Problem 22 - Temple, Inc. produces several models of grandfather clocks. An outside supplier has offered to produce the economy clocks for Temple for $350 each. Temple needs 1,200 clocks annually. Temple has provided the following unit costs for its economy model:  

Using good form, prepare an incremental analysis which shows the effect of the make or buy decision. Show calculations to support your answers in the space outside the answer box.

Problem 23 - A division has the following data:

                       Sales                                                        $600,000

                       Variable expenses                                       320,000

                       Fixed expenses                                           310,000

What will be the incremental effect on net income if this division is eliminated, assuming the fixed expenses will be allocated to profitable segments?  Use the incremental analysis approach.  

Only costs that change between alternatives are incremental. Fixed expenses that are allocated never change.

Problem 24 - Diversified Machines has four product lines, one of which reflects the following results:

                       Sales                                                                 $220,000

                       Variable expenses                                                120,000

                       Contribution margin                                              100,000

                       Fixed expenses                                                     120,000

                       Net loss                                                               $(20,000)

If this product line is eliminated, 40% of the fixed expenses can be eliminated and the other 60% will be allocated to other product lines.

A.  Create an incremental analysis to determine if this product line should be eliminated.     

B. Identify any non-relevant costs.

Since the other 60% of fixed costs will be incurred regardless of decision, they are not relevant.

Problem 25 - Sally Industries can produce 100 units of a necessary component part with the following costs:

                       Direct Materials                                 $30,000

                       Direct Labor                                        13,000

                       Variable Overhead                               32,000

                       Fixed Overhead                                   12,000

If Sally Industries purchases the component externally, $3,000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying?

The company is indifferent when the cost of making the part equals the cost of buying the part, which is $78,000:

Problem 26 - Hernandez, Inc. manufactures 3 models of picture frames. Hernandez Corporation manufactures 5,000 frames per year. The unit cost to produce a metal frame follows:

A local company has offered to supply Hernandez the 5,000 metal frames it needs for $16 each. In good form, create an incremental analysis for the make or buy decision. 

Problem 27 - Crisp has 4 product lines: milk, ice cream, yogurt, and butter. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are allocated. Results of June follow:    

A. In good form, prepare an incremental analysis of the effect of dropping the milk product line.

B.  Briefly state how the cost allocation death spiral concept applies to this problem. 

The cost allocation death spiral occurs when a company drops a product line/division that has a loss. Management may believe this will eliminate the loss, however, since the common fixed costs must be allocated and absorbed by other products, the total profit of the company declines. i.e., allocated fixed costs cannot be avoided.

Problem 28 - Evans Corporation currently manufactures 3,000 subassemblies annually for its main product. The costs per unit are as follows:                 

Howard Company has contacted Evans with an offer to sell it 3,000 subassemblies for $18.00 each. $5 of the fixed overhead per unit is unavoidable. In good form in the answer box below, create an incremental analysis for the make or buy decision.  (Do not include extraneous information/calculations inside the answer box.)

*The unavoidable portion of this cost ($5) exists whether or not the company makes or buys the subassemblies. If the subassemblies are bought, the company saves the avoidable portion of the cost, $2 per unit.

Problem 29 Parrino has three product lines in its retail stores: books, videos, and music. The allocated fixed costs are based on units sold and are unavoidable. Results of the fourth quarter are presented below:    

Demand of individual products is not affected by changes in other product lines. In good form, prepare an incremental analysis of the effect of dropping the Video product line.   

Note: Incremental analyses show only the differences in revenues and costs. Comparative columns or comparative income statements, or a revised income statement showing the net amounts to be reported after the drop are NOT incremental analyses. We emphasized incremental analysis using this approach in class.

Problem 30 - Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 800 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor and $5 for fixed manufacturing overhead. The unit cost is based on the monthly usage of 800 baskets. The company determined that 30% of the fixed manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $12 each, and can supply all the units it needs. In good form, prepare an incremental analysis to determine if Calc should buy the component from the supplier?  

 Since 30% of the fixed cost is avoidable, this cost will be a savings.

Problem 31 - Boys Toys sells three products in its retail stores: planes, trains, and cars. Results of the 4^th quarter are below:       

Demand of individual products are not affected by changes in other product lines. In good form, prepare an incremental analysis to determine if planes should be discontinued.

