Question
39. Lott Bicycle Company has been manufacturing its own seats for its bicycles. The company is currently operating at 100% of capacity, and variable manufacturing
39. Lott Bicycle Company has been manufacturing its own seats for its
bicycles. The company is currently operating at 100% of capacity,
and variable manufacturing overhead is charged to production at the
rate of 60% of direct labor cost. The direct materials and direct
labor cost per unit to make the bicycle seats are $8.00 and $9.00,
respectively. Normal production is 50,000 bicycles per year.
A supplier offers to make the bicycle seats at a price of $20 each.
If the bicycle company accepts this offer, all variable
manufacturing costs will be eliminated, but the $30,000 of fixed
manufacturing overhead currently being charged to the bicycle seats
will have to be absorbed by other products.
INSTRUCTIONS
Prepare the incremental analysis for the decision to make or buy
the bicycle seats. Should Lott Bicycle Company buy the seats from the outside supplier?
a. MAKE - $20000 adv. b. BUY 120000 adv.
c. BUY - $20000adv. d. MAKE $120000 adv.
40. Benson Company produced and sold 20,000 units of product and is
operating at 80% of plant capacity. Unit information about its
product is as follows:
Sales Price $70
Variable manufacturing cost $45
Fixed manufacturing cost ($300,000/20,000) 15 60
Profit per unit $10
The company received a proposal from a foreign company to buy 4,000
units of Benson Company's product for $50 per unit. This is a
one-time only order and acceptance of this proposal will not affect
the company's regular sales. The president of Benson Company is
reluctant to accept the proposal because he is concerned that the
company will lose money on the special order.
INSTRUCTIONS
Prepare a schedule reflecting an incremental analysis of this
proposal and indicate the effect the acceptance of this order might
have on the company's income.
a. Might INCREASE income by $20,000. b. Might INCREASE income by $120,000.
c. Might DECREASE income by $120,000. d. Might DECREASE income by $20,000.
41. Carter Company manufactures cappuccino makers. For the first eight
months of 2013 the company reported the following operating results
while operating at 80% of plant capacity:
Sales (500,000 units) $75,000,000
Cost of goods sold 45,000,000
Gross profit 30,000,000
Operating expenses 24,000,000
Net income $ 6,000,000
An analysis of costs and expenses reveals that variable cost of
goods sold is $80 per unit and variable operating expenses are
$30 per unit.
In September, Carter Company receives a special order for 40,000
machines at $120 each from a major coffee shop franchise.
Acceptance of the order would result in $10,000 of shipping costs
but no increase in fixed expenses.
INSTRUCTIONS
Prepare an incremental analysis for the special order. Should Carter Company accept the special order?
a. ACCEPT. b. REJECT.
42. Monroe Enterprises relies heavily on a copier machine to process the
paperwork. Recently the copy clerk has not been able to process all
the necessary copies within the regular work week.
Management is considering updating the copier machine with a faster
model.
Current Copier New Model
Original purchase cost $10,000 $20,000
Accumulated depreciation 8,000
Estimated operating costs (annual) 9,000 4,000
Useful life 5 years 5 years
If sold now, the current copier would have a salvage value of
$1,000. If operated for the remainder of its useful life, the
current machine would have zero salvage value. The new machine is
expected to have zero salvage value after five years.
INSTRUCTIONS
Prepare an analysis to show whether the company should retain or
replace the machine.
a. RETAIN income up $45000. b. REPLACE income up by $6000.
c. RETAIN income down $39000. d. REPLACE income down by $6,000.
43. Simon Forest Corporation operates two divisions, the Timber
Division and the Consumer Division. The Timber Division manufactures
and sells logs to paper manufacturers. The Consumer Division
operates retail lumber mills which sell a variety of products in the
do-it-yourself homeowner market. The company is considering
disposing of the Consumer Division since it has been consistently
unprofitable for a number of years. The income statements for the
two divisions for the year ended December 31, 2013 are presented
below:
Timber Consumer
Division Division Total
Sales $1,500,000 $ 400,000 $1,900,000
Cost of goods sold 900,000 300,000 1,200,000
Gross profit 600,000 100,000 700,000
Selling & administrative expenses 250,000 150,000 400,000
Net income $ 350,000 $( 50,000) $ 300,000
In the Consumer Division, 70% of the cost of goods sold are variable
costs and 30% of selling and administrative expenses are variable
costs. The management of the company feels it can save $50,000 of
fixed cost of goods sold and $40,000 of fixed selling expenses if it
discontinued operation of the consumer division.
INSTRUCTIONS
If the company had discontinued the division for 2013, determine what net income would have been.
a. Might have been $350,000. b. Might have been a loss of $55,000.
c. Might have been $295,000. d. Might have been a loss of $295,000.
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