PART A. Starling Co. is considering disposing of a machine with a book value of

Question

PART A. Starling Co. is considering disposing of a machine with a book value of $24,900 and estimated remaining life of five years. The old machine can be sold for $5,300. A new high-speed machine can be purchased at a cost of 65,500. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $23,400 to $20,100 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is

a.increase of $43,700 b.increase of $56,810 c.decrease of $43,700 d.decrease of $56,810

PART B .The following data is given for the Starling Co. :

Round your final answer to the nearest dollar. Do not round interim calculations.

The fixed factory overhead volume variance is

a.$54,460 unfavorable b.$54,460 favorable c.$23,763 unfavorable d.$23,763 favorable

Part C. Starling Co. is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $18.00 per unit. The unit cost for the business to make the part is $21.00, including fixed costs, and $11.00, excluding fixed costs. If 32,913 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?

a.$98,739 cost increase b.$592,434 cost decrease c.$230,391 cost decrease d.$230,391 cost increase

Budgeted production (at 100% of normal capacity) 1,017 units Actual production   966 units Materials:     Standard price per pound $1.82     Standard pounds per completed unit 10     Actual pounds purchased and used in production 9,370     Actual price paid for materials $19,209 Labor:     Standard hourly labor rate $14.96 per hour     Standard hours allowed per completed unit 4.6     Actual labor hours worked 4,974.9     Actual total labor costs $75,867 Overhead:     Actual and budgeted fixed overhead $1,086,000     Standard variable overhead rate $26.00 per standard labor hour     Actual variable overhead costs $139,297 Overhead is applied on standard labor hours.

Explanation / Answer

A)

The Income Decrease by $43700.

B)

Actual and Budgeted Fixed Overhead cost = $1086000

Budgeted Production = 1017 units

Absorbed Rate = $1086000 / 1017 = $1067.85

Absorbed Overhead = Actual Production * Absorbed Rate

= 966 * $1067.85

= $1031543

Fixed Overhead Volume Variance = Budgeted Overhead - Absorbed Overhead

= $1086000 - $1031543

= $54457

C)

Purchase Cost = 32913 * $18 = $592434

Making Cost = 32913 * $11 = $362043

Differential Cost = $592434 - $362043 = $230391 Decrease

Particulars Old Machine New Machine Differential Revenues :- Sale of Machine $5300 $5300 Cost ;- Purchase Price $65500 $65500 Annual Manufacturing Cost ($23400*5) = $117000 ($20100*5) = $100500 ($16500) Income/(Loss) ($117000) ($160700) ($43700)

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