On E7-5 I did not include fixed manufacturing costs to my incremental analysis because it said that it would be eliminated or absorbed into other products. Should I have included the fixed manufacturing costs of $45,000 to end up getting a net loss of $13,500 instead of $7,500?

E7-5 Use incremental analysis for make-or-buy decision Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is curre variable manufacturing is charged to production at the rate of 70% of direct labor cost. The direct mate per unit to make a pair of finials are $4 and $5, respectively. Normal production is 30,000 curtain rods p A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the s costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the other products. Instructions (a) Prepare the incremental analysis for the decision to make or buy the finials. (b) Should Pottery Ranch buy the finials? (c ) Would your answer be different in (b) if the productive capacity released by not making the finials of $20,000. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells wi (a) Prepare the incremental analysis for the decision to make or buy the finials. Make Buy Net income Increase (Decrease) Direct materials $120,000 $0 $120,000 Direct labor $150,000 $0 $150,000 Variable overhead costs $105,000 $0 $105,000 Fixed manufacturing costs $0 $0 $0 Purchase price $0 $382,500 ($382,500) $375,000 $382,500 ($7,500) Total annual costs (b) Should Pottery thebecause finials?that would result in a net income decrease They should notRanch buy thebuy 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 $20,000. by $7,500. Instead they will save more by just making their finials so it is not worth the extra costs to buy it. Yes my answer would be different in part (b) if the productive capacity released by not making the finials could be used to produce income of $20,000. There would be a $12,500 increase in Net income if the productive capacity released by not making the finials was used to produce the income of $20,000. Yes my answer would be different in part (b) if the productive capacity released by not making the finials could be used to produce income of $20,000. There would be a $12,500 increase in Net income if the productive capacity released by not making the finials was used to produce the income of $20,000. Total annual cost (above) Opportunity cost Total cost Make Buy Net income Increase (Decrease) $375,000 $20,000 $395,000 $382,500 0 $382,500 ($7,500) $20,000 $12,500 After you have completed E7-5, consider the following additional question. 1. Assume that the direct materials and direct labor cost per unit to make the finials are $4.75 and $ What impact do these changes on your analysis and the decision to make-or-buy the finials? s. The company is currently operating at 100% of capacity, and or cost. The direct materials and the direct labor cost n is 30,000 curtain rods per year. ery Ranch accepts the supplier's offer, all variable manufacturing ntly being charged to the finials will have to be absorbed by by not making the finials could be used to produce income or a formula in cells with a "?" . by not making e finials are $4.75 and $5.50, respectively. e-or-buy the finials? E7-8 Prepare incremental analysis concerning make-or-buy decision. Innova uses 1.000 units of the component IMC2 every month to manufacture one of its products. The u manufacture the components are as follows: Direct materials Direct labor Overhead Total $65.00 45.00 126.50 236.50 Overhead costs include variable material handling costs of $6.50, which are applied to products on the costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist 40% fixed costs. A vendor has offered to supply the IMC2 component at a price of $200 per unit. Instructions (a) Should Innova purchase the component from the outside vendor if Innova's capacity remains idle (b) Should Innova purchase the component from the outside vendor if it can use its facilities to manu another product? What information will Innova need to make an accurate decision? Show your c (c ) What are the qualitative factors that Innova will have to consider when making its decision? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells wi (a) Should Innova purchase the component from the outside vendor if Innova's capacity remains idle Make IMC2 Buy IMC2 Net income Increase (Decrease) Direct materials $65.00 $0 $65.00 Direct labor 45.00 0 45.00 Material handling 6.50 0 6.50 Variable overhead costs 72.00 0 72.00 0 200 (200.00) $188.50 $200.00 ($11.50) Purchase price Total unit cost Response: Innova should not purchase the component from the outside vendor if Innova's capacity remains idle because that would result in a $11.50 net income decrease for the company. (b) Should Innova purchase the component from the outside vendor if it can use its facilities to manu another product? What information will Innova need to make an accurate decision? Show your c Response: For Innova to make an accurate decision the information they would need to know is the opportunity cost of making the other product. In part (a) it reveals that if Innova purchases the product it would cost them $11,500 more (which is 1,000*11.50). The company would need to increase their contribution margin to be more than 11,500 through manufacturing the other product before it would understandable for Innova to buy the product from the outside vendor. (c ) What are the qualitative factors that Innova will have to consider when making its decision? Response: The qualitative factors that Innova will have to consider would be the quality of the component, the delivery to be on-time, and if the vendor is really reliable. After you have completed E7-8, consider the following additional question. 