W5 A2 7 - 9

7.

ABD Realty manages five apartment complexes in its region. Shown below are summary income statements for each apartment complex: U V W X Y

Rental income $1000 $1210 $2347 $1878 $1065

Expenses (-) 800 1300 2600 2400 1300

Operating income (=) $200 ($90) ($253) ($522) ($235) Included in the expenses is $1,200 of common corporate expenses that have been allocated to the apartment complexes based on rental income. These common corporate expenses would have to be incurred regardless of how many apartment complexes ABD Realty manages. The apartment complex(es) that ABD Realty should consider dropping is (are): A. v,w,x,y B. w,x,y C. x,y D. x

8.

Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year: Direct materials $20,000

Direct labor 55,000

Variable manufacturing overhead 45,000

Fixed manufacturing overhead 70,000 (+)

Total manufacturing cost $190,000 (=) Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why? A no becuase it would be $5000 cheaper to make the part B yes because it would be $10,000 cheaper to buy the part C no because it would be $15,000 cheaper to make the part D yes because it would be $25,000 cheaper to buy the part

9.

Kingston Company needs 10,000 units of a certain part to be used in its production cycle. The following information is available concerning Kingston's unit product cost: Direct materials $6

Direct labor 24

Variable manufacturing overhead 12

Fixed manufacturing overhead 15 (+)

Unit product cost $57 (=) Utica Company has offered to supply Kingston's entire annual requirements of the part for $53 each. If Kingston buys the part from Utica instead of making it, Kingston would have no other use for the facilities and 60 percent of the fixed manufacturing overhead would continue. In deciding whether to make or buy the part, the total relevant costs to make the part internally are: A $342,000 B $480,000 C $530,000 D $570,000