory. The following costs are associated annually with this part of the process
Fixed manufacturing overhead 7 when 4,000 units are produced:
The fixed overhead costs are unavoidable. Tenchavez allocates fixed overhead costs Direct material $4,000
based on its annual capacity of 15,000 pairs it is able to make. An overseas company Direct labor 2,000
recently offered to buy 3,000 pairs of shoes at $21 per pair. Regular customers buy Manufacturing overhead (fixed & variable) 6,800
shoes from Tenchavez at $30 per pair. Total $12,800
All but $3,000 of the manufacturing overhead costs will continue if Monk discontinues The variable costs are directly attributable to the products produced for the specific
making the components. Monk will be able to eliminate machine rental of $1,800 per departments. All of the allocated costs will continue even if a division is discontinued.
year if the components are no longer manufactured. Anheiser allocates indirect fixed costs based on the number of units to be sold. Since
the Wise division has a net loss, Anheiser feels that it should be discontinued. Anheiser
A. How much are the incremental cost or savings if Monk outsources? Use the feels if the division is closed, that sales at the Bud division will increase by 20%, and
incremental approach to justify your answer. that sales at the Er division will stay the same.
Of the $6,800, $3,000 is avoidable, and $3,800 will
continue. A. Prepare an incremental analysis showing the effect of discontinuing the Wise division
on the remainingdivisions.
Incremental cost to buy 4,000 components ($
12,000) Bud
Incremental manufacturing savings if bought: Incremental revenue
Machine rental $ 1,800 20%*$70,000 - $50,000 ($36,000)
Direct materials 4,000 Incremental variable costs savings
Direct labor 2,000 20%*32,000 - $26,000 19,600
Overhead – avoidable portion 3,000 Incremental direct fixed costs saved 19,000
Total Incremental savings 10,800 Increase increase in profit if discontinued $2,600
Incremental cost of buying ($1,200)
components B. Should Anheiser close the Wise division? Briefly indicate why or why not.
Yes. The profit increases by $2,600 when the division is eliminated. Direct fixed
B. What is the amount of avoidable costs if Monk buys rather than makes the costs and variable costs for the Wise division were relatively high compared to those for
components? the Bud and Er divisions. The increase in sales by 20% of the Bud division was enough
$10,800 – from part A above….the costs that can be avoided if the alternative course of to offset the loss of the Wise division.
action—buying—is taken.

C. Which costs/amounts from above are opportunity costs, if any? Problem 6 - Gordon Company sells two items, corn and broccoli. The company is
$1,800......the rent savings are given up if the alternative action--buying--is undertaken. considering dropping corn. It is expected that sales of broccoli will increase by 40% as a
Note that the cost of the products--whether bought or made is still a 'cost' for the result. Dropping corn will allow the company to cancel its monthly rental of its corn
company. shucker costing $100 a month. The other equipment will be used for additional
production of broccoli. One employee earning $200 can be terminated if corn production
D. Should Monk make or buy the components? Briefly justify your answer. is dropped. Gordon’s other allocated costs are unavoidable. The company rents all of its
Monk should make the components. There is an additional cost of $1,200 if Monks equipment. A condensed, budgeted monthly income statement with both products is
buys the components. Increases in costs are bad choices in decision making because below:
the cost must be passed on to the customer or absorbed as lower profits by the seller. Total Corn Broccoli
Sales $20,000 $8,000 $12,000
Problem 5 - Anheiser, Inc. has three divisions: Bud, Wise, and Er. Results of May, Food materials 4,500 2,000 2,500
2003 are presented below: Direct labor 3,200 1,200 2,000
Bud Wise Er Total Equipment rental 2,900 2,600 300
Units sold 3,000 5,000 2,000 10,000 Other allocated overhead 3,100 2,100 1,000
Revenue $70,000 $50,000 $40,000 $160,000
Less variable costs 32,000 26,000 16,000 74,000 Operating income $6,300 $ 100 $6,200
Less direct fixed costs 14,000 19,000 12,000 45,000 In good form, prepare an incremental analysis to determine the financial effect of
Less allocated fixed costs 6,000 10,000 4,000 20,000 dropping corn production.
Net income $18,000 ($5,000) $ 8,000 $21,000 Incremental change in revenue:
Increase in broccoli sales: $12,000 x 40% = +$4,800
 Decrease in corn sales (8,000) Incremental VOH cost savings +16,000
Incremental decrease in revenue ($3,200) Incremental FOH cost savings (40%*$300*100clocks) +12,000
Incremental Net savings to buy per unit +$2,000
Incremental change in variable costs:
Food materials: Increase in broccoli costs: $2,500 x 40% (1,000)
Decrease in corn costs +2,000 Problem 9 - Young Siding Co. produces computers, which sell for $400 each. A
Direct labor: Increase in broccoli labor: $2,000 x 40% (800) foreign distribution wants to order 1,000 units at $300 a unit. 70% of the fixed
overhead is unavoidable. Production costs per unit are:
Decrease in corn labor +1,200 Direct materials $90
Incremental decrease in variable costs +1,400 Direct labor 120
Equipment rental reduction - corn shucker +100 Variable overhead 50
Incremental decrease in profits if corn production is dropped ($1,700) Fixed overhead 60
A. How much is the relevant cost of producing one more computer?
Relevant costs are incremental costs of making one unit.
Problem 7 - Parrino has three product lines in its retail stores: books, videos, and music. $90 + $120 + $50 = $260
Results of the 4th quarter are presented below: Note that fixed costs do not increase when one additional unit is produced.
Books Music Videos Total
Units sold 1,000 2,000 2,000 5,000 B. What the effect on net income of accepting the special order? Use the incremental
Revenue $22,000 $40,000 $23,000 $85,000 approach.
Variable departmental costs 15,000 22,000 12,000 49,000 Incremental revenue = $1,000 x $300 = $300,000
Direct fixed costs 1,000 3,000 2,000 6,000 Incremental costs = $1,000 x 260 = ($260,000)
Allocated fixed costs 7,000 7,000 7,000 21,000 Increase of $40,000
Net income ($1,000) $ 8,000 $ 2,000 $ 9,000
The allocated fixed costs are unavoidable. Demand of individual products are not
affected by changes in other product lines. If Parrino discontinues the Books product Scott, Inc. has a capacity of producing 300,000 units a year and sells
Problem 10 -
line, what is the effect on profit? Use the incremental approach. them at $28 a unit. At present Scott is selling 250,000 units. A foreign distributor
Incremental revenue ($22,000) has offered to purchase 40,000 units at $20 a unit. Variable selling costs will be
Incremental costs: reduced by 40%. The sales manager determined that incremental costs of
Variable costs savings +15,000 accepting the order are $744,000. Should Scott accept the order? Use the
Direct fixed costs savings +1,000 incremental approach.
Incremental drop in profits if discontinued ($6,000) Yes, incremental profit is $56,000.

