CHAPTER 7 SOLUTIONS TO PROBLEMS: SET B PROBLEM 7-1B (a) Reject Order Accept Order Revenues (1, X $3) Selling and administrative expenses Net income $ $ $3, 24, 25, $ 35, (1) (2) $ 3, ( (24,) ( (25,) $ 35, (1) Variable costs = $3,6, $9, = $2,16,; $2,16, 9, units = $24 per unit; 1, X $24 = $24,. (2) Variable costs = $36, $18, = $18,; $18, 9, units = $2. per unit; 1, X ($2. + $.5) = $25,. (b) Yes, the special order should be accepted because net income will be increased by $35,. (c) Unit selling price = $24 (variable manufacturing costs) + $2.5 (variable selling and administrative expenses) + $5.5 (net income) = $32.. (d) Nonquantitative factors to be considered are: (1) possible effect on domestic sales, (2) possible alternative uses of the unused plant capacity, and (3) ability to meet customer s schedule for delivery without increasing costs. 7-1 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)
PROBLEM 7-2B (a) Make FIZBE Buy FIZBE Direct materials (5, X $4.75) Direct labor (5, X $4.6) Indirect labor (5, X $.45) Utilities (5, X $.35) Depreciation Property taxes Insurance Purchase price Freight and inspection (5, X $.3) Receiving costs Total annual cost $23,75 23, 2,25 1,75 2, 7 1,5 $54,95 $ 9 2 6 56, 1,5 5 $59,7 ($ 23,75 ( 23, ( 2,25 ( 1,75 ( 1,1 ( 5 ( 9 ( (56,) ( (1,5) (5) ($ (4,75) (b) The company should continue to make FIZBE because net income would be $4,75 less if FIZBE were purchased from the supplier. (c) The decision would be different. Because of the opportunity cost of $6,, net income will be $1,25 higher if FIZBE is purchased as shown below: Make FIZBE Buy FIZBE Total annual cost Opportunity cost Total cost $54,95 6, $6,95 $59,7 $59,7 $(4,75) 6, $ 1,25 (d) Nonfinancial factors include: (1) the adverse effect on employees if FIZBE is purchased, (2) how long the supplier will be able to satisfy the Gill Corporation s quality control standards at the quoted price per unit, and (3) will the supplier deliver the units when they are needed by Gill? 7-2 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)
PROBLEM 7-3B (a) (1) General-Purpose Cleaner Not Processed Further Sales ShineBrite (75, 25) X $15 $45, General-Purpose Cleaner (25, 2) X $2 25, Total revenue $7, Costs NPR 2, Additional costs for ShineBrite 3, Total costs 5, Gross profit $2, (2) General-Purpose is Processed Further Sales ShineBrite (75, 25) X $15 $45, Premium Cleaner (25, 2) X $16 2, Premium Stain Remover (25, 2) X $16 2, Total revenue $85, Costs NPR 2, Additional costs for ShineBrite 3, PST 14, Total costs 64, Gross profit $21, (3) If the general-purpose cleaner is processed further overall company profits will be $1, higher. Therefore, management made the wrong decision by choosing to not process the general-purpose cleaner further. 7-3 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)
PROBLEM 7-3B (Continued) (b) Don t Process G-P Cleaner Further Process G-P Cleaner Further Incremental revenue $25, $4, $15, Incremental costs 14, (14,) Totals $25, $26, $ 1, When trying to decide if the general-purpose cleaner should be processed further into PC and PSR, only the relevant data need be considered. All of the costs that occurred prior to the creation of the general-purpose cleaner are sunk costs and can be ignored. The decision should be made by comparing the incremental revenue from further processing to the incremental costs. 7-4 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)