Problem 32 - The following estimated costs were provided by Young Company:

Young received an order for 600 units from a new customer in a country in which Young has never done business. This customer would like to spend $86 per widget. Young has capacity to produce 900 more units. Should Young accept the order? Support with an incremental analysis.

Yes, it can make $3,000 more profit

Incremental revenue (600 x $86) = +$51,600

Incremental DM cost  (600 x $30) =  (18,000)

Incremental DL cost (600 x $36) = (21,600)

Incremental VMOH cost (600 x $15) = (9,000)

Incremental profit = + $3,000

Fixed OH is not incremental since it does not change.

Problem 33 - Kirk Company plans to produce 50,000 buckets next year at a total cost of $850,000.  Fixed costs are $3 per unit at this level of operations. Selling price is $8 per unit.  Kirk is considering lowering the price to $7 per unit, and feels that this action will cause sales to climb to 60,000 buckets. Use incremental analysis to calculate incremental profit or loss if the change is made to the sales price. 

Problem 34 - Zeriff’s Donuts currently sells donuts for $4.00 per dozen.  These donuts cost $2.70 per dozen to produce.  Business was very slow yesterday, and several dozen donuts have been marked down to $1.50 per dozen on the day-old table today.  What is the sunk cost associated with these donuts?
 The original cost of the donuts is $2.70 no matter what and it can't be changed. This is a sunk cost.

Problem 35 - Morley, Inc. has three product lines in its retail stores: putters, drivers, and sinkers. The allocated fixed costs are based on units sold and are unavoidable. Results of May follow:

Demand of individual products is not affected by changes in other product lines. In good form, prepare an incremental analysis of the effect of dropping the sinkers product line.

Problem 36 - Walker, Inc. currently manufactures 4,000 motors for its electric scooters annually. Direct material costs are $48,000 and direct labor total $12,000 annually. Overhead totals $10 per unit of which $4 is variable. Thirty percent of the fixed overhead is unavoidable. Anthony, Inc. has contacted Walker with an offer to sell the motors for $21 each. In good form, create an incremental analysis for the make or buy decision. 

Problem 37 - Bing Corporation currently manufactures a lid for its main product. The relevant costs to produce one unit for direct costs are $1.70, and the allocated common costs are $0.80 per unit. A supplier has offered to provide the monthly supply of 12,000 lids for $21,600. Should Bing outsource the lids?  Use incremental analysis.

No, the cost increases by $1,200

Incremental savings of cost to make: $1.70 x 12,000 = $20,400

Incremental cost to buy: ($21,600)

Incremental cost to buy instead of make: $20,400 - $21,600 = ($1,200)

Problem 38 -  Block Corporation currently makes the rolls that it uses for its sandwiches. It uses 50,000 rolls annually. The costs to make the rolls are given below:

Materials	$0.04
Labor	$0.03
VOH	$0.02
FOH	$0.07

A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are purchased, 20% of the fixed overhead could be avoided. Determine the effect if Block accepts the offer. Use incremental analysis. 

Profits will decrease (costs will increase) by $300 if accepted.

Incremental analysis:

Incremental cost to buy                          ($0.11)

Incremental cost savings:

  DM savings                                       + $0.04

  DL savings                                        + $0.03

  VOH savings                                     + $0.02

 FOH savings ($.07 x 20%)                 + $0.014

Incremental decrease in profit per unit = $.006

Total incremental decrease in profit (50,000 x $0.006) = $300

Problem 39 - Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped. 

	Bowling Shoes	Athletic Shoes	Boots
Sales	$120,000	$420,000	$360,000
VC	64,000	220,000	140,000
CM	56,000	200,000	220,000
Direct FC	40,000	70,000	90,000
Allocated FC	20,000	70,000	60,000
NI	($4,000)	$60,000	$70,000

If bowling shoes are dropped, what would happen to the overall net income? Support with incremental analysis.

It would decrease by $16,000.

        Incremental Revenue                  ($120,000)

        Incremental VC savings               + $64,000

        Incremental Direct FC savings     + $40,000

        Incremental decrease in profits  ($16,000)

Problem 40 -  Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped. 