Incremental Revenue = 40,000 x $20 = $800,000

Problem 8 -Temple, Inc. produces grandfather clocks and sells 100 per year. Incremental costs = $744,000
: Incremental profit = $800,000 - $744,000 = $56,000
Unit
Cost
Direct materials $ 200 Problem 11 - It costs Roy Company $14 of variable costs and $6 of allocated
Direct labor 240 fixed costs to produce a toy truck that sells for $30. A buyer offers to purchase
Variable overhead 160 3,000 units at $18 each. Roy has unused capacity. What will occur to profits is the
Fixed overhead (40% avoidable) 300 offer is accepted and produced? Use the incremental approach.
A. An outside supplier has offered to produce the clocks for Temple for $700. Use the Incremental increase in revenue (3,000*$18) $54,000
incremental approach. Incremental increase in costs (3,000*$14) (42,000)
Relevant costs are the incremental costs of making one clock: Incremental increase in profits to accept $12,000
Incremental Cost to buy ($70,000)
Incremental DM cost savings +20,000
Incremental DL cost savings +24,000
Problem 12 - At the start of the year, West Coast Grocery Supply budgeted sales
and variable costs for three product lines as shown below in the table. With this
level of allocation, the Canned Goods line does not appear Problem 14 - Chapman Company manufactures widgets. Embree Company has
profitable. approached Chapman with a proposal to sell the company widgets at a price of
Canned $100,000 for 50,000 units. Chapman is currently making these components in its
Meat Dairy Total own factory. The following costs are associated with this part of the process
Goods
Sales $15,000 $1,500 $20,000 $36,500 when 50,000 units are produced:
Variable Costs 10,000 1,000 18,000 29,000 Direct material $44,000
Contribution Margin 5,000 500 2,000 7,500 Direct labor 20,000
Fixed Costs 1,644 164 2,192 4,000 Manufacturing 60,000
Profit (Loss) $ 3,356 $ 336 ($ 192) $ 3,500 overhead
West Coast Grocery Supply is operating at capacity in terms of the existing Total $124,000
warehouse and the current fleet of delivery trucks. If the Canned Goods line is The manufacturing overhead consists of $32,000 of costs that will be eliminated if
dropped, $500 of fixed costs specifically associated with the Canned Goods line the components are no longer produced by Chapman. The remaining
can be avoided. Additionally, sales of Meat and Dairy can be increased by 20% manufacturing overhead will continue whether or not Chapman makes the
each. components. From Chapman’s point of view, what is the amount of avoidable
costs if it buys rather than makes the components?
A.How much is the fixed cost savings related to canned goods? $44,000 + $20,000 + $32,000 = $96,000
The amount of fixed costs that can be avoided = $500

B. Using the cost allocation death spiral concept, indicate whether West Coast
should drop its canned goods line. No, the company will lose more money if it
drops canned goods. Since not all fixed costs can be eliminated, they must be
allocated to the other divisions causing those divisions to have reduced profits or
create losses.
Problem 15 - Wilson Company is considering replacing equipment which
originally cost $56,000 and which has $43,000 accumulated depreciation to date.
A new machine will cost $67,000. How much costs are sunk in this situation?
$56,000 This will not affect the outcome of decision making.

Problem 16 - Darnell Inc. budgeted 5,000 widgets for production during 2004.
Problem 13 - Hand Devices makes and sells hand-held computers. Each Fixed factory overhead is allocated using ABC. The following estimated costs
computer regularly sells for $200. The following cost data per computer are based were provided:
on a normal production of 8,000 computers produced each period. The company Direct material ($80/unit) $400,000
has the capacity to produce 12,000 computers. Direct labor ($22/hr. * 2 hrs./unit) 220,000
Variable manufacturing overhead 40,000
Direct materials $75 ($8/unit)
Direct labor 55 Fixed factory overhead costs 269,000
Factory Overhead (75% variable, 25% 40 ($53.80/unit)
unavoidable fixed) Total $929,000
Hand Devices has received a special order for a sale of 500 computers to an Cost per unit = $185.80
overseas customer. The customer is willing to pay $150 per computer. The only
selling costs that would be incurred on this order would be $10 per computer for A. Darnell received an order for 400 units from a new customer in a country in
shipping. Hand is now selling 8,000 computers through regular distributors each which Darnell has never done business. This customer would like to spend $160
period. Should Hand Devices accept the special order? use the incremental per widget. Darnell has capacity to produce 5,500 units. Should Darnell accept the
approach. order? Support your work with an incremental analysis.
No. The incremental costs are $170 per computer, which exceeds the price the Yes, it can make $11,200
customer is willing to pay. Incremental revenue per widget $160
Incremental revenue per computer = $150 Incremental cost per widget:
Incremental cost per computer.$75 + $55 + [75% x $40] + $10 = $170 $80 + ($22 x 2) + $8 = 132
Incremental loss per computer = $150 - $170 = $20 Incremental profit per unit $ 28
 Total incremental profit = $28 x 400 = $11,200
B. Darnell received an offer from another company to manufacture the same
quality widgets for them at $140. Should Darnell let someone else manufacture all
5,000 widgets and focus on only distribution? Support your work with an
incremental analysis.
No, Darnell can expect profitability to decline $40,000 if it outsources production.
Incremental Cost to buy per widget ($140*5,000)
Incremental Cost to make per widget/savings if buy widgets:
$80 + ($22 x 2) + $8 = $132*5,000
Incremental savings if manufactured
C. While evaluating the offer to outsource, Darnell realized it could rent its
manufacturing space for $ 50,000. Now, should Darnell outsource the
manufacture of the widgets? Support your work with an incremental analysis.
Yes, Darnell can expect profitability to increase $10,000 if they outsource
production
Cost to buy all 5,000 widgets: $140 x 5,000 = ($700,000)
Opportunity cost of renting facility +50,000
Cost to make per widget: $132 x 5,000 = +660,000
Incremental savings if outsourced +$10,000
$8 + $3 + $1 = $12; Relevant = incremental. Note that avoidable means it is a cost
that will not be incurred if the product is bought instead of made, i.e., it is a
cost savings. The direct costs are saved as well. Only the costs that are
different if the cookies are made instead of bought are relevant.
Problem 19 - Barry Corporation currently manufactures a subassembly for its
($700,000) main product. The costs per unit are as follows:
Direct materials $ 1.00
+660,000 Direct labor 10.00
$ 40,000 Variable overhead 5.00
Fixed overhead 8.00
Total $24.00
Funkhouser Company has contacted Barry with an offer to sell it 5,000 of the
subassemblies for $18.00 each. Total relevant costs if Barry makes the
subassemblies are $85,000. Should Barry make or buy the subassemblies?
Support your answer with an incremental analysis.
Cost to make - costs to buy = incremental cost
$85,000 (given) - (5,000 x $18) = ($5,000) Cost savings if made.
Note that you do not know how much of the fixed overhead is avoidable per unit, so you
can't use per unit amounts. In addition, since the relevant cost to make is given, it
is much easier to find the answer than calculating.

