Exam 21: Incremental Analysis

Incremental analysis - make-or-buy decision Paramount Bikes,Inc. ,uses 10,000 derailleurs in its bicycles each year.Derailleurs currently cost the company $20.90 per unit to manufacture,determined as follows: Paramount Bikes,Inc. ,has been approached by an outside supplier that will provide derailleurs at a price of $16 per unit.If Paramount Bikes,Inc. ,stops producing derailleurs,the direct materials,direct labor,and variable manufacturing overhead will be eliminated,as will $30,000 of the fixed manufacturing overhead.Use incremental analysis to determine whether Paramount Bikes,Inc. ,should make or buy derailleurs.Complete the following schedule,and indicate in the space provided your decision to continue making,or to buy the part: Decision: ________

When sales of one product contribute to the sales of another product they are called contribution products.

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair,the repaired units can be sold for $275,000.The company receives an offer to purchase these motors for $100,000 before repairing them.The company's decision should be to sell the motors at the offered price.

Legendary Motors has 7,000 defective autos on hand,which cost $12,880,000 to manufacture.Legendary can either sell these defective autos as scrap for $8,000 per auto,or spend an additional $18,320,000 on repairs and then sell them for $12,000 per unit.What is the net advantage to repair the autos compared to selling them for scrap?

[The following information applies to the questions displayed below.] Burns Industries currently manufactures and sells 20,000 power saws per month,although it has the capacity to produce 35,000 units per month.At the 20,000-unit-per-month level of production,the per-unit cost is $65,consisting of $40 in variable costs and $25 in fixed costs.Burns sells its saws to retail stores for $80 each.Allen Distributors has offered to purchase 5,000 saws per month at a reduced price.Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs. -Which of the following is not a relevant factor in Burns' decision concerning whether to accept the special order from Allen?

All incremental revenue or incremental costs are relevant.

Which cost is not relevant in making financial decisions?

The Fine Point Company currently produces all of the components for its one product,an electric pencil sharpener.The unit cost of manufacturing the motor for this pencil sharpener is: The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit.The relevant cost of manufacturing the motor to be considered in reaching the decision is:

[The following information applies to the questions displayed below.] Perry's Cycle Company manufactures annually 20,000 units of TushSeat,a bicycle seat used on many of the company's products,and also sold directly to retailers for $38 per unit.At the current level of production,the cost per unit to produce TushSeat consists of: It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers. -Assume that Perry's fixed costs remain unchanged if the seats are purchased from an outside supplier.In order to operate more profitably by buying the seats rather than manufacturing them,Perry must negotiate a price per unit from the outside supplier that is less than:

Incremental costs can be defined as:

Special order decision Prudent Products Corporation manufactures and sells 1,000 motorcycle engines each month.A primary component in each motor is an oil pump used to keep the motor lubricated.Prudent Products has the monthly capacity to produce 1,500 oil pumps.The variable unit costs associated with manufacturing each pump are shown below: Fixed manufacturing overhead per month (for up to 1,500 units of production)averages $46,000.Volk's Autos,Inc. ,has offered to purchase 250 oil pumps from Prudent Products per month to be used in its own motorcycles. (a)Prudent Product's average unit cost of manufacturing each oil pump if it rejects Volk's Autos' order is $________ per unit. (b)The incremental unit cost of producing each additional oil pump is $________ per unit. (c)If this special order is accepted,the price per unit that Prudent Products could charge Volk's Autos in order to earn a $20,000 monthly pretax profit on the sale is $________ per unit.

[The following information applies to the questions displayed below.] Creative Star Corporation produces three lines of desks from wood: Classic,Royal,and Standard.Cost and revenue data pertaining to each product are shown below: Classic desks require five square yards of wood,Royal requires ten square yards,and Standard requires three square yards.High demand for each product line far exceeds the company's production capacity. -If Creative Star Corporation has a limited supply of wood available,which products should it produce?

Aircraft Products,a manufacturer of aircraft landing gear,makes 1,000 units each year of a special valve used in assembling one of its products.The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60.The valves could be purchased from an outside supplier at $77 each.If the valve were purchased from the outside supplier,40% of the total fixed costs incurred in producing this valve could be eliminated.Buying the valves from the outside supplier instead of making them would cause the company's operating income to:

[The following information applies to the questions displayed below.] BT&T Corporation manufactures telephones.Recently,the company produced a batch of 600 defective telephones at a cost of $9,000.BT&T can sell these telephones as scrap for $9 each.It can also rework the entire batch at a cost of $6,500,after which the telephones could be sold for $20 per unit. -If BT&T reworks the defective telephones,by how much will its operating income change?

The net change in operating income resulting from a decision to manufacture product B2 is:

[The following information applies to the questions displayed below.] BT&T Corporation manufactures telephones.Recently,the company produced a batch of 600 defective telephones at a cost of $9,000.BT&T can sell these telephones as scrap for $9 each.It can also rework the entire batch at a cost of $6,500,after which the telephones could be sold for $20 per unit. -Which of the following statements is false regarding the defective units?

Nonfinancial considerations are relevant in decision-making.

A sunk cost is an expenditure that has proven to be nonproductive.

Incremental revenue is relevant in decision-making.

The relevant costs and revenues to consider in a special order decision include variable costs,fixed costs,and incremental revenues.