ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
Exercise 7-2
Gruden Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing
20,000 golf discs is:
Materials
$10,000
Labor
30,000
Variable overhead
20,000
Fixed overhead
Total
40,000
$100,000
Gruden also incurs 5% sales commission ($0.35) on each disc sold.
McGee Corporation offers Gruden $4.80 per disc for 5,000 discs. McGee would sell the discs under its own brand
name in foreign markets not yet served by Gruden. If Gruden accepts the offer, its fixed overhead will increase from
$40,000 to $46,000 due to the purchase of a new imprinting machine. No sales commission will result from the
special order.
(a)
Prepare an incremental analysis for the special order. (Enter negative amounts using either a negative sign
preceding the number e.g. -45 or parentheses e.g. (45).)
Reject
Order
Revenues
Accept
Order
Net Income
Increase
(Decrease)
$
$
$
$
$
$
Materials
Labor
Variable overhead
Fixed overhead
Sales commissions
Net income
(b) Should Gruden accept the special order? Why or why not?
Exercise 7-5
Schopp Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 100%
of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost.
The direct materials and direct labor cost per unit to make the lamp shades are $4 and $5, respectively. Normal
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
production is 30,000 table lamps per year.
A supplier offers to make the lamp shades at a price of $12.75 per unit. If Schopp Inc. accepts the supplier’s offer,
all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being
charged to the lamp shades will have to be absorbed by other products.
(a)
Prepare the incremental analysis for the decision to make or buy the lamp shades. (Enter negative amounts
using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Make
Direct materials
Buy
Net Income
Increase (Decrease)
$
$
$
$
$
$
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost
(b) Should Schopp Inc. buy the lamp shades?
(c ) Would your answer be different in (b) if the productive capacity released by not making the lamp
shades could be used to produce income of $25,000
Exercise 7-9
Rachel Rey recently opened her own basketweaving studio. She sells finished baskets in addition to the raw
materials needed by customers to weave baskets of their own. Rachel has put together a variety of raw material
kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Rachel is
unable to carry all varieties of kits originally assembled and must choose between two basic packages.
The basic introductory kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic
package costs Rachel $14 and sells for $30. The second kit, called Stage 2, includes cut reeds that have already
been dyed. With this kit the customer need only soak the reeds and weave the basket. Rachel is able to produce
the second kit by using the basic materials included in the first kit and adding one hour of her own time, which she
values at $18 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Rachel
is able to make two kits of the dyed reeds, in one hour, from one kit of undyed reeds. The Stage 2 kit sells for $35.
(a)
Prepare an incremental analysis for the Rachel’s basketweaving shop. (Enter negative amounts using either a
negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Sell
Process Further
Net Income
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(Basic Kit)
Sales per unit
(Stage 2 Kit)
Increase
(Decrease)
$
$
$
$
$
$
$
$
$
$
$
$
Costs per unit
Direct materials
Direct labor
Total
Net income per unit
(b)
The parts of this question must be completed in order. This part will be available when you complete the part above.
Exercise 7-17
Twyla Company operates a small factory in which it manufactures two products: C and D. Production and sales
results for last year were as follows.
Units sold
Selling price per unit
C
D
9,000
20,000
$95
$75
Variable cost per unit
50
40
Fixed cost per unit
22
22
For purposes of simplicity, the firm averages total fixed costs over the total number of units of C and D produced and
sold.
The research department has developed a new product (E) as a replacement for product D. Market studies show that
Twyla Company could sell 10,000 units of E next year at a price of $115; the variable cost per unit of E is $40. The
introduction of product E will lead to a 10% increase in demand for product C and discontinuation of product D. If the
company does not introduce the new product, it expects next year’s results to be the same as last year’s.
(a)
Compute company profit with products C & D and with products C & E.
Net profit products C & D
Net profit products C & E
$
$
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(b)
The parts of this question must be completed in order. This part will be available when you complete the part
above.