Problem 17 - Auchter Company has old inventory on hand that cost $12,000. Its
scrap value is only $5,000. The inventory could be sold for $20,000 if Problem 20 - The cost to produce Part A was $10 per unit in 2003. During 2004, it has
manufactured further at an additional cost of $13,000. What should Auchter do? increased to $11 per unit. In 2004, Supplier Company has offered to supply Part A
Support your work with an incremental analysis. for $9 per unit. For the make-or-buy decision, identify the following amounts that are
Process further and sell: relevant:
Incremental revenue $20,000 A. Incremental revenues
Incremental costs (13,000) There are never any incremental revenues with make or buy decisions.
Incremental profit 7,000 B. Differential costs are $2 per unit.
Incremental revenue to sell as is: $5,000 Cost to make - cost to buy = $11 - $9 = $2 per unit
Best option is to process further and sell at $20,000.
Problem 21 - A company uses 10,000 units of Part A in producing its products. A
Problem 18 - Zweig, Inc. produces batches of chocolate chip supplier offers to make Part A for $70. Max Company has relevant costs of $80 a
cookies: unit to manufacture Part A. There is excess capacity. How much is the opportunity
Batch cost of buying Part A from the supplier?
Cost Zero. Opportunity costs are the value of benefits forgone by selecting one alternative over
Direct materials $ 8.00 another. There are no opportunity costs in this problem.
Direct labor 3.00
Variable overhead 1.00
Problem 22 - Temple, Inc. produces several models of grandfather clocks. An outside
Fixed common overhead 4.00
supplier has offered to produce the economy clocks for Temple for $350 each. Temple
An outside supplier has offered to produce the cookies for $14 per batch. What is
needs 1,200 clocks annually. Temple has provided the following unit costs for its
the minimum amount that Zweig would sell additional batches of cookies if the
economy model:
company is under capacity?
Unit
 Cost If this product line is eliminated, 40% of the fixed expenses can be eliminated and the
Direct materials $ 100 other 60% will be allocated to other product lines.
Direct labor 120 A. Create an incremental analysis to determine if this product line should be eliminated.
Variable overhead 80
Fixed overhead (40% 150 Effect on
avoidable) Profit
Incremental decrease in revenue ($220,000)
Using good form, prepare an incremental analysis which shows the effect of the make Incremental variable cost savings $120,000
or buy decision. Show calculations to support your answers in the space outside the Incremental fixed cost savings ($120,000 x 40%) +48,000
answer box. Incremental decrease in profits if eliminated ($52,000)
Incremental B. Identify any non-relevant costs.
Incremental analysis:
effect Since the other 60% of fixed costs will be incurred regardless of decision, they are not
Incremental Cost to buy (1,200 x $350) ($420,000) relevant.
Incremental Cost savings:
Savings of DM $100 x 1,200 = $120,000
Savings of DL $120 x 1,200 = 144,000 Problem 25 - Sally Industries can produce 100 units of a necessary component part
Savings of VOH $80 x 1,200 = 96,000 with the following costs:
40% x $150 x 1,200 Direct Materials $30,000
Savings of FOH 72,000 Direct Labor 13,000
=
Incremental total cost savings +432,000 Variable Overhead 32,000
Incremental cost saving if clocks are bought instead Fixed Overhead 12,000
$12,000 If Sally Industries purchases the component externally, $3,000 of the fixed costs can be
of made
avoided. At what external price for the 100 units is the company indifferent between
making or buying?
Problem 23 - A division has the following data: The company is indifferent when the cost of making the part equals the cost of buying
Sales $600,000 the part, which is $78,000:
Variable expenses 320,000 Effect on
Incremental savings:
Fixed expenses 310,000 Profit
What will be the incremental effect on net income if this division is eliminated, assuming ($30,000 + $13,000 + $32,000 + $3,000) $78,000
the fixed expenses will be allocated to profitable segments? Use the incremental
analysis approach.
Effect on Problem 26 - Hernandez, Inc. manufactures 3 models of picture frames. Hernandez
profit Corporation manufactures 5,000 frames per year. The unit cost to produce a metal
Incremental revenue ($600,000) frame follows:
Incremental variable costs +320,000 Direct Materials $6
Incremental effect on profit ($280,000) Direct Labor 7
Only costs that change between alternatives are incremental. Fixed expenses that are Variable Overhead 2
allocated never change. Fixed Overhead (70% 5
unavoidable)
Total $20
Problem 24 - Diversified Machines has four product lines, one of which reflects the A local company has offered to supply Hernandez the 5,000 metal frames it needs for
following results: $16 each. In good form, create an incremental analysis for the make or buy decision.
Sales $220,000 Incremental cost to buy ($80,000) 5,000 x $16 = $80,000
Variable expenses 120,000 Incremental savings:
Contribution margin 100,000 Direct materials savings +$30,000 5,000 x $6 = $30,000
Fixed expenses 120,000 Direct labor savings +35,000 5,000 x $7 = $35,000
Net loss $(20,000) Variable overhead savings +10,000 5,000 x $2 = $10,000
 Fixed overhead savings - avoidable portion +7,500 5,000 x $5 x 30% = $7,500 Incremental savings on variable MOH +12,000 3,000 x $4
Incremental savings if 'buy' decision is made $2,500 Incremental savings on fixed MOH +6,000 3,000 x $2*
Incremental net cost to buy ($3,000)
Problem 27 - Crisp has 4 product lines: milk, ice cream, yogurt, and butter. The
allocated fixed costs are based on units sold and are unavoidable. Demand of individual
products is not affected by changes in other product lines. 40% of the fixed costs are
direct, and the other 60% are allocated. Results of June follow:
Milk Ice Cream Yogurt Butter
Units sold 2,000 500 400 200
Revenue $10,000 $20,000 $10,000 $20,000
Variable departmental costs 6,000 13,000 4,200 4,800
Fixed costs 5,000 2,000 3,000 7,000
Net income (loss) ($1,000) $5,000 $2,800 $8,200

