Managerial Accounting 1B Ch23

Managerial Accounting 1B Ch23


Don't use plagiarized sources. Get Your Custom Essay on
Managerial Accounting 1B Ch23
Just from $15/Page
Order Essay


Financial and Managerial Accounting


Chapter 23






Exercise 23-2 Scrap or rework L.O.A1


A company must decide between scrapping or reworking units that do not pass inspection. The company has 15,000 defective units that cost $6.00 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $4.50 each and then sold for the full price of $9.00 each. If the units are sold as is, the company will also be able to build 15,000 replacement units at a cost of $6.00 each, and sell them at the full price of $9.00 each.




(1) What is the incremental income from selling the units as scrap? (Omit the “$” sign in your response.)




  Incremental income $ [removed]




(2) What is the incremental income from reworking and selling the units? (Omit the “$” sign in your response.)




  Incremental income $ [removed]




(3) What must the company decide?
  The units should not be reworked




2.Exercise 23-4 Decision to accept additional business or not L.O. A1


Feist Co. expects to sell 200,000 units of its product in the next period with the following results.




  Sales (200,000 units)   $ 3,000,000  
  Costs and expenses        
      Direct materials     400,000  
      Direct labor     800,000  
      Overhead     200,000  
      Selling expenses     300,000  
      Administrative expenses     514,000  

  Total costs and expenses     2,214,000  

  Net income   $ 786,000  





The company has an opportunity to sell 20,000 additional units at $12 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 15% and (2) administrative expenses would increase by $86,000.




Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit. (Leave no cells blank – be certain to enter “0” wherever required. Input all amounts as positive values. Omit the “$” sign in your response.)






Exercise 23-6 Make or buy decision L.O. A1


Santos Company currently manufactures one of its crucial parts at a cost of $3.40 per unit. This cost is based on a normal production rate of 50,000 units per year. Variable costs are $1.50 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Santos is considering buying the part from a supplier for a quoted price of $2.70 per unit guaranteed for a three-year period.




Calculate the total incremental cost of making 50,000 units. (Omit the “$” sign in your response.)




  Total incremental cost  




Calculate the total incremental cost of buying 50,000 units. (Omit the “$” sign in your response.)




  Total incremental cost




Should the company continue to manufacture the part, or should it buy the part from the outside supplier?


4.Exercise 23-8 Sell or process decision L.O. A1


Cantrell Company has already manufactured 20,000 units of Product A at a cost of $20 per unit. The 20,000 units can be sold at this stage for $500,000. Alternatively, the units can be further processed at a $300,000 total additional cost and be converted into 4,000 units of Product B and 8,000 units of Product C. Per unit selling price for Product B is $75 and for Product C is $50.




1. Calculate the Incremental Net Income (or loss) if processed further. (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)




  Incremental net income (or loss)  




2. Indicate whether the 50,000 units of Product A should be processed further or not.




5.Exercise 23-12 Sales mix determination and analysis L.O. A1


Bethel Company owns a machine that can produce two specialized products. Production time for Product TLX is two units per hour and for Product MTV is five units per hour. The machine’s capacity is 2,200 hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 3,750 units of Product TLX and 2,000 units of Product MTV. Selling prices and variable costs per unit to produce the products follow.




  Product TLX   Product MTV  
  Selling price per unit   $ 12.50       $ 7.50    
  Variable costs per unit     3.75         4.50    




1. Determine the company’s most profitable sales mix.




  Product TLX  
  Product MTV  




2. Determine the contribution margin that results from that sales mix. (Do not round your cost per unit rate, round your intermediate and final answer to the nearest dollar amount. Omit the “$” sign in your response.)




  Contribution margin  




Problem 23-6A Analysis of possible elimination of a department L.O. A1


[The following information applies to the questions displayed below.]


Home Decor Company’s management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The company’s 2011 departmental income statement shows the following.




Departmental Income Statements
For Year Ended December 31, 2011
  Dept. 100 Dept. 200 Combined
  Sales   $ 872,000       $ 580,000       $ 1,452,000  
  Cost of goods sold     524,000         414,000         938,000  



  Gross profit     348,000         166,000         514,000  
  Operating expenses                            
    Direct expenses                            
       Advertising     34,000         24,000         58,000  
       Store supplies used     8,000         7,600         15,600  
       Depreciation—Store equipment     10,000         6,600         16,600  



       Total direct expenses     52,000         38,200         90,200  
    Allocated expenses                            
       Sales salaries     130,000         78,000         208,000  
       Rent expense     18,880         9,440         28,320  
       Bad debts expense     19,800         16,200         36,000  
       Office salary     37,440         24,960         62,400  
       Insurance expense     4,000         2,200         6,200  
       Miscellaneous office expenses     4,800         3,200         8,000  



       Total allocated expenses     214,920         134,000         348,920  



  Total expenses     266,920         172,200         439,120  



  Net income (loss)   $ 81,080       $ (6,200 )     $ 74,880  







In analyzing whether to eliminate Department 200, management considers the following:




a. The company has one office worker who earns $1,200 per week, or $62,400 per year, and four sales clerks who each earn $1,000 per week, or $52,000 per year.
b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to Department 200. The salary of the fourth clerk, who works half-time in both departments, is divided evenly between the two departments.
c. Eliminating Department 200 would avoid the sales salaries and the office salary currently allocated to it. However, management prefers another plan. Two salesclerks have indicated that they will be quitting soon. Management believes that their work can be done by the other two clerks if the one office worker works in sales half-time. Eliminating Department 200 will allow this shift of duties. If this change is implemented, half the office worker’s salary would be reported as sales salaries and half would be reported as office salary.
d. The store building is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equipment currently used by Department 200.
e. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it.








Problem 23-6A Part 1


1. Complete the three-column report that lists items and amounts for (a) the company’s total expenses (including cost of goods sold)—in column 1, (b) the expenses that would be eliminated by closing Department 200—in column 2, and (c) the expenses that will continue—in column 3. (Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)






7.Problem 23-6A Part 2


2. Complete the forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100’s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk. (Input all amounts as positive values. Omit the “$” sign in your response.)