Instructors Solutions Manual for Cost Accounting, 5Ce

11-29 (60 min.) Multiple choice; comprehensive problem on relevant costs.

You may wish to assign only some of the parts.

Per Unit

Total Fixed Variable

Manufacturing costs: Direct materials $1.30 Direct manufacturing labour 1.48 Variable manuf. indirect costs 0.92 Fixed manuf. indirect costs 0.75 $4.45 $0.75 $3.70 Marketing costs: Variable $1.72 Fixed 1.10 2.82 1.10 1.72 $7.27 $1.85 $5.42 1. (d) $4.45

Manufacturing Costs

Variable $3.70 Fixed 0.75 Total $4.45

2. (e) None of the above. Decrease in operating income is $3,000.

Old Differential New Sales 300,000 $7.50 $2,250,000 + $240,900* 345,000 $7.22 $2,490,900 Variable costs Manufacturing 300,000 $3.70 1,110,000 + 166,500 345,000 $3.70 1,276,500 Marketing and other 300,000 $1.72 516,000 + 77,400 345,000 $1.72 593,400 Variable product costs 1,626,000 + 243,900 1,869,900 Contribution margin 624,000 3,000 621,000 Fixed costs: Manufacturing $0.75 25,000

12 mos. =

225,000

225,000

Marketing and other $1.10 300,000 330,000 330,000 Fixed product costs 555,000 - 555,000 Operating income $ 69,000 $ 3,000 $ 66,000

*Incremental revenue:

$7.22 (45,000) $324,900

Deduct price reduction

$0.28 (300,000) 84,000

$240,900

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Chapter 11

11-29 (contd)

3. (c) $3,750

If this order were not landed, fixed overhead would be underallocated by $3,750. Therefore, taking the order increases operating income by $1,500 plus $3,750, or $5,250.

Another way to present the same idea follows:

Sales will increase by [5,000 ($4.45) = $22,250] + $1,500 $23,750 Costs will increase by 5,000 ($3.70) 18,500 Fixed overhead will not change Change in operating income $ 5,250

Note that this answer to (3) assumes that variable marketing costs are not influenced by this contract. These 5,000 units do not displace any regular sales.

4. (c) $5,150 less ($5,250 $10,400)

Government Contract Regular Customers

As above $5,250 Sales, 5,000 (7.50) $37,500 Increase in costs: Variable costs only: Manufacturing, 5,000 (3.70) $18,500 Marketing, 5,000 (1.72) 8,600 27,100 Fixed costs are not affected Change in operating income $ 10,400

5. (c) $5.08: Selling price to break even

Differential costs: Variable: Manufacturing $3.70 Shipping 0.86 $4.56 (10,000) $45,600 Fixed: $5,200 10,000 0.52 (10,000) 5,200 $5.08 (10,000) $50,800

6. (e) $1.72, the variable marketing costs. The other costs are past costs, and are therefore irrelevant.

7. (e) None of these. The correct answer is $4.419. This part always gives students trouble. The short-cut solution below is followed by a longer solution that is helpful to students.

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Instructors Solutions Manual for Cost Accounting, 5Ce

11-29 (contd) Shortcut solution: The highest price to be paid would be measured by those costs that could be avoided by halting production and subcontracting:

Variable manufacturing costs $3.700 Fixed manufacturing costs saved $112,500 300,000 0.375 Marketing costs (0.20 $1.72) 0.344 $4.419

Longer but clearer solution:

Comparative Annual Income Statement

Present Difference Proposed

Sales [300,000*$7.5] $2,250,000 $ $2,250,000 Variable costs: Manufacturing, 300,000 3.70 1,110,000 +215,700 1,325,700* Marketing and other, 300,000 $1.72 516,000 103,200 412,800 Variable product costs 1,626,000 1,738,500 Contribution margin 624,000 511,500 Fixed costs: Manufacturing 225,000 112,500 112,500 Marketing and other 330,000 330,000 Total fixed costs 555,000 442,500 Operating income $ 69,000 $ 0 $ 69,000

*This solution is obtained by filling in the above schedule with all the known figures and working from the bottom

up and from the top down to the unknown purchase figure. Maximum variable costs that can be incurred:

$1,738,500 $412,800 = maximum purchase costs, or $1,325,700. Divide $1,325,700 by 300,000 units, which yields a

maximum purchase price of $4.419.

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