1 (10 marks) Escher Skateboards has been manufacturing its own wheels for its skateboards. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $1.50 and $1.80, respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $4 each. If the skateboard company accepts this offer, all variable manufacturing costs will be eliminated, but the $42,000 of fixed manufacturing overhead currently being charged to the skateboard wheels will have to be absorbed by other products. Required: a. Prepare the incremental analysis for the decision to make or buy the wheels. (5 marks) b. Should Escher Skateboard buy the wheels from the outside supplier? Justify your answer. (2 marks) c. What 2 (two) qualitative factors should also be considered in making the decision? (3 marks) Question 3 (10 marks) Barnstorming Company flies vintage aircraft at air shows and has a fleet of three airplanes. One of the airplanes cost $250,000 to purchase ten years ago and now has a book value of $75,000. The company is considering replacing this airplane with a different type which will cost $350,000. The current airplane could be sold for $50,000. If the company buys the new airplane, it is expected that fuel costs will decrease from $80,000 annually to $45,000 annually and maintenance costs will decrease from $70,000 to $30,000. Both the current airplane and the new airplane will have a service life of ten years. At that time, both airplanes would have to be scrapped with no recovery value. Required (10 marks) Calculate whether the company should purchase the new airplane or not. Show all your work. Question 2 (10 marks) Clinton Company sells two items, Product A and Product B. The company is considering dropping Product B. It is expected that sales of Product A will increase by 40% as a result. The company's direct costs behave as variable costs, while the indirect costs do not vary with changes in sales. Dropping Product B will allow the company to cancel one equipment rental costing $300 per month, while the other existing equipment will be used for additional production of Product A. One supervisor earning $600 per month would also be terminated if Product B is dropped. Clinton's other fixed overhead will continue regardless of the decision made. The current monthly income statement data follows: Sales Revenue Product A $12,000 Product B $8,000 Company-Wide Total $20,000 Direct Costs 3,500 2,200 5,700 Indirect Costs: Indirect labour 1,000 1,200 2,200 Equipment rental 300 2,600 2,900 Other fixed overhead 1,000 2,100 3,100 Operating income/(loss) $6,200 ($100) $6,100 Required: Determine the effect on Clinton's company-wide monthly operating income (in total dollars) if Product B is dropped. Should Clinton Company drop Product B? 1