19. Feller Company plans to discontinue a division that generates a total contri

Question

19. Feller Company plans to discontinue a division that generates a total contribution margin of $20,000 per year. Fixed overhead associated with this division is $50,000 of which $5,0000 cannot be eliminated. If the division is discontinued, how would Feller's operating income be affected? A. Have no effect on operating income B. Decrease operating income by $15,000 C. Increase operating income by $25,000 D. Increase operating income by $30,000 E. Increase operating income by $55,000 20. Which of the following statement is true? A. Fixed manufacturing overhead is treated as a period cost under absorption costing method B. Absorption costing method is more useful than variable costing approach in managerial accounting and internal decision-making purposes. C. Variable costing method is used in external financial reporting. D. The term contribution margin appears in the income statement prepared using the absorption costing approach. E. Fixed manufacturing overhead is treated as a product cost under absorption costing method. 21. Delphi Company's policy is to keep 25% of the next month's sales in ending inventory. If sales in April are expected to be 5,800 units, and sales in May are expected to be 8,000 units, how many units should be produced in April? A. 5,250 B. 6.350 C.7,250 D. 7,800 E. 8,500 22. During January, 80,000 units were produced. The standard quantity of material allowed per unit was 3 pounds at a standard cost of $4 per pound. If there was an unfavourable quantity variance of $4,000, the actual quantity of materials used must have been A. 50,000 pounds B. 76,000 pounds C. 84,000 pounds D. 241,000 pounds E. 263,000 pounds

Explanation / Answer

Solution 19:

Loss of contribution margin due to discontinue of division = $20,000

Saving in fixed overhead associated with division = $50,000 - $5,000 = $45,000

Increase (decrease) in net operating income on discontinuance of division = $45,000 - $20,000 = $25,000

Hence option C is correct.

Solution 20:

The true statement is "Fixed manufacturing overhead is treated as a product cost under absorption costing method"

Therefore option E is correct.

Solution 21:

Expected Sale for april = 5800 units

Desired ending inventory for april = 8000*25% = 2000 units

Beginning inventory at april = 5800*25% = 1450 units

Estimated production for april = Expected sales units + desired ending inventory - beginning inventory

= 5800 + 2000 - 1450 = 6350 units

Hence option B is correct.

Solution 22:

Material quantity variance = $4,000 U

(SQ - AQ) * SP = -$4,000

(80000*3 - AQ) * 4 = $4,000

AQ = 241000 pound

Hence option D is correct.

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