Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capa

Question

Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso's plant manager is considering making the headlights now being purchased form an outside supplier for $11 each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4 of direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of: A) $(2.00) B) $1.60 C) $0.40 D) $2.80 25. Product R19N has been considered a drag on profits at Buzzco Corporation for some time and management is considering discontinuing the product altogether Data Iron t k company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is discontinued. What would be the effect on the company's overall net operating income if product R19N were dropped? A) Overall net operating income would decrease by $59,000. B) Overall net operating income would decrease by $22,000 B) Overall net operating income would increase by $59,000. D) Overall net operating income would increase by $22,000.

Explanation / Answer

Answer 24 Cost of headlight being purchased from outside supplier = $11 Per unit Cost of manufacture of headlight by Peluso Company Type of cost Variable Fixed Total Direct Material $4.00 $0.00 $4.00 Direct labour $3.00 $0.00 $3.00 Manufacturing overhead $3.60 $2.40 $6.00 Total Cost per Unit $10.60 $2.40 $13.00 Cost of purchase per unit $11.00 Net gain per unit $0.40 The answer is option C i.e.$0.40 per unit Answer 25 Contribution margin from Product R19N Sales $2,70,000.00 Less : Variable exp. $1,32,000.00 Contribution margin $1,38,000.00 If company discontinue Product R19N , then it has to forego the contribution margin. Effect of discontnue Product R19N on Company's overall net operating income are as under Decrease in Net Income due to Contribution margin -$1,38,000.00 Increase in Net Income by avoiding fixed Mfg EXP. $49,000.00 Increase in Net Income by avoiding fixed Selling exp. $30,000.00 Overall Decrease in net Income   -$59,000.00 The answer is option A Overall net operating income would decrease by $59000

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