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Class Work Answers

1) Dropping the overnight case segment would result in a $260,000 loss in contribution margin but $140,000 in avoidable fixed costs, resulting in a net disadvantage of $120,000. Therefore, the overnight cases should not be discontinued. 2) Dropping the Bath Department would result in a $940,000 loss in contribution margin but $530,000 in avoidable fixed costs, resulting in a decrease in net operating income of $410,000. 3) It is more cost effective to manufacture 15,000 units internally rather than purchase them, as manufacturing costs $90,000 less than purchasing.

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15 views4 pages

Class Work Answers

1) Dropping the overnight case segment would result in a $260,000 loss in contribution margin but $140,000 in avoidable fixed costs, resulting in a net disadvantage of $120,000. Therefore, the overnight cases should not be discontinued. 2) Dropping the Bath Department would result in a $940,000 loss in contribution margin but $530,000 in avoidable fixed costs, resulting in a decrease in net operating income of $410,000. 3) It is more cost effective to manufacture 15,000 units internally rather than purchase them, as manufacturing costs $90,000 less than purchasing.

Uploaded by

david.samhon73
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Class work answers:

Dropping or Retaining a Segment

Contribution margin lost if the cases are discontinued.................................. $(260,000)


Less fixed costs that can be avoided if the cases are
discontinued:
Salary of the product line manager.........................................................$ 21,000
Advertising.............................................................................................
110,000
Insurance on inventories.........................................................................9,000 140,000
Net disadvantage of dropping the cases......................................................... $(120,000)

No, the overnight cases should not be discontinued.


Answer: 2

Contribution margin lost if the Bath Department is dropped:


Lost from the Bath Department......................................................................................
$(700,000)
Lost from the Kitchen Department (10% × $2,400,000)............................................... (240,000)
Total lost contribution margin............................................................................................
(940,000)
Less avoidable fixed costs ($900,000 – $370,000)............................................................ 530,000
Decrease in overall net operating income..........................................................................
$(410,000)
Make/Buy

make buy Total cost Total


of cost of
making buying
15,000 15,000
units units
Purchasing cost $35 $525,000
Direct materials $14 $210,000
Direct labor 10 150,000
Variable manufacturing 3 45,000
overhead
Supervisor’s salary 2 30,000
Allocated general overhead 0 0
Total cost $29 $435,000 $525,000

Difference in the favor of making $6 per unit or $90,000 total

Make Buy
Purchasing cost $525,000
Making costs $435,000
Opportunity cost $150,000
Total cost $585,000 $525,000
Difference in the favor of purchasing $60,000

Solution
 As long as there is an access capacity (full capacity of 10,000), while current production
capacity is 6,000 televisions, thus, no change in fixed cost
 Manufacturing overhead (70% variable and 30% unavoidable fixed), thus, the 30% does
not considered when calculated the production costs.
 The incremental cost in is example is only the $6

The minimum selling price per television in negotiating a price for this special order = the
production cost + the incremental cost related to this special order

The production cost:

Direct materials $80

Direct labor $60

Manufacturing overhead $28

$40 x 70%

incremental cost related to this special order $6

The minimum selling price per television $174

Per units Total


500 units
Incremental Revenue $45 $22,500
500 units x $45
Less: incremental costs
Variable Manufacturing costs $20
Variable (sales commissions) $4
$6 x 2/3
(the 1/3 is not affected by this decision)
Total Costs $24 $12,000
Incremental profit 21 $10,500

Accept the special order

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