A. In good form, prepare an incremental analysis of the effect of dropping the milk
product line.

Incremental revenue ($10,000)

Incremental variable cost savings +6,000
Incremental fixed cost savings (5,000 x .40) +2,000
Incremental decrease in profits ($2,000)

B. Briefly state how the cost allocation death spiral concept applies to this problem.
The cost allocation death spiral occurs when a company drops a product line/division
that has a loss. Management may believe this will eliminate the loss, however, since the
common fixed costs must be allocated and absorbed by other products, the total profit
of the company declines. i.e., allocated fixed costs cannot be avoided.

Problem 28 - Evans Corporation currently manufactures 3,000 subassemblies annually

for its main product. The costs per unit are as follows:
Direct materials $ 3.00
Direct labor 8.00
Variable 4.00
overhead
Fixed overhead 7.00
Total $22.00

Howard Company has contacted Evans with an offer to sell it 3,000 subassemblies for
$18.00 each. $5 of the fixed overhead per unit is unavoidable. In good form in the
answer box below, create an incremental analysis for the make or buy decision. (Do
not include extraneous information/calculations inside the answer box.)
Incremental analysis: Calculations (not part of analysis):
Incremental cost to buy ($54,000) 3,000 x $18
Incremental savings on direct materials +9,000 3,000 x $3
Incremental savings on direct labor +24,000 3,000 x $8
*The unavoidable portion of this cost ($5) exists whether or not the company makes or Incremental cost to buy ($1,200)
buys the subassemblies. If the subassemblies are bought, the company saves the Since 30% of the fixed cost is avoidable, this cost will be a savings.
avoidable portion of the cost, $2 per unit.

Problem 31 - Boys Toys sells three products in its retail stores: planes, trains, and cars.
Problem 29 Parrino has three product lines in its retail stores: books, videos, and Results of the 4th quarter are below:
music. The allocated fixed costs are based on units sold and are unavoidable. Results Planes Trains Cars Total
of the fourth quarter are presented below: Units sold 1,000 2,000 2,000 5,000
Books Music Videos Total Revenue $31,000 $43,000 $26,000 $100,000
Units sold 1,000 2,000 2,000 5,000 Variable departmental costs 22,000 24,000 13,000 59,000
Revenue $24,000 $48,000 $34,000 106,000 Direct fixed costs 5,000 4,000 3,000 12,000
Variable departmental costs 15,000 22,000 23,000 60,000 Allocated fixed costs 6,000 7,000 7,000 20,000
Direct fixed costs 3,000 6,000 5,000 14,000 Net income ($2,000) $ 8,000 $ 3,000 $ 9,000
Allocated fixed costs 4,400 8,800 8,800 22,000 Demand of individual products are not affected by changes in other product lines. In
Net income (loss) $ 1,600 $11,200 ($2,800) $10,000 good form, prepare anincremental analysis to determine if planes should be
discontinued.
Incremental revenue ($31,000)
Demand of individual products is not affected by changes in other product lines. In good Incremental VC savings +22,000
form, prepare anincremental analysis of the effect of dropping the Video product line. Incremental direct fixed costs +5,000
Incremental analysis: Incremental decline in profit if discontinued ($4,000)
Incremental revenue ($34,000)
Incremental savings on variable costs +23,000
Problem 32 - The following estimated costs were provided by Young Company:
Incremental savings on direct fixed costs +5,000
Direct material ($30/unit) $30,000
Incremental decrease in profit to drop video line ($6,000)
Direct labor ($12/hr. * 3 hrs./unit) 36,000
Note: Incremental analyses show only the differences in revenues and costs.
Variable manufacturing overhead 15,000
Comparative columns or comparative income statements, or a revised income
($15/unit)
statement showing the net amounts to be reported after the drop are NOT incremental
Fixed factory overhead costs 10,000
analyses. We emphasized incremental analysis using this approach in class.
($10/unit)
Total $91,000
Problem 30 - Calc, Inc. owns a machine that produces baskets for the gift packages the Young received an order for 600 units from a new customer in a country in which Young
company sells. The company uses 800 baskets in production each month. The costs of has never done business. This customer would like to spend $86 per widget. Young has
making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 capacity to produce 900 more units. Should Young accept the order? Support with an
for direct labor and $5 for fixed manufacturing overhead. The unit cost is based on the incremental analysis.
monthly usage of 800 baskets. The company determined that 30% of the fixed Yes, it can make $3,000 more profit
manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the
baskets for $12 each, and can supply all the units it needs. In good form, prepare Incremental revenue (600 x $86) = +$51,600
an incremental analysis to determine if Calc should buy the component from the Incremental DM cost (600 x $30) = (18,000)
supplier? Incremental DL cost (600 x $36) = (21,600)
Incremental cost to buy (800 x $12) ($9,600) Incremental VMOH cost (600 x $15) = (9,000)
Incremental profit = + $3,000
Incremental cost savings:
Fixed OH is not incremental since it does not change.
DM ($4 x 800) +3,200
VOH ($3 x 800) +2,400
DL ($2 x 800) +1,600 Problem 33 - Kirk Company plans to produce 50,000 buckets next year at a total cost
FOH ($5 x 30% x 800) +1,200 of $850,000. Fixed costs are $3 per unit at this level of operations. Selling price is $8
per unit. Kirk is considering lowering the price to $7 per unit, and feels that this action
will cause sales to climb to 60,000 buckets. Use incremental analysis to Incremental direct material cost savings +48,000
calculate incremental profit or loss if the change is made to the sales price. Incremental direct labor cost savings +12,000
Incremental revenue: Effect on Profit Incremental variable overhead cost savings ($4 x 4,000) +16,000
Before change: $8 x 50,000 = $400,000 Incremental fixed overhead cost savings
After change: $7 x 60,000 = 420,000 [$10- $4] x 4,000 x 70% +16,800
Incremental increase in profits $20,000 Incremental net cost savings if buy instead of make $8,800

