I nedd E7-2B Exercises: Set B E7-1B Hewitt Company produces golf discs which it

ID: 2512312 • Letter: I

Question

I nedd E7-2B

Exercises: Set B E7-1B Hewitt Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is: Make incremental analysis for special-order decision. $ 10,000 24,000 Variable overhead Fixed overhead 50,000 $104,000 Total Hewitt also incurs 5% sales commission ($0.35) on each disc sold. Tiger Corporation offers Hewitt $4.50 per disc for 4,000 discs. Tiger would sell the discs under its own brand name in foreign markets not yet served by Hewitt. If Hewitt accepts the offer, its fixed overhead will increase from $50,000 to $55,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order. Instructions (a) Prepare an incremental analysis for the special order (b) Should Hewitt accept the special order? Why or why not? (c) What assumptions underlie the decision made in part (b)? Penn Company manufactures toasters. For the first 8 months of 2012, the com- Make incremental analys E7-2B pany reported the following operating results while operating at 75% of plant capacity for special order. (S0 Sales (400,000 units) Cost of goods sold Gross profit Operating expenses Net income $4,000,000 2,800,000 1,200,000 900,000 300,000 Cost of goods sold was 75% variable and 25% fixed. Operating expenses were 70% van able and 30% fixed. In September, Penn Company receives a special order for 50,000 toasters at $8 each a Company of Mexico City. Acceptance of the order would result in $8,000 of operating expenses from Topek shipping costs but no increase in fixed Instructions (a) Prepare an incremental analysis for the special order. (b) Should Penn Company accept the special order? Why or why not? E7-3B Weaver Company is the creator of B.Go, a technology that weaves siver into its Use i special order (S0 3) fabrics to kill bacteria and odor on clothing while managing heat. B-Go has become very popular as an undergarment for sports activities. Operating at capacity, the company can produce 1,000,000 undergarments of B-Go a year: The per unit and the total costs for an individual garment when the company operates at full capacity are as follows. Total Per Undergarment Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses $2,000,000 500,000 1,000,000 1,250,000 250,000 0.50 $5.00 $5,000,000 Totals The U.S. Army has approached Weaver and expressed an interest in purchasing 200,000 B-Go undergarments for personnel in extremely warm climates. The Army would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. In addition, the Army has agreed to pay an additional $1.00 per undergarment to cover all other costs and provide a profit. Presently, Weaver is operating at 70 percent capacity and does not have any other potential buyers for B-Go. If Weaver accepts the Army's offer, it will not incur any variable selling expenses related to this order

Explanation / Answer

Problem E7-2B

Affect on Profit from special order

Question is related on the decision making based on relevant cost.

Relevant Cost is the cost which will be incurred in future and different under each alternative course of action. The following costs are considered as relevant cost:

- Direct material cost

- Direct labor cost

- Variable manufacturing overhead

- Variable Cost of Goods Sold

- Variable selling and administrative expenses

- Fixed Cost which is directly related to the alternative course of action.

The above costs are the variable cost which will vary with the production volume. Hence these costs have both the characteristic of relevant cost i.e. it is a future cost and different under each alternative course of action.

Sometimes there are some fixed costs which will directly associated with the production or increase production units and have characteristics of relevant cost. i.e. future cost and different under each alternative course of action.

Irrelevant cost is the costs which do not play any role in decision making. Irrelevant Cost is the SUNK Cost which has already been incurred and does not change whether company accept or reject the order. Hence it is treated as IRRELEVANT COST.

Part 1 --- Incremental Analysis of Special Order

Current Capacity of the company (75%) = 400,000 Units

Full Capacity of the Company = 400,000 Units / 75% = 533,333 Units

It means company has idle capacity of 25% and can make the units by using the same plant facility upto 133,333 Units.

Special Order Units = 50,000 Units

If means company can easily make the Special Order Units. SO we need to identify all the relevant cost that will be incurred if the special order is accepted.

Unit Variable Cost of Goods Sold = ($2,800,000 * 75%) / 400,000 Units = $2,100,000 / 400,000 = $5.25

Unit Variable Operating Expenses = (900,000 * 70%) / 400,000 Units = $1.575 per unit

Incremental Analysis of Special Order

Increase in Sales Revenue (50,000 toasters @ $8)

$400,000

Less: Variable Cost of Goods Sold (50,000*5.25)

$262,500

Less: Variable Operating Expenses (50,000*$1.575)

$78,750

Incremental Contribution Margin

$58,750

Less: Increase in Shipping Cost

$8,000

Incremental Profit from Special Order

$50,750

If Special Order is accepted, the company’s profit will be increased by $50,750

Note --- Fixed Cost does not play any role in decision making since it is considered as SUNK COST i.e. the cost which had already been incurred in past and will not incur in future. Hence ignored.

Part 2 – The company should accept the special order since it will increase the company’s profit by $50,750