Introduction To Managerial Accounting
Introduction To Managerial Accounting
8th Edition
ISBN: 9781259917066
Author: BREWER, Peter C., Garrison, Ray H., Noreen, Eric W.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 11, Problem 7F15

Cane Company manufactures two products called A1pia d Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity produce 10,0000 units of each product Its average cost per unit for each product at this level of activity are given below:
Chapter 11, Problem 7F15, Cane Company manufactures two products called A1pia d Beta that sell for $120 and $80, respectively.
The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are unavoidable and have been allocated to products based on sales dollars.
Required:
(Answer each question independently unless instructed otherwise.)
Assume that Cane normally produces and sells 40,000 Betas per year. What is the financial advantage (disadvantage) of discontinuing the Beta product line?

Expert Solution & Answer
Check Mark
To determine

Concept Introduction:

Financial advantage (disadvantage): Financial advantage (disadvantage) refers to the incremental profit or loss, a company will earn in situations like acceptance of a special order, dropping of a business line, etc.

It is calculated by only considering the relevant costs. The incremental revenues and incremental costs are taken together to calculate financial advantage or disadvantage. Financial advantage refers to incremental net operating income and financial disadvantage refers to incremental net operating loss.

To calculate:

Financial advantage (disadvantage) of discounting Beta from operations.

Answer to Problem 7F15

Solution:

The financial advantage of discounting Beta from operations is $200,000 as Beta was earning - $ 200,000 as net operating loss considering all the relevant costs.

Explanation of Solution

The financial advantage (disadvantage) will be the net operating income lost due to discontinuance of Beta.

Note: The common fixed expenses are unavoidable, thus they are irrelevant costs here.

Net operating income (considering all the relevant costs) −

    Net Operating Income from − Beta
    Sales revenue ($ 80 per unit X 40,000 units)3,200,000
    Less: Variable expenses
    Direct Material ($ 12 per unit X 40,000 units)480,000
    Direct Labor ($ 15 per unit X 40,000 units)600,000
    Variable manufacturing overhead ($ 5 per unit X 40,000 units)200,000
    Variable selling expenses ( $ 8 per unit X 40,000 units)320,000
    Total variable expenses1,600,000
    Less: Traceable fixed manufacturing overhead ( $ 18 per unit X 100,000 units)18,00,000
    Net Operating Loss from - Beta(200,000)

Given, the information for the product Beta −

  • Regular sales units = 40,000 units
  • Selling price per unit = $ 80 per unit
  • Direct Material per unit = $ 12 per unit
  • Direct Labor per unit = $ 15 per unit
  • Variable manufacturing overhead per unit = $ 5 per unit
  • Variable selling expenses per unit = $ 8 per unit
  • Traceable fixed manufacturing overhead = $ 18 per unit

Calculations:

  1. Sales revenue

  2.   Sales revenue = $ 80 per unit X 40,000 unitsSales revenue = $ 3,200,000

  3. Total Variable expenses

  4.   Direct material = $ 12 per unit X 40,000 unitsDirect material = $ 480,000

      Direct labor = $ 15 per unit X 40,000 unitsDirect labor = $ 600,000

      Total Variable manufacturing overhead = $ 5 per unit X 40,000 unitsTotal Variable manufacturing overhead = $ 200,000

      Total Variable selling expenses= $ 8 per unit X 40,000 unitsTotal Variable selling expenses= $ 320,000

      Total variable expenses = Direct material + Direct labor + Variable manufacturing overhead                                           + Variable selling expenses

      Total variable expense = $ 480,000 + 600,000 + $ 200,000 + $ 320,000Total variable expense = $ 1,600,000

  5. Total traceable fixed manufacturing overhead −

  6.   Total traceable fixed manufacturing overhead= $ 18 per unit X 100,000 unitsTotal traceable fixed manufacturing overhead= $ 1,800,000

  7. Net operating loss

  8.   Net operating Loss= Sales revenue  Total variable expenses                                       Total traceable fixed manufacturing overheadNet operating Loss= $ 3,200,000  $ 1,600,000  $ 1,800,000Net operating Loss = - $ 200,000

Conclusion

Thus, the financial advantage of discounting Beta from operations is $ 200,000.

.

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Chapter 11 Solutions

Introduction To Managerial Accounting

Ch. 11 - Give at least four examples of possible...Ch. 11 - Prob. 12QCh. 11 - Define the following terms: joint products, joint...Ch. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Prob. 16QCh. 11 - The Excel worksheet form that appears below is to...Ch. 11 - The Excel worksheet form that appears below is to...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Prob. 9F15Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Prob. 13F15Ch. 11 - Prob. 14F15Ch. 11 - Cane Company manufactures two products called...Ch. 11 - Identifying Relevant Costs Syahn, AB, is a Swedish...Ch. 11 - Prob. 2ECh. 11 - Make or Buy Decision Troy Engines, Ltd,...Ch. 11 - Special Order Decision Imperial Jewelers...Ch. 11 - Volume Trade-off Decisions Outdoor Luggage, Inc.,...Ch. 11 - Prob. 6ECh. 11 - Sell or Process Further Decisions Dorsey Company...Ch. 11 - Volume Trade-Off Decisions Barlow Company...Ch. 11 - Special Order Decision Delta Company produces a...Ch. 11 - Make or Buy Decision Futura Company purchases the...Ch. 11 - Make or Buy Decision Han Products manufactures...Ch. 11 - Volume Trade-Off Decisions Benoit Company produces...Ch. 11 - Prob. 13ECh. 11 - Identification of Relevant Costs Kristen Lu...Ch. 11 - Prob. 15ECh. 11 - Identification of Relevant Costs Bill has just...Ch. 11 - Prob. 17ECh. 11 - Prob. 18PCh. 11 - Dropping or Retaining a Segment Jackson Count...Ch. 11 - Sell or Process Further Decision (Prepared from a...Ch. 11 - Prob. 21PCh. 11 - Prob. 22PCh. 11 - Make or Buy Decision Silven Industries, which...Ch. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Close or Retain a Store Superior Markets. Inc.,...Ch. 11 - Sell or Process Further Decisions Come-Clean...Ch. 11 - Make or Buy Decisions “In my opinion, we ought to...
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