Problem 34 - Zeriff’s Donuts currently sells donuts for $4.00 per dozen. These donuts
Problem 37 - Bing Corporation currently manufactures a lid for its main product. The
cost $2.70 per dozen to produce. Business was very slow yesterday, and several
relevant costs to produce one unit for direct costs are $1.70, and the allocated
dozen donuts have been marked down to $1.50 per dozen on the day-old table today.
common costs are $0.80 per unit. A supplier has offered to provide the monthly
What is the sunk cost associated with these donuts?
supply of 12,000 lids for $21,600. Should Bing outsource the lids? Use incremental
The original cost of the donuts is $2.70 no matter what and it can't be changed. This is
analysis.
a sunk cost.
No, the cost increases by $1,200
Incremental savings of cost to make: $1.70 x 12,000 = $20,400
Problem 35 - Morley, Inc. has three product lines in its retail stores: putters, drivers, Incremental cost to buy: ($21,600)
and sinkers. The allocated fixed costs are based on units sold and are unavoidable. Incremental cost to buy instead of make: $20,400 - $21,600 = ($1,200)
Results of May follow:
Putters Drivers Sinkers Total
Problem 38 - Block Corporation currently makes the rolls that it uses for its
Units sold 500 1,000 1,000 2,500
sandwiches. It uses 50,000 rolls annually. The costs to make the rolls are given below:
Revenue $24,000 $48,000 $34,000 106,000
Variable departmental Materials $0.04
costs 15,000 22,000 23,000 60,000 Labor $0.03
Direct fixed costs 3,000 6,000 5,000 14,000 VOH $0.02
Allocated fixed costs 4,000 8,000 8,000 20,000 FOH $0.07
Net income (loss) $ 2,000 $12,000 ($2,000) $12,000 A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are
Demand of individual products is not affected by changes in other product lines. In good purchased, 20% of the fixed overhead could be avoided. Determine the effect if Block
form, prepare anincremental analysis of the effect of dropping the sinkers product line. accepts the offer. Use incremental analysis.
Incremental analysis: Profits will decrease (costs will increase) by $300 if accepted.
Incremental decrease in revenue ($34,000) Incremental analysis:
Incremental savings of variable costs +23,000 Incremental cost to buy ($0.11)
Incremental savings of direct fixed costs +5,000 Incremental cost savings:
Incremental decline in profit if Sinkers dropped ($6,000) DM savings + $0.04
DL savings + $0.03
VOH savings + $0.02
Problem 36 - Walker, Inc. currently manufactures 4,000 motors for its electric scooters FOH savings ($.07 x 20%) + $0.014
annually. Direct material costs are $48,000 and direct labor total $12,000 annually. Incremental decrease in profit per unit = $.006
Overhead totals $10 per unit of which $4 is variable. Thirty percent of the fixed
overhead is unavoidable. Anthony, Inc. has contacted Walker with an offer to sell the Total incremental decrease in profit (50,000 x $0.006) = $300
motors for $21 each. In good form, create an incremental analysis for the make or buy
decision.
Problem 39 - Menlo Shoe Company is trying to decide whether or not to continue
making bowling shoes. The following information is available for the segments. Assume
Incremental analysis:
that all direct fixed costs could be avoided if a segment is dropped and that the total
Incremental cost to buy ($21 x 4,000) ($84,000) common fixed costs would remain unchanged if the bowling shoes were dropped.
 Bowling Units sold 2,000 4,000 4,000 10,000
Athletic Shoes Boots
Shoes Revenue $22,000 $40,000 $23,000 $85,000
Sales $120,000 $420,000 $360,000 Variable departmental costs 15,000 22,000 12,000 49,000
VC 64,000 220,000 140,000 Direct fixed costs 1,000 3,000 2,000 6,000
CM 56,000 200,000 220,000 Allocated fixed costs 7,000 7,000 7,000 21,000
Direct FC 40,000 70,000 90,000 Net income ($1,000) $ 8,000 $ 2,000 $ 9,000
Allocated FC 20,000 70,000 60,000 Allocated fixed costs are unavoidable. Individual product demand is not affected by
NI ($4,000) $60,000 $70,000 changes in other product lines.
If bowling shoes are dropped, what would happen to the overall net income? Support
with incremental analysis. A. In good form, use the incremental approach to determine if BarBQue Heaven should
It would decrease by $16,000. discontinue Ribs. Label appropriately. Show calculations in the space provided if
Incremental Revenue ($120,000) needed. .
Incremental VC savings + $64,000 Incremental analysis:
Incremental Direct FC savings + $40,000 Incremental revenue ($22,000)
Incremental decrease in profits ($16,000) Incremental variable costs savings + 15,000
Incremental direct fixed cost savings + 1,000
Incremental decrease in profit if ribs are dropped ($6,000)
Problem 40 - Menlo Shoe Company is trying to decide whether or not to continue
making bowling shoes. The following information is available for the segments. Assume B, Briefly state how the cost allocation death spiral applies to this problem.
that all direct fixed costs could be avoided if a segment is dropped and that the total When a division is eliminated, the fixed costs that had been allocated to it, have to
common fixed costs would remain unchanged if the bowling shoes were dropped. be allocated to the remaining divisions. Hence, the allocated fixed costs do not
Bowling Shoes Athletic Shoes Boots disappear. Without the additional contribution margin from the dropped product, total
Sales $120,000 $420,000 $360,000 profit declines. If more products are dropped the company spins into a deeper cut in
VC 64,000 220,000 140,000 profits or increased loss.
CM 56,000 200,000 220,000
Direct FC 40,000 70,000 90,000
Allocated FC 20,000 70,000 60,000 Problem 42 - Halo Inc. budgeted 8,000 bearings for production during 2006. Fixed
NI ($4,000) $60,000 $70,000 factory overhead is allocated using ABC. Halo received an offer from a suppler to
Assume that boots normally sell for $90 per pair. An exporter has approached Menlo manufacture the same quality bearings at $81 each. The space currently occupied by
about buying 1,000 pairs of boots for a one-time export deal for $80 per pair. $3.00 per the manufacturing facility could be leased out for $20,000 per year if the supplier
unit of the normal variable cost could be avoided on this sale, but Menlo would have to provides the bearings. The following estimated costs were provided:
pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to produce this Direct material ($50/unit) $400,000
