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

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.)

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?

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.

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

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.

HOME DECOR COMPANY
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.

Required:

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.)

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.)