1. Assume that unit cost for direct materials changed to $68.00 and that overhead costs changed to What impact do these changes have on the make-or-buy decision? one of its products. The unit costs incurred to pplied to products on the basis of direct material labor dollars and consist of 60% variable costs and ce of $200 per unit. va's capacity remains idle? n use its facilities to manufacture te decision? Show your calculations. making its decision? r or a formula in cells with a "?" . va's capacity remains idle? vendor if income n use its facilities to manufacture te decision? Show your calculations. y would need to eveals that if s 1,000*11.50). ore than 11,500 e for Innova to making its decision? uld be the s really verhead costs changed to $130.00. E7-10 Determine whether to sell or process further, joint products Stahl Inc. produces three separate products from a common process costing $100,000. Each of the pr can be sold at the split-off point or can be processed further and then sold for a higher price. Shown be are cost and selling price data for a recent period. Product 10 Product 12 Product 14 Sales Value at Split-off Point $60,000 15,000 55,000 Cost to Process Further $100,000 30,000 150,000 Sales Value after Further Processing $190,000 35,000 215,000 Instructions (a) Determine total net income if all products are sold at the split-off point. (b) Determine total net income if all products are sold after further processing. (c ) Using incremental analysis, determine which products should be sold at the split-off point and which should be processed further. (d) Determine total net income using the results from (c ) and explain why the net income is different from that determined in (b). NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells wi (a) Determine total net income if all products are sold at the split-off point. Sales Joint costs Net income (b) Determine total net income if all products are sold after further processing. Sales Joint costs Additional costs Net income (c) $130,000 100,000 $30,000 $440,000 100,000 280,000 $60,000 Using incremental analysis, determine which products should be sold at the split-off point and which should be processed further. Incremental revenue Incremental costs Incremental profit (loss) Product 10 $130,000 100,000 $30,000 Product 12 $20,000 30,000 ($10,000) Product 14 $160,000 150,000 $10,000 Response: Products 10 and 14 should be processed further for a profit but product 12 should be sold at the split off point to save the company from losing $10,000. If they process product 10 and 14 further then there will be a $40,000 increase to profit. (d) Determine total net income using the results from (c ) and explain why the net income is different from that determined in (b). Sales Joint costs Additional costs Net income $420,000 100,000 250,000 $70,000 Response: The net income is $10,000 dollars more than (d) because in part (b) the product 12 is not processed further which saved the company from losing $10,000. However in part (b) product 12 was processed further and that made the company lose $10,000 therefore making the net income less than part (d) After you have completed E7-10, consider the additional question. 1. Assume that sales value at split-off point for Product 10 changed to $75,000 and the cost to process Product 14 further changed to $162,000. What impact do these changes have on total net income at split-off point and after further processing? s costing $100,000. Each of the products n sold for a higher price. Shown below r processing. be sold at the split-off plain why the net income a number or a formula in cells with a "?" . r processing. be sold at the split-off or a ave the d 14 plain why the net income ecause ed the 2 was herefore ged to $75,000 and What impact do these urther processing? E7-11 Determine whether to sell or process further, joint products Kirk Minerals processes materials extracted from mines. The most common raw material that it proces results in three joint products: Spock, Uhura, and Suhu. Each of these products can be sold as is, or e be processed further and sold for a higher price. The company incurs joint costs of $180,000 to proces of the raw material that produces the three joint products. The following cost and sales information is a for one batch of each product. Spock Uhura Suhu Sales Value at Split-off Point $210,000 300,000 455,000 Allocated Joint Costs $40,000 60,000 80,000 Instructions Determine whether each of the three joint products should be sold as is, or processed further. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells wi Spock Uhura Sales value of processed product $300,000 $400,000 Sales value @ split-off point 210,000 300,000 Incremental revenue Incremental costs $90,000 110,000 $100,000 85,000 Incremental profit (loss) ($20,000) $15,000 Response: To determine whether each of the three joint products should be sold as is or processed further then they need to determine the incremental profit (loss) that would result from each. The joint costs are not important to the decision because the costs will not change if the products are sold as is or processed further. After you have completed E7-11, consider the additional question. 1. Assume that sales value at split-off point for Uhura changed to $350,000 and the cost to proces further for Sulu changed to $325,000. What impact do these changes have on the decision to sell as is or to process further for each product? ost common raw material that it processes of these products can be sold as is, or each can incurs joint costs of $180,000 to process one batch ollowing cost and sales information is available Cost to Process Further $110,000 85,000 250,000 Sales Value of Processed Product $300,000 400,000 800,000 old as is, or processed further. her a number or a formula in cells with a "?" . Suhu $800,000 455,000 $345,000 250,000 $95,000 ucts should be sold as is or al profit (loss) that would sion because the costs will r. ged to $350,000 and the cost to process hese changes have on the decision to E7-15 Use incremental analysis concerning elimination of division. 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 director and suggested the Percy Division be eliminated. "If the Percy Division is eliminated," she said, "our total profits would increase by $26,000." Sales Cost of goods sold Gross Profit Operating expenses Net income The Other Five Divisions $1,664,200 978,520 685,680 527,940 $157,740 Percy Division $100,000 76,000 24,000 50,000 ($26,000) Total $1,764,200 1,054,520 709,680 577,940 $131,740 In the Percy Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses are $30,000 variable and $20,000 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Instructions Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells wi Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answ Continue Eliminate Net income Increase (Decrease) $100,000 $0 ($100,000) Cost of goods sold 61,000 0 61,000 Operating expenses 30,000 0 30,000 Total variable 91,000 0 91,000 Contribution margin 9,000 0 (9,000) Cost of goods sold 15,000 15,000 0 Operating expenses 20,000 20,000 0 Total fixed 35,000 35,000 0 Net income (loss) ($26,000) ($35,000) ($9,000) Sales Variable costs Fixed costs Response: Veronica is not right about eliminating the Percy Division. The schedule shows that the net income will decrease by $9,000 if the Percy Division is eliminated. This results equals the contribution margin that would be gone if they did not continue to run the Percy Division. None of the fixed costs could be avoided since they are period costs that come with eliminating or continueing the division. Only the variable costs are affected by the elimination of the division. After you have completed E7-15, consider the following additional question. 