order, and no regular sales will be affected. Should Menlo accept this order? Support Direct labor ($16/hr. * 1.5 hrs./unit) 192,000
with an incremental analysis. Variable manufacturing overhead 48,000
Yes, profits will increase by $44,000. ($6/unit)
# of boots sold = $360,000/$90 = 4,000 Fixed factory overhead costs 144,000
Incremental cost per unit = $140,000/4,000 = $35 ($18/unit)
Total $784,000
Incremental revenue ($80 x 1,000) $80,000
Incremental VC ($35 - $3) x 1,000 (32,000) Cost per unit = $98.00
Increase in fixed costs 4,000 Use the incremental approach to determine if Halo should buy its bearings from the
Incremental increase in profits $44,000 supplier. Label appropriately. Show calculations in the space provided if needed. .
Incremental analysis: Calculations:
Incremental cost to buy ($648,000) ($81*8,000)
Problem 41 BarBQue Heaven has three product lines in its stores: ribs, chicken, and Incremental cost savings - DM +400,000
beef. Results of May are presented below: Incremental cost savings - DL +192,000
Ribs Chicken Beef Total Incremental cost savings - VOH +48,000
 Incremental lease revenue +20,000 Problem 45 Block Corporation currently makes the rolls that it uses for its sandwiches.
Incremental cost savings to buy from $12,000 It uses 50,000 rolls annually. The costs to make the rolls are given below:
supplier Materials $0.04
Labor $0.03
Problem 43 Clinton Company makes and sells 16,000 ties each year. Fixed overhead VOH $0.02
costs are allocated to ties based on its annual production of 16,000 ties. The unit cost of FOH $0.07
making one tie at this activity level follows: A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are
Direct material $9 purchased, 20% of the fixed overhead could be avoided. If Block accepts the offer, it will
Variable manufacturing 3 be:
overhead Incremental analysis:
Direct labor 5 Incremental cost to buy ($0.11)
Fixed manufacturing 4 Incremental cost savings:
overhead DM savings + $0.04
Capacity is 20,000 ties. Forty percent of the fixed overhead costs is avoidable. An DL savings + $0.03
overseas company recently offered to buy 2,500 ties at $20 per tie even though VOH savings + $0.02
Clinton’s regular customers pay $25 each. FOH savings + $0.014
A. Use the incremental approach to determine the effect on income if Clinton accepts ($.07 x 20%)
the order for 2,500 ties. Label appropriately. Show calculations in the space provided Incremental decrease in profit per unit = $.006
if needed. Total incremental decrease in profit = $300
Incremental analysis: Calculations: (50,000 x $0.006)
Incremental revenue $50,000 2,500*$20
Incremental costs = DM (22,500) 2,500*$9
Incremental costs = DL (7,500) 2,500*$3 Problem 46 Alan Company makes sets of wrenches. They are trying to decide whether
Incremental costs = VOH (12,500) 2,500*$5 to continue to make the case the wrenches are sold in, or to outsource it to another
Incremental costs avoided = FOH (4,000) 2,500*$4*40% company. The direct material and direct labor cost to produce the cases total $2.00 per
case. The overhead cost is $1.00 per case which consists of $0.40 in variable overhead
Incremental increase in profit if special order $3,500
which would all be eliminated if the case were bought from the outside supplier. The
accepted
$0.60 of fixed overhead is based on expected production of 200,000 cases per year and
B. Should Clinton accept? Briefly justify your answer.
consists of the salary of the case production manager of $40,000 per year and $80,000
Most likely, yes. Profits increase by $3,500. Qualitative benefits and costs should be
in depreciation on equipment that would have no resale value. The manager would be
considered as well.
laid off if the cases were bought externally. Additionally, if the case production were
stopped, the space that it is using could be rented out for $20,000 per year. The outside
Problem 44 SMP Company's market for the Model 64 has changed significantly, and supplier has offered to supply the cases for $2.80 per case. How much will Alan save or
SMP has had to drop the price per unit from $265 to $125. There are some units in the lose if the cases are bought externally?
work in process inventory that have costs of $150 per unit associated with them. SMP Incremental analysis:
could sell these units in their current state for $100 each. It will cost SMP $10 per unit to Incremental cost to buy per case ($2.80)
complete these units so that they can be sold for $125 each. Which of the following is Incremental cost savings to buy:
the amount of sunk costs in this problem? DM and DL savings + $2.00
$150 per unit VOH savings + $0.40
Two costs are not relevant since the profits remain the same regardless if SMP is FOH savings:
dropped or not. The original selling price of $265 does not make the company more or Salary $40,000/200,000 = = $0.20
less profitable. The $150 cost exists regardless of the decision made. However, a sunk Incremental opportunity cost is bought +$0.10
cost is an amount incurred for which it is too late to change. The previous selling price is ($20,000/200,000)
not a 'cost'. Incremental cost increase if bought = ($0.10) per case
Problem 47- Smith Company manufactures widgets. Newman Company has Direct FC +32,000
approached Smith with a proposal to sell the company one of the components used to Incremental increase in profits $34,000
make widgets at a price of $100,000 for 50,000 units. Smith is currently making these
components in its own factory. The following costs are associated with this part of the
process when 50,000 units are produced: Problem 49 Menlo Shoe Company is trying to decide whether or not to continue making
Direct material $44,000 bowling shoes. The following information is available for the segments. Assume that all
Direct labor 20,000 direct fixed costs could be avoided if a segment is dropped and that the total common
MOH 60,000 fixed costs would remain unchanged if the bowling shoes were dropped.
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the Bowling
Athletic Shoes Boots
components are no longer produced by Smith. The remaining manufacturing overhead Shoes
will continue whether or not Smith makes the components. Answer the following Sales $120,000 $420,000 $360,000
questions from Smith's point of view. VC 64,000 220,000 140,000
Should Smith make or buy the components for the widgets? CM 56,000 200,000 220,000
Direct FC 40,000 70,000 90,000
