Accounting Handout Questions

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Acct 5200
Chapter 12 Handout Questions
2. Minimum acceptable price of the special order for Crandle Manufacturers Inc.
Only variable costs are relevant for the special order, as fixed costs will not change.
Variable costs per unit:
•
Direct materials: $140
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Direct labor: $100
•
Manufacturing support: $105
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Marketing costs: $55
Total variable costs per unit = $140 + $100 + $105 + $55 = $400
Thus, the minimum acceptable price for the special order should cover the variable costs.
Answer: A) $400
3. Decision on Snapper Tool Company’s special order
Let’s compare the operating profit with and without the special order.
Without special order:
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Operating profit: $32,000
With special order:
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Operating profit: $32,800
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The increase in operating profit is $32,800 – $32,000 = $800.
The company should accept special orders because they increase operating profits.
Answer: D) Yes, since operating profits will most likely increase.
4. Lowest price Dantley’s Furniture should bid
Dantley’s Furniture has surplus capacity, so only variable costs must be considered for the longterm order.
Variable costs per unit:
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Total manufacturing costs: $240
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Percentage variable costs: 75%
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Variable cost per unit: $240 * 75% = $180
Thus, the lowest price per unit should cover the variable costs.
Answer: B) $180
4. Swan Manufacturing’s one-time-only special order
a. Full cost per unit if marketing costs are $3,000:
Full cost = Total manufacturing costs + Marketing costs Full cost = $7,025 + $3,000 = $10,025
b. Contribution margin per unit:
Contribution margin = Selling price – Variable costs Variable costs = Direct materials + Direct
labor + Variable manufacturing support Variable costs = $1,825 + $900 + $1,300 = $4,025
Contribution margin per unit = $10,537.50 – $4,025 = $6,512.50
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c. Relevant costs for making the decision:
Relevant costs include all variable costs, which will change with the special order. Fixed costs
are not relevant since they do not change with the order.
d. Minimum acceptable price:
The minimum acceptable price should cover the variable costs: Minimum acceptable price =
Variable costs per unit = $4,025
e. Consideration of a price of $5,400:
Since $5,400 exceeds the variable costs ($4,025), the order would cover the variable costs and
contribute to fixed costs and profit. Thus, Swan Manufacturing should consider the price of
$5,400.
Answer: Swan Manufacturing should consider a price of $5,400 per unit because it covers
the variable costs and contributes to profit.
5. Incremental analysis for Sarasota Bicycles
a. Incremental analysis:
Make
Buy
$600,000
$0
Direct labor (200,000 units @ $720,000
$0
Direct materials (200,000
units @ $3.00)
$3.60)
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Variable manufacturing
$216,000
$0
$0
$1,600,000
Total variable cost
$1,536,000
$1,600,000
Fixed manufacturing
$84,000
$84,000
$1,620,000
$1,684,000
overhead (30% of direct
labor)
Purchase cost (200,000 units
@ $8.00)
overhead
Total cost
b. Decision:
Since the total cost of making the wheels ($1,620,000) is less than the total cost of buying the
wheels ($1,684,000), Sarasota Bicycles should continue making the wheels.
Answer: Sarasota Bicycles should not buy the wheels from an outside supplier. The cost of
making the wheels is $64,000 less than buying them.
6. Decision for Rubium Micro Devices
a. Relevant costs for making:
Direct materials: $54.00 Direct labor: $35.00 Variable overhead: $40.00 Total variable cost per
unit: $129.00
Fixed overhead elimination: $89,000 Fixed overhead per unit (assuming 6,000 units): $34.00
b. Decision:
Total cost to make per unit = $163.00 Total cost to buy per unit = $144.00
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Savings in fixed overhead if bought: $89,000 Cost savings per unit if bought: $19 per unit ($163
– $144)
Cost difference for 6,000 units: Total cost to make = $163 * 6,000 = $978,000 Total cost to buy
= $144 * 6,000 = $864,000 Fixed overhead savings = $89,000
Net savings if buy = $978,000 – $864,000 – $89,000 = $25,000
Answer: B) Buy; savings = $25,000
7. Impact of discontinuing the travel book line
Travel book line contribution margin = $97,000
Direct costs to be avoided:
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Order and delivery processing: $25,000
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Rent (per sq. foot used): $4,000
Total direct costs to be avoided: $25,000 + $4,000 = $29,000
Net impact on profits = Contribution margin – Direct costs to be avoided = $97,000 – $29,000 =
$68,000
Answer: C) $68,000