Exam 20: Incremental Analysis

Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $82,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July follow: How much are total joint costs of the products?

The basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs.

Fornelli, Inc. can produce 100 units of a component part with the following costs: If Fornelli, Inc. can purchase the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows. The unassembled bikes are sold to retailers at $450 each. Speedy currently has unused productive capacity that is expected to continue indefinitely; management has concluded that some of this capacity can be used to assemble the bikes and sell them at $495 each. Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but there will be no additional fixed overhead as a result of assembling the bikes. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. (b) Should Speedy sell or process further? Why or why not?

In a make-or-buy decision, opportunity costs are

Use the following information for questions . Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. -If the outside supplier offers a unit price of $68, net income will increase (decrease) by

Use the following information for questions . Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period: -The additional profit that would result from processing rough lumber further is

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?

A revenue that differs between alternatives and makes a difference in decision-making is called a(n)

All of the following are relevant to the sell or process further decision except

Use the following information for questions . Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. -If Clemente accepts the offer, by how much will net income increase (decrease)?

An opportunity cost

Tasty Bites produces corn chips. The cost of one batch is below: An outside supplier has offered to produce the corn chips for $30 per batch. How much will Tasty Bites save if it accepts the offer?

You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each individual work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The software for this system is extremely impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value information for these options follows: Required: Prepare a brief report for management in which you make a recommendation for one system or the other, using the information given.

It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 5,000 units. If the special order is accepted, what will be the effect on net income?

The process used to identify the financial data that change under alternative courses of action is called __________________ analysis.

Martin Company incurred the following costs for 70,000 units: Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping. If Martin wants to break even on the order, what should the unit sales price be?

Billings Company has the following costs when producing 100,000 units: An outside supplier has offered to make the item at $4.50 a unit. If the decision is made to purchase the item outside, current production facilities could be leased to another company for $165,000. The net increase (decrease) in the net income of accepting the supplier's offer is

If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item.