Continue to make them because the incremental cost of buying from Newman is Allocated FC 20,000 70,000 60,000
$4,000. NI ($4,000) $60,000 $70,000
Incremental analysis: If bowling shoes are dropped, what would happen to overall net income?
Incremental cost to buy ($100,000) Incremental revenue ($120,000)
Incremental cost savings to make: Incremental VC savings + $64,000
DM + $44,000 Incremental direct FC savings + $40,000
DL + $20,000 Incremental decrease in profits ($16,000)
MOH + $32,000
Incremental cost to buy ($4,000)
Problem 50 Menlo Shoe Company is trying to decide whether or not to continue making
bowling shoes. The following information is available for the segments. Assume that all
Problem 48 Huxley Sports Company sells logo sports merchandise and does custom direct fixed costs could be avoided if a segment is dropped and that the total common
screen printing. They are trying to decide whether or not to continue screen printing. fixed costs would remain unchanged if the bowling shoes were dropped.
The following information is available for the segments. Assume that all direct fixed Bowling
costs could be avoided if a segment is dropped and that the total common fixed costs Athletic Shoes Boots
Shoes
would remain unchanged if the screen printing were dropped. Sales $120,000 $420,000 $360,000
Screen Apparel VC 64,000 220,000 140,000
Printing Sales CM 56,000 200,000 220,000
Sales $120,000 $420,000 Direct FC 40,000 70,000 90,000
Variable costs 72,000 220,000 Allocated FC 20,000 70,000 60,000
Contribution margin 48,000 200,000 NI ($4,000) $60,000 $70,000
Direct fixed costs 32,000 70,000 Assume that boots normally sell for $90 per pair. An exporter has approached Menlo
Allocated common fixed about buying 1,000 pairs of boots for a one-time export deal for $80 per pair. $3.00 per
20,000 70,000
costs unit of the normal variable cost could be avoided on this sale, but Menlo would have to
Net income ($4,000) $60,000 pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to produce this
Assume that more space will be allocated to apparel sales if screen printing is dropped. order, and no regular sales will be affected. If Menlo accepts this order:
This will allow apparel sales to increase by 25%. What is the impact on profits of the # of boots sold = $360,000/$90 = 4,000
proposed change? Incremental cost per unit =
Incremental revenue - screen ($120,000) $140,000/4,000 = $35
Incremental revenue - apparel (25%*$420,000) 105,000
Incremental savings/(costs): Incremental revenue ($80 x 1,000) $80,000
VC - screen printing + 72,000 Incremental VC ($35 - $3) x 1,000 (32,000)
VC - apparel (25%*$220,00) (55,000) Increase in fixed costs 4,000
Incremental increase in profits $44,000
Problem 51Contesa Company plans to produce 8,000 units during May at a total cost
of $29,000. Fixed costs total $13,000. Selling price per unit is $5.00. Management is
considering lowering the price to $4.60 per unit, and feels that this action will cause
sales to climb to 8,800 units. How much are the incremental costs incurred if 8,800 units
are produced and sold?
Total costs = FC + VC
$29,000 = $13,000 + X; so VC = $16,000;
VC per unit: $16,000/8,000 = $2 per unit
Incremental costs to produce 800 more units (8,800 - 8,000):
800 units x $2 = $1,600
Problem 52 Don’s Donuts budgets the following costs for the production of 36,000
boxes of donuts next year: Rent, $20,000; other fixed costs, $6,000; direct materials,
$54,000, and direct labor, $36,000. The normal selling price is $4.00 per box. A new
convenience store has offered to pay Don’s $3.00 per box to supply them with 10,000
boxes of donuts during the year. Assuming that Don’s has the capacity to fill this order
along with their other production and that accepting this order will not cause problems
with any of their other customers, should Don’s Donuts accept this order? Justify your
answer with computations.
Yes, because incremental profits will increase by $5,000.
Incremental revenue: $3.00 x 10,000 = $30,000
Incremental costs: VC/unit= [$54,000+$36,000]/36,000 = $2.50; so incremental
costs are $2.50 x 10,000 boxes = $25,000; Incremental profit is revenue less cost:
$30,000 - $25,000 = $5,000
Problem 53 - AT, Inc. plans to produce and sell 80,000 calculators next year. Fixed
costs are $100,000. The current selling price is $7 each and the variable cost per unit is
$4. Management is considering raising the selling price to $8 per unit, but this is likely to
cause the sales volume to drop to 76,000 units. How much is the incremental profit
associated with the changes?
Incremental revenue
(80,000 x $7) - (76,000 x $8) $48,000
Incremental costs:
Variable cost: ((80,000 - 76,000) x $4) (16,000)
Incremental profit $32,000
Problem 54 Tague Company sells calculators. During the past year, 6,000 calculators
were produced and sold at $10 each. Variable cost per unit was $3 and total fixed costs
were $200,000. Tague would like to raise the selling price per unit to $11 each, but feels
that this will reduce sales to 5,500 bottles per year. How much is the incremental
revenue of raising the selling price?
Old revenue: $10 x 6,000 = $60,000
New revenue: $11 x 5,500 = $60,500
Incremental revenue: $60,500 - $60,000 = $500
Problem 55 At Fruit Company, the total cost to produce 50,000 units is $750,000. Total
fixed costs are $250,000. What is the expected cost to produce 48,000 units?
VC = ($750,000 - $250,000) = $500,000
VC per unit = $500,000/50,000 = $10
Cost at 48,000 units = $10(48,000) + $250,000 = $730,000
Problem 56 At Richetti Company, the total variable cost to produce 15,000 units is
$45,000. Total fixed costs are $21,000. What is the expected cost to produce 13,000
units?
VC per unit = $45,000/15,000 = $3 per unit
Total cost = variable cost + fixed costs = [$3*13,000] + $21,000 = $60,000
Note that product costs include both fixed and variable amounts. If the question
asked for the incremental cost, then $39,000, the variable cost would be the answer,
only if the difference in units was 13,000.
Problem 57 Key Company plans to produce and sell 500 skateboards next year. Fixed
costs are estimated at $50,000. Key sells each skateboard for $60. Total variable costs
at 500 units are $12,000. Management is considering decreasing the selling price to
$55 each, which is likely to cause the sales volume to increase to 600 units. How much is
the incremental revenue associated with the changes?
Option 1 (price at $60) = $60 x 500 = $30,000