(58,) PROBLEM 7-4B (a) Cost $21, Accumulated depreciation (42,*) Book value 168, Sales proceeds (58,) Loss on sale $11, *$21, 5 years = $42, (b) (1) Retain Old Equipment Revenues ($36, X 4 yrs.) $1,44, Less costs: Variable costs $2, Fixed costs 12, Selling & administrative 18, Depreciation 168, 668, Net income $ 772, (2) Replace Old Equipment Revenues $1,44, Less costs: Variable costs $ 48, Fixed costs 2, Selling and administrative 18, Depreciation 25, 498, Operating income 942, Less: Loss on old equipment 11, Net income $ 832, (c) Retain Old Equipment Replace Old Equipment Variable costs $2, $ 48, $152, Fixed costs 12, 2, 1, New equipment cost 25, (25,) Salvage on old equipment 58, Totals $32, $26, $ 6, 7-5 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)
PROBLEM 7-4B (Continued) (d) MEMO TO: Gene Simmons FROM: Student SUBJECT: Relevant Data for Decision to Replace Old Equipment When deciding whether or not to replace any old equipment, the analysis should only include cost data relevant to the replacement decision. The $11, loss that would be experienced if we replace the old equipment with the newer equipment is related to a sunk cost, namely the cost of the old equipment. Sunk costs are irrelevant in decision making. The loss occurs when comparing the book value of the old equipment to the cash proceeds that would be received. The book value of $168, would be deducted as depreciation expense over the next four years if the equipment were retained. If the equipment is replaced with the newer model the book value will be expensed in the current year, less the cash proceeds received on disposal. Therefore, the $168, book value will be expensed under either alternative, making it irrelevant. 7-6 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)
PROBLEM 7-5B (a) Sales Variable expenses Selling and administrative Total variable expenses Contribution margin Division III $31, 189, 45, 234, $ 76, Division IV $17, 14,4 49, 189,4 ($ (19,4) (b) (1) Division III Continue Eliminate Contribution margin (above) Fixed expenses Selling and administrative Total fixed expenses Income (loss) from operations $ 76, 81, 3, 111, ($(35,) $ (4,5 15, 55,5 $(55,5) $(76,) 4,5 15, 55,5 $(2,5) (2) Division IV Continue Eliminate Contribution margin (above) Fixed expenses Selling and administrative Total fixed expenses Income (loss) from operations $(19,4) (15,6) 21,) 36,6) $(56,) $ 7,8 1,5 18,3 $(18,3) $19,4 7,8 1,5 18,3 $37,7 Division III should be continued as contribution margin ($76,) is greater than the savings in fixed costs ($55,5) that would result from elimination. Therefore, income from operations would decrease $2,5 if Division III is eliminated. Division IV should be eliminated because it is producing negative contribution margin ($19,4). Income from operations will increase $37,7 by discontinuing this division. 7-7 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)
PROBLEM 7-5B (Continued) (c) PANDA COMPANY CVP Income Statement For the Quarter Ended March 31, 217 Sales Variable expenses Selling and administrative Total variable expenses Contribution margin Fixed expenses (1) Selling and administrative (2) Total fixed expenses Income (loss) from operations Divisions I II III Total $51, 21, 24, 234, 276, 92,6 39,5 132,1 $143,9 $4, 2, 4, 24, 16, 52,6 43,5 96,1 $ 63,9 $31, 189, 45, 234, 76, 83,6 33,5 117,1 $ (41,1 ) $1,22, 599, 19, 78, 512, 228,8 116,5 345,3 $ 166,7 (1) Division s fixed cost of goods sold plus 1/3 of Division IV s unavoidable fixed cost of goods sold [$156, X (1% 9%) X 5% = $7,8]. Each division s share is $2,6. (2) Division s fixed selling and administrative expenses plus 1/3 of Division IV s unavoidable fixed selling and administrative expenses [$7, X (1% 7%) X 5% = $1,5]. Each division s share is $3,5. (d) Income from operations with Division IV of $129, (given) plus incremental income of $37,7 from eliminating Division IV = $166,7 income from operations without Division IV. 7-8 Copyright 215 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,7/e Problems: Set B Solutions (For Instructor Use Only)