GEN COMBO MANAGERIAL ACCOUNTING FOR MANAGERS; CONNECT 1S ACCESS CARD
GEN COMBO MANAGERIAL ACCOUNTING FOR MANAGERS; CONNECT 1S ACCESS CARD
4th Edition
ISBN: 9781259911682
Author: Eric Noreen
Publisher: McGraw-Hill Education
Question
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Chapter 7, Problem 7.18P
To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The financial advantage of investing additional capital of $80,000 in fixed selling expense.

Expert Solution
Check Mark

Answer to Problem 7.18P

Explanation of Solution

    ParticularAmount $
    Sales
      75000unit×$32perunit
    2,400,000
    Less: Variable expense
    Direct materials
      75000unit×$10.00perunit
    750,000
    Direct labor
      75000unit×$4.50perunit
    337,500
    Variable manufacturing overhead
      75000unit×$2.30perunit
    172,500
    Variable selling expenses
      75000unit×$1.20perunit
    90,000
    Contribution margin1,050,000
    Less: fixed expense
    Fixed manufacturing overhead300,000
    Fixed selling expense
      210,000unit+$80,000
    290,000
    Net income 460,000
    Less: net income under current policy330,000
    Incremental net income 130,000

Unit product cost for both years by using super variable costing would include direct materials of $19 per unit. Net operating income for year is $8,000.

  60,000units+25%(60,000units)=75,000units

Increase in fixed selling expense will lead to increase in sales from current policy of 60000 units to 75000 units. Increase in sales and the fixed selling expense will lead to increase the net income by $130000

Thus increased fixed selling expense is justified

The net income under the current policy of selling 60000 units as shown below:

    ParticularAmount $
    Sales
      60,000unit×$32perunit
    1920000
    Less: Variable expense
    Direct materials
      60000unit×$10.00perunit
    600000
    Direct labor
      60000unit×$4.50perunit
    270000
    Variable manufacturing overhead
      60000unit×$2.30perunit
    138000
    Variable selling expenses
      60000unit×$1.20perunit
    72000
    Contribution margin840000
    Less: fixed expense
    Fixed manufacturing overhead300000
    Fixed selling expense 210000
    Net income 330000

Hence the net income under the current policy of selling 60000 units is $330,000

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The break-even price per unit

Expert Solution
Check Mark

Answer to Problem 7.18P

The per unit break-even price on the order is $22.15

Explanation of Solution

Per unit break-even price on the order:

    ParticularAmount $
    Direct material per unit 10
    Add: direct labor per unit4.50
    Add: variable manufacturing overhead2.30
    Add: variable selling expense 3.20
    Add: import duties per unit 1.70
    Add: permit and license per unit ()0.45
    Per unit break-even price $22.15

Thus, the per unit break-even price on the order is $22.15

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The unit cost figure that is relevant for setting a minimum selling price.

Expert Solution
Check Mark

Answer to Problem 7.18P

The relevant cost per unit is $1.20.

Explanation of Solution

The relevant cost of the units that are considered to be seconds is the variable selling expense. Direct material, direct labor and variable manufacturing overhead costs are already incurred. It implies all the three costs are sunk cots. Thus the relevant cost per unit is $1.20.

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: The total contribution margin, total fixed cost, financial advantage and the effect closing the plant for two month.

Expert Solution
Check Mark

Answer to Problem 7.18P

The fixed selling expense to be incurred on closing the plant is $28,000.

Explanation of Solution

The impact on profit of closing the plant as:

    ParticularAmount $Amount $
    Contribution margin lost42000
    Fixed costs:
    Fixed manufacturing overhead cost(30000)
    Fixed selling expense (28000)(58000)
    Net disadvantage of closing the plant (16000)

Thus, the net disadvantage of closing the plant is $16,000.

The contribution margin per unit current policy

    ParticularAmount$
    ASelling price per unit 32
    Variable expense per unit
    BDirect material10
    CDirect labor4.50
    DVariable manufacturing overhead2.30
    EVariable selling expenses 1.20
    F=B+C+D+ETo variable expense per unit 18
    G=AFContribution margin per unit 14

Thus the contribution margin per unit under current policy is $14

The contribution margin lost:

  contributionmarginlost=unitsfor2months×%canbesold×contributionmargin=( 60000units 12months×2months)×30%×$14=10,000units×30%×$14=$42,000

Thus the contribution margin lost during the closure of the plant is $42,000

The fixed manufacturing overhead to be incurred on closing the plant

  Fixedmanufacturingoverhead=Totalcost12months×2months×30%=$30000012month×2months×60%=$30,000

The fixed selling expense to be incurred on closing the plant

  Fixedsellingexpense=Totalcost12months×2months×(100%20%)=$210,00012month×2months×80%=$28,000

Thus, the fixed selling expense to be incurred on closing the plant is $28,000

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.

To compute: avoidable cost per unit

Expert Solution
Check Mark

Answer to Problem 7.18P

The unit cost that will be relevant is $20.95

Explanation of Solution

The unit cost will be relevant if the outside supplier supplies the required units as:

    ParticularAmount$
    ADirect material10
    BDirect labor4.50
    CVariable manufacturing overhead2.30
    DFixed manufacturing overhead cost

      $5.00×75%

    3.75
    EVariable selling expenses

      $1.20×13

    0.40
    F=A+B+C+D+ETotal relevant cost per unit 20.95

Thus the unit cost that will be relevant is $20.95

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