29. Assuming the Foothall Helmet line is dropped, ioual fised costs remain uncha
ID: 2567082 • Letter: 2
Question
29. Assuming the Foothall Helmet line is dropped, ioual fised costs remain unchanged, and he space formerly used to peoduce the Foodball Helmet line is usod to incrcase the sales of Baseball Helmets by 70%, how will operating income be ameter A. Increase $37,000 B, Increase $22,500 C. Decrease $37,000 D. Decrease $22,500 USE THE FOLLOWING INFORMATION FOR THE NEXT 3 QUESTIONS Lincoln Company peoduces a part thot is used in the manafacture of one of its products. The unit uring costs of this part, assuning a production level of 5,000 units, are as Sollow S3 Direct materials Direct labor Vaniable manaacturing overhcad Total cost $14 BE CAREFUL-THE BUY PRICE THAT ERICKSON COMPANY IS CHARGING LINCOLN COMPANY IS CHANGING IN EACH OF THE NEXT 3 QUESTIONS 30. Erickson Company has offered to sell 5,000 units of the same part to Lincoln Compary for S13 per unit. What should Lincols Company do? A Make the part and save $5,000 B. Make the part and save S15,000 C. Buy from Erickson and save $5,000 D. Buy from Erickson and save $15,000.Explanation / Answer
Solution:
29) the correct option is B. Increase $22,500
Effect of this increase of sales of Baseball Helmets by 70%
Total Fixed Cost – NOT CHANGED
Loss of Contribution from Football Helmet = $30,000
Contribution Margin Ratio of Baseball Helmet = Contribution Margin $75,000 / Sales Revenue $310,000 x 100 =
Increase in Contribution Margin from Increase of sales of Baseball Helmets by 70% = Existing Contribution Margin of Baseball Helmet x 70% = $75,000 x 70% = $52,500
Net Increase in Company’s Operating Income due to dropping of Football Helmet = Increase in Contribution Margin from Baseball Helmet – Loss of Contribution Margin from Football Helmet
= $52,500 - $30,000
= $22,500
Hence, the correct option is B. Increase $22,500
30) The correct option is A. Make the part and save $5,000
The problem is related to the decision making whether make the product in house or buy from the outside supplier.
The Relevant Cost will play a very important role in this type of decision making.
Relevant costs are the future cost which will incur in the future and vary with each alternative course of action.
Relevant Costs are direct materials, direct labor and variable manufacturing overheads since these costs are the variable cost and vary with the output of production. If company will make the product in house this cost incur but if they buy from outside supplier this cost will not incur.
In this type of question, fixed costs are treated as Irrelevant. Since the fixed costs are the sunk cost which will not vary with the production unit. The fixed cost will remain same whether company make the product in house or buy product from outside. Hence Fixed Costs are ignored.
Total Unit Variable Cost for making the product in house = Direct materials $3 + Direct labor $5 + Variable manufacturing overhead $4 = $12 per unit
If company will make product in house, $12 per unit will incur.
Price offered by the Outside Supplier per unit = $13 per unit
If company make product in house $12 per unit incur and if company buy the product from outside $13 per unit will incur. Hence, it is suggested to company to Make the Product in House and Save $1 per unit.
If $1 per unit will be saved by making the product in house, total saving by making the product in house = 5,000 Units x $1 Saving per unit = $5,000
Hence, the correct option is A. Make the part and save $5,000
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
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