Option 1 (price at $55) = $55 x 600 = $33,000
Incremental revenue = $33,000 - $30,000 = $3,000
Problem 58 Eng Company plans to produce and sell 400 skateboards next year. Fixed
costs are estimated at $10,000. Eng sells each skateboard for $50. Variable costs are
$20 per unit. Management is considering decreasing the selling price to $45 each,
which is likely to cause the sales volume to increase to 500 units. How much is
the incremental profit associated with the changes?
Incremental revenue = (400 x $50) - (500 x $45) = +$2,500
Incremental costs = 100 x $20 = (2,000)
Incremental profit = $2,500 - $2,000 = $500
Problem 59 Bell Company sells sims. During the past year, 8,000 sims were produced
and sold at $10 each. Variable cost per unit was $4 and total fixed costs were $160,000.
Bell would like to raise the selling price per unit to $12 each, but feels that this will
reduce sales to 7,400 sims per year.
A. Highlight the amounts of any items which are not relevant to this decision. can supply all it needs. The company determined that 15% of the fixed overhead is
Highlighted in green = not relevant. Fixed costs are not relevant since the amount stays avoidable if the company discontinues production of the economy cable. In addition, the
the same regardless of whether the selling price stays at $10, or in raised to $12. company could lease the machine used to make the economy cable to another
company for $8,000 annually. In good form, prepare an incremental analysis to
B. How much is the incremental revenue? determine if Sabab shouldoutsource the component.
Current revenue: 8,000 x $10 = $80,000 Incremental Analysis Amounts Calculations (if
Revenue if change is made: 7,400 x $12 = 88,800 Incremental cost to buy ($224,000) Buy: $0.28*800
Incremental revenue +$8,800 Incremental variable cost savings
DM: $0.12*800
C. How much is the incremental profit? Direct materials +96,000
DL: $0.06*800,
Incremental revenue (from part B) +$8,880 Direct labor +48,000 VMOH: $0.05*8
Incremental cost: [8,000 - 7,400] x $4 = (2,400) Variable manufacturing overhead +40,000 VAOH: $0.03*8
Incremental profit $6,400 Variable administrative overhead +24,000 $0.15*800,000
Incremental fixed overhead savings +14,400
Problem 60 Kirk Company plans to produce 50,000 buckets next year at a total cost of Incremental lease revenue is bought +8,000
$850,000. Fixed costs are $3 per unit at this level of operations. Selling price is $8 per Incremental increase in profit if bought +$6,400
unit. Kirk is considering lowering the price to $7 per unit, and feels that this action will
cause sales to climb to 60,000 buckets. Use incremental analysis to
Should Sabab outsource? Yes. Profits increase by $6,400.
calculate incremental profit or loss if the change is made to the sales price.
Incremental revenue: Effect on Profit Problem 63 Hooters sells 3 child meals in its restaurants: Hot Wings, 3 Mile Wings, and
Before change: $8 x 50,000 = $400,000 Volcano Wings. Changes in product lines do not affect demand of other products.
After change: $7 x 60,000 = 420,000 Results of June are below:
Increase in revenue $20,000 Hot Wings 3 Mile Wings Volcano Total
Units sold 4,000 2,500 2,600 9,100
Revenue $32,000 $30,000 $26,000 $88,000
Problem 61 Don’s Donuts budgets the following costs for the production of 36,000 Variable departmental
boxes of donuts next year: Rent, $20,000; other fixed costs, $6,000; direct materials, costs 19,200 16,500 10,400 46,100
$54,000, and direct labor, $36,000. The normal selling price is $4.00 per box. A new Direct fixed costs 5,000 7,000 4,000 16,000
convenience store has offered to pay Don’s $3.00 per box to supply them with 10,000 Allocated fixed costs 6,500 8,500 7,500 22,500
boxes of donuts during the year. Assuming that Don’s has the capacity to fill this order Net income $1,300 ($2,000) $4,100 $3,400
along with their other production and that accepting this order will not cause problems Seventy percent of the allocated fixed costs are unavoidable. In good form, prepare
with any of their other customers, should Don’s Donuts accept this order? an incremental analysis to determine if 3 Mile Wings should be discontinued.
Yes, because incremental profits will increase by $5,000. Incremental Analysis Amounts
Incremental revenue: $3.00 x 10,000 = $30,000 Incremental revenue if dropped ($30,000)
Incremental costs:
Incremental variable cost savings +16,500
VC/unit= [$54,000+$36,000]/36,000 = $2.50;
so incremental costs are $2.50 x 10,000 boxes = $25,000 Incremental direct fixed cost savings +7,000
Incremental profit = revenue less cost: $30,000 - $25,000 = $5,000 Incremental fixed costs avoided* +2,550
Incremental decrease in profit if dropped ($3,950)
Problem 62 Sabab, Inc. produces 4 different qualities of cable for broadband internet * $8,500*30% = $2,550
hookups. Sabab currently produces 800,000 yards of economy cable each month. The Should 3 Mile Wings be discontinued? Briefly justify your response as to why or why
costs of making each yard is $0.12 for direct materials, $0.05 for variable manufacturing not.
overhead, $0.03 for variable administrative overhead, $0.06 for direct labor, and $0.12 3 Mile Wings should not be discontinued because profits would decline by $3,950,
for fixed manufacturing overhead. Overhead is allocated based on direct labor hours. which results in a net loss of $550 for the company instead of a $3,400 profit.
An outside supplier has offered to sell Sabab economy cable for $0.28 per yard, and
Problem 64 The following estimated costs were provided by Narb Company:
Direct material ($20/unit) $240,000
Direct labor ($12/hr. * .25 hrs./unit) 36,000
Variable manufacturing overhead 18,000
Allocated fixed overhead costs 30,000
($2.50/unit)
Total $324,000
Narb received an order for 2,500 units from a new customer with whom Narb is anxious
to do business. This customer would like to spend $26 per widget. Narb has the
capacity to produce the additional units. In good form, prepare an incremental
analysis to determine if Narb should accept the order.
Incremental Analysis Amounts Calculations:
Incremental revenue if accepted +$65,000 2,500 * $26 = $65,000
Incremental DL cost increase (7,500) $12*0.25hrs.*12,000 =
$7,500
Incremental DM cost increase (50,000)
2,500 * $20 = $65,000
Incremental VOH cost increase (3,750) 2,500*12,000 = $3,750
Incremental increase in profit if accepted $3,750

# of units: $240,000/$20 = 12,000 units