Problem 7-1A
ShurShot Sports Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months
of 2014, the company reported the following operating results while operating at 80% of plant capacity and
producing 120,000 units.
Amount
Sales
Cost of goods sold
$4,800,000
3,600,000
Selling and administrative expenses
Net income
405,000
$795,000
Fixed costs for the period were cost of goods sold $960,000, and selling and administrative expenses $225,000.
In July, normally a slack manufacturing month, ShurShot Sports receives a special order for 10,000 basketballs at
$27 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and
administrative expenses $0.50 per unit because of shipping costs but would not increase fixed costs and expenses.
(a)
Prepare an incremental analysis for the special order. (Round all per unit computations to 2 decimal places,
e.g. 15.25. Enter negative amounts using either a negative sign preceding the number e.g. -45 or
parentheses e.g. (45).)
Reject
Order
Revenues
Net Income
Increase
(Decrease)
Accept
Order
$
$
$
$
$
$
Cost of goods sold
Selling and administrative expenses
Net income
(b)
Should ShurShot Sports Inc. accept the special order? Explain your answer.
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(c)
What is the minimum selling price on the special order to produce net income of $4.00 per ball?
Problem 7-4A
Last year (2013), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron
Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator
demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from
the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition,
he asked the company’s accountant to provide him with cost data on the company’s elevator. This information is
presented below.
Old Elevator
Purchase price
$120,000
Estimated salvage value
New Elevator
$160,000
0
0
Estimated useful life
5 years
4 years
Depreciation method
Straight-line
Straight-line
$35,000
$10,000
23,000
8,500
Annual operating costs
other than depreciation:
Variable
Fixed
Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which elevator is
used. If the old elevator is replaced now, at the beginning of 2014, Richter Condos will be able to sell it for $25,000.
(a)
Determine any gain or loss if the old elevator is replaced.
$
(b)
Prepare a 4-year summarized income statement for each of the following assumptions:
(1) The old elevator is retained
(2) The old elevator is replaced
(c)
Using incremental analysis, determine if the old elevator should be replaced.
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
Exercise 8-4
Kaspar Corporation makes a commercial-grade cooking griddle. The following information is available for Kaspar
Corporation's anticipated annual volume of 30,000 units.
Per Unit
Direct materials
$ 17
Direct labor
$
Variable manufacturing overhead
$ 11
Total
8
Fixed manufacturing overhead
$ 300,000
Variable selling and administrative expenses $
4
Fixed selling and administrative expenses
$ 150,000
The company uses a 40% markup percentage on total cost.
(a)
Compute the total cost per unit.
Total cost per unit
$
(b)
Compute the target selling price.
Exercise 8-5
Paige Corporation makes a mechanical stuffed alligator that sings the Martian national anthem. The following information
is available for Paige Corporation's anticipated annual volume of 500,000 units.
Per Unit
Direct materials
$
Direct labor
$
9
Variable manufacturing overhead
$
15
$
14
Fixed manufacturing overhead
Variable selling and administrative expenses
Fixed selling and administrative expenses
Total
7
$ 3,000,000
$ 1,500,000
The company has a desired ROI of 25%. It has invested assets of $26,000,000.
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(a)
Compute the total cost per unit. (Round answer to 2 decimal places, e.g. 10.50.)
Total cost per unit
$
(b)
Compute the desired ROI per unit.
(c)
Compute the markup percentage using total cost per unit.
(d)
Compute the target selling price.
Exercise 8-10
Wasson’s Classic Cars restores classic automobiles to showroom status. Budgeted data for the current year are:
Time Charges
Restorers' wages and fringe benefits
Material Loading
Charges
$270,000
-
-
$67,500
Administrative salaries and fringe benefits
54,000
21,960
Other overhead costs
24,000
77,490
$348,000
$166,950
Purchasing agent's salary and fringe benefits
Total budgeted costs
The company anticipated that the restorers would work a total of 12,000 hours this year. Expected parts and
materials were $1,260,000.