Assume that boots normally sell for $90 per pair. An exporter has approached Menlo about buying 1,000 pairs of boots for a one-time export deal for $80 per pair. $3.00 per unit of the normal variable cost could be avoided on this sale, but Menlo would have to pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to produce this order, and no regular sales will be affected. Should Menlo accept this order? Support with an incremental analysis.

Yes, profits will increase by $44,000.

Problem 41  BarBQue Heaven has three product lines in its stores: ribs, chicken, and beef. Results of May are presented below:                

Allocated fixed costs are unavoidable. Individual product demand is not affected by changes in other product lines.

A.  In good form, use the incremental approach to determine if BarBQue Heaven should discontinue Ribs. Label appropriately. Show calculations in the space provided if needed.  .

B,   Briefly state how the cost allocation death spiral applies to this problem.

      When a division is eliminated, the fixed costs that had been allocated to it, have to be allocated to the remaining divisions. Hence, the allocated fixed costs do not disappear. Without the additional contribution margin from the dropped product, total profit declines. If more products are dropped the company spins into a deeper cut in profits or increased loss.

Problem 42 - Halo Inc. budgeted 8,000 bearings for production during 2006. Fixed factory overhead is allocated using ABC. Halo received an offer from a suppler to manufacture the same quality bearings at $81 each. The space currently occupied by the manufacturing facility could be leased out for $20,000 per year if the supplier provides the bearings. The following estimated costs were provided:

Use the incremental approach to determine if Halo should buy its bearings from the supplier. Label appropriately. Show calculations in the space provided if needed.  .

Problem 43 Clinton Company makes and sells 16,000 ties each year. Fixed overhead costs are allocated to ties based on its annual production of 16,000 ties. The unit cost of making one tie at this activity level follows:

Capacity is 20,000 ties. Forty percent of the fixed overhead costs is avoidable. An overseas company recently offered to buy 2,500 ties at $20 per tie even though Clinton’s regular customers pay $25 each.

A.   Use the incremental approach to determine the effect on income if Clinton accepts the order for 2,500 ties. Label appropriately. Show calculations in the space provided if needed.    

B.   Should Clinton accept?  Briefly justify your answer.

Most likely, yes. Profits increase by $3,500. Qualitative benefits and costs should be considered as well.

Problem 44  SMP Company's market for the Model 64 has changed significantly, and SMP has had to drop the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of $150 per unit associated with them. SMP could sell these units in their current state for $100 each. It will cost SMP $10 per unit to complete these units so that they can be sold for $125 each. Which of the following is the amount of sunk costs in this problem?

$150 per unit

Two costs are not relevant since the profits remain the same regardless if SMP is dropped or not. The original selling price of $265 does not make the company more or less profitable. The $150 cost exists regardless of the decision made. However, a sunk cost is an amount incurred for which it is too late to change. The previous selling price is not a 'cost'.

Problem 45 Block Corporation currently makes the rolls that it uses for its sandwiches. It uses 50,000 rolls annually. The costs to make the rolls are given below:

Materials	$0.04
Labor	$0.03
VOH	$0.02
FOH	$0.07

A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are purchased, 20% of the fixed overhead could be avoided. If Block accepts the offer, it will be:

Incremental analysis:

Incremental cost to buy              ($0.11)

Incremental cost savings:

  DM savings                             + $0.04

  DL savings                              + $0.03

  VOH savings                            + $0.02

 FOH savings                           + $0.014

    ($.07 x 20%)

Incremental decrease in profit per unit = $.006

Total incremental decrease in profit = $300

   (50,000 x $0.006)

Problem 46 Alan Company makes sets of wrenches. They are trying to decide whether to continue to make the case the wrenches are sold in, or to outsource it to another company. The direct material and direct labor cost to produce the cases total $2.00 per case. The overhead cost is $1.00 per case which consists of $0.40 in variable overhead which would all be eliminated if the case were bought from the outside supplier. The $0.60 of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the case production manager of $40,000 per year and $80,000 in depreciation on equipment that would have no resale value. The manager would be laid off if the cases were bought externally. Additionally, if the case production were stopped, the space that it is using could be rented out for $20,000 per year. The outside supplier has offered to supply the cases for $2.80 per case. How much will Alan save or lose if the cases are bought externally?