1. Assume that variable cost of goods sold for the Percy Division changed to $68,000 and fixed operating expenses changed to $27,500. There was no change to variable operating costs. How would these changes impact your answer? operating performance o Dunn's board of directors inated," she said, "our d, and operating expenses sts will be eliminated if the support your answer. r or a formula in cells with a "?" . edule to support your answer. The schedule shows minated. This results tinue to run the Percy od costs that come re affected by the d to $68,000 and fixed able operating costs. P7-3A Determine if product should be sold or processed further. Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The co produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name Flo processing costs for this conversion amount to $240,000. FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bo cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and tab additional processing costs for this process amounts to $100,000. Both table products can be sold for $ The company decided not to process the table cleaner into TSR and TP based on the following anal Process Further Production in ounces Revenue Costs: CDG costs TCP costs Total costs Weekly gross profit Table Cleaner 300,000 $204,000 Table Stain Remover (TSR) 300,000 $168,000 70000* 0 70,000 $134,000 52,500 50,000 102,500 $65,500 *If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is total physical output. ** If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP co 50% of the total physical output and are each allocated 25% of the CDG cost. Instructions (a) Determine if management made the correct decision to not process the table cleaner further by d (1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed (2) Calculate the company's total weekly gross profit assuming the table cleaner is processed fur (3) Compare the resulting net incomes and comment on management's decision. (b) Compare the resulting net incomes and comment on management's decision. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells wi (a) Determine if management made the correct decision to not process the table cleaner further by d (1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed Table Cleaner Not Processed Further Sales: FloorShine $400,000 Table cleaner Total Revenue Costs: CDG Additional costs of FloorShine Total costs Gross profit (a) 204,000 $604,000 210,000 240,000 450,000 $154,000 Determine if management made the correct decision to not process the table cleaner further by d (2) Calculate the company's total weekly gross profit assuming the table cleaner is processed fur Table Cleaner Processed Further Sales: FloorShine Table Stain Remover Table Polish Total Revenue Costs: CDG Additional costs of FloorShine TCP Total costs Gross profit (a) $400,000 168,000 168,000 $736,000 210,000 240,000 100,000 550,000 $186,000 Determine if management made the correct decision to not process the table cleaner further by d (3) Compare the resulting net incomes and comment on management's decision. Response: The management in charge made the wrong decision when they decided not to process the table cleaner further. Processing the table cleaner further ctually resulted in an increase in gross profi compared to the original decision of not processing it further. The gross profit for processing the cleaner further was $32,000 more than the original process that did not involve processing the ta cleaner further. (b) Compare the resulting net incomes and comment on management's decision. Don't Process Table Cleaner Process Table Cleaner Incremental revenue Incremental costs Total Further $204,000 0 $204,000 Further $336,000 100,000 $236,000 Response: Even though the incremental costs was more to process the table cleaner further, the extra incremental revenue that was received from processing the table cleaner further out weigh the extra costs and resulted in a net income increase in the end compared to not processing the table cleaner further. 1. After you have completed P7-3A, consider the following additional question. Assume that the selling price of the two table products after further processing changed to $13 for each 25-ounce bottle and the cost of TCP compound to further process changed to $120,000. How do these changes impact the decision to process or not process further? aner processing company. The company's Dargar plant mmon set of chemical inputs (CDG). Each week 900,000 0,000 ounces of floor cleaner and 300,000 ounces of table o a polish with the trade name FloorShine. The additional n be sold for $17 per 25-ounce bottle. However, the table ounces of another compound (TCP) to the 300,000 ounces table stain remover (TSR) and table polish (TP). The th table products can be sold for $14 per $25-ounce bottle. nd TP based on the following analysis. Process Further Table Polish (TP) 300,000 $168,000 52,500 50,000 102,500 $65,500 Total $336,000 105,000 ** 100,000 205,000 $131,000 e $210,000 of CDG cost, which is equal to 1/3 of the 200,000 ounces. TSR and TP combined account for the CDG cost. cess the table cleaner further by doing the following. the table cleaner is not processed further. the table cleaner is processed further. gement's decision. ent's decision. number or a formula in cells with a "?" . cess the table cleaner further by doing the following. the table cleaner is not processed further. cess the table cleaner further by doing the following. the table cleaner is processed further. cess the table cleaner further by doing the following. gement's decision. y decided not to process the table ulted in an increase in gross profit The gross profit for processing the table t did not involve processing the table ent's decision. Net Income Increase (Decrease) $132,000 (100,000) $32,000 ocess the table cleaner further, the he table cleaner further out weighed d compared to not processing the nal question. her processing changed to $13 her process changed to $120,000. ocess further