In late January, the company experienced a fire in its facilities that destroyed most of the accounting records. The
accountant remembers that the hourly labor rate was $70 and that the material loading charge was 83.25%.
(a)
Determine the profit margin per hour on labor. (Round answer to 2 decimal places, e.g. 10.50.)
Profit margin on labor
$
per hour
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(b)
Determine the profit margin on materials.
(c)
Determine the total price of labor and materials on a job that was completed after the fire that required 150 hours
of labor and $60,000 in parts and materials
Exercise 8-16
Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells
reading lamps.
Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $10
from an outside vendor. Division A needs 10,000 lamps for the coming year.
Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers are estimated at
40,000 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $7 per lamp and include
$1 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of
fixed costs for Division B is $80,000. Consider the following independent situations.
(a)
What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum
transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 15.25.)
Minimum transfer price accepted by Division B
Maximum transfer price paid by Division A
$
per unit
$
per unit
(b)
Suppose Division B could use the excess capacity to produce and sell externally 15,000 units of a new product
at a price of $7 per unit. The variable cost for this new product is $5 per unit. What should be the minimum
transfer price accepted by Division B for the $10,000 lamps and the maximum transfer price paid by Division
A? Justify your answer
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ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(c) If Division A needs 15,000 lamps instead of 10,000 during the next year, what should be the
minimum transfer price accepted by Division B and the maximum transfer price paid by Division A?
Justify your answer.
Problem 8-1A
Dewitt Corporation needs to set a target price for its newly designed product M14–M16. The following
data relate to this new product.
Per Unit
Direct materials
$20
Direct labor
$40
Variable manufacturing overhead
$10
Fixed manufacturing overhead
Variable selling and administrative expenses
Fixed selling and administrative expenses
Total
$1,440,000
$5
$960,000
These costs are based on a budgeted volume of 80,000 units produced and sold each year. Dewitt uses
cost-plus pricing methods to set its target selling price. The markup percentage on total unit cost is 30%.
(a)
Compute the total variable cost per unit, total fixed cost per unit, and total cost per unit for M14–M16.
Variable cost per unit
$
Fixed cost per unit
Total cost per unit
$
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(b)
Compute the desired ROI per unit for M14-M16
(c)
Compute the target selling price for M14-M16
(d)
Compute the variable cost per unit, fixed cost per unit, and total cost per unit assuming that 60,000
M14-M16s are sold during the year.
Problem 8-6A
Comm Devices (CD) is a division of Worldwide Communications, Inc. CD produces pagers and other
personal communication devices. These devices are sold to other Worldwide divisions, as well as to other
communication companies. CD was recently approached by the manager of the Personal Communications
Division regarding a request to make a special pager designed to receive signals from anywhere in the
world. The Personal Communications Division has requested that CD produce 12,000 units of this special
pager. The following facts are available regarding the Comm Devices Division.
Selling price of standard pager
$95
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
Variable cost of standard pager
50
Additional variable cost of special pager
30
For each of the following independent situations, calculate the minimum transfer price, and determine
whether the Personal Communications Division should accept or reject the offer.
(a)
The Personal Communications Division has offered to pay the CD Division $105 per pager. The CD
Division has no available capacity. The CD Division would have to forgo sales of 12,000 pagers to
existing customers in order to meet the request of the Personal Communications Division.
Minimum transfer price
$
Personal Communications Division should
the offer.
(b)
The Personal Communications division has offered to pay the CD Division $105 per pager. The CD
division has no available capacity. The CD Division would have to forego sales of 16,000 pagers to
existing customers in order to meet the request of the Personal Communications Division.
ACC560 – Week 5 Homework Chapter 7
Chapter 7: Exercises 2, 5, 9, and 17; Problems 1 and 4
Chapter 8: Exercises 4, 5, 10, and 16; Problems 1 and 6
(c)
The Personal Communications Division has offered to pay the CD Division $100 per pager. The CD
Division has available capacity.