Incremental analysis:

Incremental cost to buy per case    ($2.80)

Incremental cost savings to buy:

  DM and DL savings  + $2.00

  VOH savings  + $0.40

  FOH savings:

   Salary $40,000/200,000 = = $0.20
Incremental opportunity cost is bought  +$0.10

    ($20,000/200,000) 

Incremental cost increase if bought = ($0.10) per case

Problem 47- Smith Company manufactures widgets. Newman Company has approached Smith with a proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000 units. Smith is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced:

The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Smith. The remaining manufacturing overhead will continue whether or not Smith makes the components. Answer the following questions from Smith's point of view.

Should Smith make or buy the components for the widgets?

Continue to make them because the incremental cost of buying from Newman is $4,000.

Incremental analysis:

Incremental cost to buy ($100,000)

Incremental cost savings to make:

   DM     + $44,000

   DL      + $20,000

   MOH    + $32,000

Incremental cost to buy ($4,000)

Problem 48  Huxley Sports Company sells logo sports merchandise and does custom screen printing. They are trying to decide whether or not to continue screen printing. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the screen printing were dropped.

Assume that more space will be allocated to apparel sales if screen printing is dropped. This will allow apparel sales to increase by 25%. What is the impact on profits of the proposed change?  

Incremental revenue - screen	($120,000)
Incremental revenue - apparel (25%*$420,000)	105,000
Incremental savings/(costs):
VC - screen printing	+ 72,000
VC - apparel (25%*$220,00)	(55,000)
Direct FC	+32,000
Incremental increase in profits	$34,000

 

Problem 49 Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped. 

If bowling shoes are dropped, what would happen to overall net income?

Incremental revenue                  ($120,000)

Incremental VC savings             + $64,000

Incremental direct FC savings    + $40,000

Incremental decrease in profits   ($16,000)

Problem 50 Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped. 

Assume that boots normally sell for $90 per pair. An exporter has approached Menlo about buying 1,000 pairs of boots for a one-time export deal for $80 per pair. $3.00 per unit of the normal variable cost could be avoided on this sale, but Menlo would have to pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to produce this order, and no regular sales will be affected. If Menlo accepts this order:

# of boots sold =   $360,000/$90 = 4,000
Incremental cost per unit = $140,000/4,000 = $35
Incremental revenue ($80 x 1,000)	$80,000
Incremental VC ($35 - $3) x 1,000	(32,000)
Increase in fixed costs	4,000
Incremental increase in profits	$44,000

 

Problem 62   Sabab, Inc. produces 4 different qualities of cable for broadband internet hookups. Sabab currently produces 800,000 yards of economy cable each month. The costs of making each yard is $0.12 for direct materials, $0.05 for variable manufacturing overhead, $0.03 for variable administrative overhead, $0.06 for direct labor, and $0.12 for fixed manufacturing overhead. Overhead is allocated based on direct labor hours. An outside supplier has offered to sell Sabab economy cable for $0.28 per yard, and can supply all it needs. The company determined that 15% of the fixed overhead is avoidable if the company discontinues production of the economy cable. In addition, the company could lease the machine used to make the economy cable to another company for $8,000 annually.  In good form, prepare an incremental analysis to determine if Sabab should outsource the component. 

Should Sabab outsource? Yes. Profits increase by $6,400.

Problem 63 Hooters sells 3 child meals in its restaurants: Hot Wings, 3 Mile Wings, and Volcano Wings. Changes in product lines do not affect demand of other products. Results of June are below:       

Seventy percent of the allocated fixed costs are unavoidable. In good form, prepare an incremental analysis to determine if 3 Mile Wings should be discontinued.

 * $8,500*30% = $2,550

Should 3 Mile Wings be discontinued? Briefly justify your response as to why or why not. 

3 Mile Wings should not be discontinued because profits would decline by $3,950, which results in a net loss of $550 for the company instead of a $3,400 profit.

Problem 64  The following estimated costs were provided by Narb Company:

Narb received an order for 2,500 units from a new customer with whom Narb is anxious to do business. This customer would like to spend $26 per widget. Narb has the capacity to produce the additional units. In good form, prepare an incremental analysis to determine if Narb should accept the order.