Exercise 7-2 a-b (Video) Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 18,300 golf discs is: Materials Labor Variable overhead Fixed overhead Total $ 9,333 26,718 19,032 37,149 $92,232 Gruden also incurs 4% sales commission ($0.28) on each disc sold. McGee Corporation offers Gruden $4.80 per disc for 5,600 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Gruden. If Gruden accepts the offer, its fixed overhead will increase from $37,149 to $42,059 due to the purchase of a new imprinting machine. No sales commission will result from the special order. McGee Corporation offers Gruden $4.80 per disc for 5,600 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Gruden. If Gruden accepts the offer, its fixed overhead will increase from $37,149 to $42,059 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. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Reject Order Accept Order Net Income Increase (Decrease) Revenues $ Materials Labor Variable overhead Fixed overhead Sales commissions Net income (b) Should Gruden accept the special order? Gruden should the special order. Exercise 7-5 (Video) Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 61% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.98 and $4.74, respectively. Normal production is 26,400 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.44 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $40,400 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. iceo fhe thing the per una ve been seened as center the cupplier's offer, all variable (a) Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Net Income Increase (Decrease) Make Buy Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost (b) Should Pottery Ranch buy the finials? ,Pottery Ranch should the finials. (c) Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $55,275? e income would income would by $ Exercise 7-6 a1-a2 (Video) Jobs, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a smartphone. The cost structure to manufacture 20,100 Tri-Robos is as follows. Direct materials ($51 per robot) Direct labor ($40 per robot) Variable overhead ($6 per robot) Allocated fixed overhead ($30 per robot) Total Cost $1,025,100 804,000 120,600 603,000 $2,552,700 Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $116 per unit or $2,331,600. Following are independent assumptions. Assume that $405,000 of the fixed overhead cost can be avoided. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Net Income Increase (Decrease) Make Buy Direct materials Direct labor Variable overhead Fixed overhead Purchase price Total annual cost Using incremental analysis, determine whether Jobs should accept this offer. The offer Assume that none of the fixed overhead can be avoided. However, if the robots are purchased from Tienh Inc., Jobs can use the released productive resources to generate additional income of $375,000. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Net Income Increase (Decrease) Make Buy Direct materials Direct labor Variable overhead Fixed overhead Opportunity cost Purchase price Totals Based on the above assumptions, indicate whether the offer should be accepted or rejected? The offer Exercise 7-9 Anna Garden recently opened her own basketweaving studio. She sells finished baskets in addition to selling the raw materials needed by customers to weave baskets of their own. Unfortunately, owing to space limitations, Anna is unable to carry all varieties of kits originally assembled and must choose between two basic packages. The Basic Kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic package costs Anna $8 and sells for $21. The second kit, called Stage 2, includes cut reeds that have already been dyed. With this kit the customer need only soak the reeds and weave the basket. Anna produces the Stage 2 kit by using the materials included in the Basic Kit. Because she is more efficient at cutting and dying reeds than her average customer, Anna is able to produce two Stage 2 kits in one hour from one Basic Kit. (She values her time at $28 per hour.) The Stage 2 kit sells for $36. Prepare an incremental analysis for the Anna's basketweaving studio. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Sell (Basic Kit) Process Further (Two Stage 2 Kits) Net Income Increase (Decrease) Sales per unit Costs per unit Direct materials $ Direct labor Total A Net income per unit LINK TO TEXT Should Anna's carry the basic introductory kit with undyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut? Anna should carry the Exercise 7-11 Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $179,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product. Spock Uhura Sulu Sales Value at Split-Off Point $210,900 300,000 455,000 Allocated Joint Costs $40,300 59,400 79,300 Cost to Process Further $109,700 84,900 250,400 Sales Value of Processed Product $300,800 399,700 800,100 Determine the incremental profit or loss that each of the three joint products. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Spock Uhura Sulu Incremental profit (loss) Indicate whether each of the three joint products should be sold as is, or processed further. Spock Uhura Sulu Exercise 7-15 (Video) Veronica Mars, a recent graduate of Bell's accounting program, evaluated the operating performance of Dunn Company's six divisions. Veronica made the following presentation to Dunn's board of directors and suggested the Percy Division be eliminated. "If the Percy Division is eliminated," she said, "our total profits would increase by $26,600." Sales Cost of goods sold Gross profit Operating expenses Net income The Other Percy Five Divisions Division $1,664,000 $100,000 978,000 76,900 686,000 23,100 526,300 49,700 $159,700 $ (26,600) Total $1,764,000 1,054,900 709,100 576,000 $133,100 In the Percy Division, cost of goods sold is $60,800 variable and $16,100 fixed, and operating expenses are $31,600 variable and $18,100 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45.) Net Income Increase (Decrease) Continue Eliminate Sales Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss) Veronica is Exercise 7-18 The costs listed below relate to a variety of different decision situations. For each cost listed below, indicate if it is relevant or not to the related decision. Cost Decision Relevant/Irrelevant 1. Unavoidable fixed overhead Eliminate an unprofitable segment Direct labor Make or buy 3. Original cost of old equipment Equipment replacement 4. Joint production costs Sell or process further 5. Opportunity cost Accepting a special order 6. Segment manager's salary Eliminate an unprofitable segment (manager will be terminated) * Cost of new equipment Equipment replacement 8. Incremental production costs Sell or process further 9. Direct materials Equipment replacement (the amount of materials required does not change) 10. Rent expense Purchase or lease a building