Able Company’s unit manufacturing cost is: Variable costs $50 Fixed costs 25 A s
ID: 2709286 • Letter: A
Question
Able Company’s unit manufacturing cost is: Variable costs $50 Fixed costs 25 A special order for 2,000 units has been received from a foreign company. The unit price requested is $55. The normal unit price is $80. If the order is accepted, unit variable costs will increase by $2 for additional freight costs. If the order is accepted, incremental profit (loss) will be
$(46,000)
$6,000
$(40,000)
$10,000
Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs:
$220,000
$190,000
$200,000
$210,000
Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs:
$34,000
$35,000
$38,000
$42,000
What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?
It is relevant since it reduces the cost of the new equipment.
It is not relevant since it reduces the cost of the old equipment.
It is not relevant to the decision since it does not impact the cost of the new equipment.
It is relevant since it increases the cost of the new equipment.
Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:
Old Machine
New Machine
$59,400
$90,000
$210,000
$300,000
The potential effects of the decision to eliminate a line of business on existing employees and the community are
ignored in incremental analysis.
quantitative factors.
qualitative factors.
opportunity costs.
Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs:
Direct materials $120,000 Direct labor 25,000 Variable overhead 45,000 Fixed overhead 30,000If Tex's Manufacturing Company purchases the component externally, $20,000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying?
$220,000
$190,000
$200,000
$210,000
Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs:
Direct materials $13,000 Direct labor 15,000 Variable overhead 3,000 Fixed overhead 7,000None of Crigui’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Crigui would be willing to accept to acquire the 60,000 units externally?
$34,000
$35,000
$38,000
$42,000
What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?
It is relevant since it reduces the cost of the new equipment.
It is not relevant since it reduces the cost of the old equipment.
It is not relevant to the decision since it does not impact the cost of the new equipment.
It is relevant since it increases the cost of the new equipment.
Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:
Old Machine
New Machine
Price $300,000 $600,000 Accumulated Depreciation 90,000 -0- Remaining useful life 10 years -0- Useful life -0- 10 years Annual operating costs $240,000 $180,600If the old machine is replaced, it can be sold for $24,000.
Which of the following amounts is relevant to the replacement decision?
$59,400
$90,000
$210,000
$300,000
The potential effects of the decision to eliminate a line of business on existing employees and the community are
ignored in incremental analysis.
quantitative factors.
qualitative factors.
opportunity costs.
Explanation / Answer
1.Able Company
Variable cost per unit = $50.
Additional variable cost due to freight = $2 per unit
Unit price = $55 per unit
Incremental profit per unit = $55 - $50 - $2 =$3 per unit
Total incremental profit = $3 * 2000 units = $6,000
2. Tex’s Manufacturing company
Total cost for making the component = $120,000 + $25,000 + $45,000 + $30,000 = $220,000
If the company plans to buy the component externally then it addition to the price of the component it has to pay unavoidable fixed costs of $10,000.
In order to be indifferent between making and buying, the cost of making and buying the component should be equal.
Total cost of making = Total cost of buying
$220,000 = External price of the component + $10,000
External price of the component = $220,000 - $10,000 = $210,000
3. Crigui Music
Variable cost for producing CDs = $13,000 + $15,000 + $3,000 = $31,000
The fixed overhead of $7,000 is unavoidable and shall be incurred even if CDs are bought externally. Hence, these fixed costs shall be ignored.
Maximum external price = Variable cost for producing CDs + Additional profit contribution from producing new product
Maximum external price acceptable = $31,000 + $4,000 = $35,000
4. Trade in allowance is the reduction in the purchase price of the new equipment when old equipment is provided to the seller.
It is relevant since it reduces the cost of the new equipment.
5. The amount relevant to the replacement decision is the savings in the annual operating costs.
Hence, answer is $240,000 - $180,600 = $59,400
6. The potential effects of the decision to eliminate a line of business on existing employees and the community are Qualitative factors.
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