Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as is
1.Gruner Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is:
Materials $ 10,000
Labor30,000
Variables overhead 20,000
Fixed overhead40,000
Total100,000
Gruner also incurs 5% sales commission ($0.35) on each disc sold.
Travis Corporation offers Guner $4.75 per disc for 5,000 discs. Travis would sell the discs under its own brand name in foreign market not yet serves by Gruner. If Gruner accepts the offer, its fixed overhead will increase from $40,000 to $45,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
a.Prepare an incremental analysis for the special order.
b.Should Gruner accept the special order? Why or Why not?
c.What assumptions underlie the decision made in part (b)
Order / Accept
Order / Net Income Effect
Revenues
Materials ($0.50)
Labor ($1.50)
Variable overhead ($1.00)
Fixed overhead
Sales commissions
Net income / $ -0-
-0-
-0-
-0-
-0-
-0-
$ -0- / $23,750
(2,500)
(7,500)
(5,000)
(5,000)
-0-
$3,750 / $23,750
(2,500)
(7,500)
(5,000)
(5,000)
-0-
$3,750
(b) As shown in the incremental analysis, Gruner should accept the special order because incremental revenue exceeds incremental expenses by $3,750.
(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. Gruner would have to consider the lost sales in making the decision. Second, if Gruner is operating at full capacity, it is likely that the special order would be rejected.
2. Selleck has recently started the manufacture of RecRobo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 RecRobo's is as follows.
CostDirect materials ($40 per robot)$ 800.00Direct Labor ($30 per robot)600,00Variables overhead ($6 per robot)120,000Allocated fixed overhead ($25 per robot)500,000
Total2,020,000
Selleck is approached by Padong Inc. , which offer to make RecRobo for $90 per unit or $1,800,000.
a.Using incremental analysis, dertemine whether Selleck should accept this offer under each of the following independent assumptions.
(1). Assume that $300.000 of the fixed overhead cost can be reduced (avoided).
(2). Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Padong Inc., Selleck can use the released productive resources to generate additional income of $300,000.
b.Describe the qualitative factors that might affect the decision to purchase the robot from an outside supplier.
Make / Buy / Net Income
Increase
(Decrease)
Direct materials / $ 800,000 / $ -0- / $ 800,000
Direct labor / 600,000 / -0- / 600,000
Variable overhead / 120,000 / -0- / 120,000
Fixed overhead / 500,000 / 200,000 / 300,000
Purchase price / 0 / 1,800,000 / (1,800,000)
Total annual cost / $2,020,000 / $2,000,000 / $ 20,000
Yes. The offer should be accepted as net income will increase by $20,000.
(2)Make / Buy / Net Income
Increase
(Decrease)
Direct materials / $ 800,000 / $ 0 / $ 800,000
Direct labor / 600,000 / 0 / 600,000
Variable overhead / 120,000 / 0 / 120,000
Fixed overhead / 500,000 / 500,000 / 0
Opportunity cost / 300,000 / 0 / 300,000
Purchase price / 0 / 1,800,000 / (1,800,000)
Totals / $2,320,000 / $2,300,000 / $ 20,000
Yes. The offer should be accepted as net income would be $20,000 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.
3. Nichols Company makes three models of phasers. Information on the three products is given below.
StunnerDouble-Set Mega-Power
Sales300,000$500,000$200,000
Variables exp150,000200,000140,000
Contribution marg 150,000300,000 60,000
Fixed expen120,000225,000 90,000
Net income$ 30,000$ 75,000$(30,000)
Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,000 (Double-Set), and $30,000 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is phased out.
Ralph Port, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.
a.Compute current not income for Nichols Company.
b.Compute net income by product line and in total Nichols Company if the company discontinues the Mega-Power product line.( Hint: Allocate the $300,000 common cist to the two remaining product lines based in their relative sales).
c.Should Nichols eliminate the Mega-Power product line? Why or Why not?
(a) $30,000 + $75,000 – $30,000 = $75,000
(b)
Stunner Double-Set 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* $262,500** $405,000
Net income $7,500 $37,500 $45,000
*$30,000 + [($300,000 ÷ $800,000) × $300,000]
**$75,000 + [($500,000 ÷ $800,000) × $300,000]
(c) As shown in the analysis above, Nichols should not eliminate the Mega-Power product line. Elimination of the line would cause net income to drop from $75,000 to $45,000. The reason for this decrease in net income is that elimination of the product line would result in the loss of $60,000 of contribution margin while saving only $30,000 of fixed expenses.