Question

What is the residual income for Rushville Division with investment? (а) (b) (c) 9. $34,200. $ 6,000 $10,200 S 6,600. What is the return on investment for Rushyille Division with the additional project investment? (a) (b) 10. 34.20% 12.00%. 14.87 % (d) 15.00%. 11. Mattoon Company uses part 65A in the production of color printers. Unit manufacturing costs of part 65A are shown below. MATTOON COMPANY UNIT COSTS INCURRED FOR PRODUCING PART 65A Direct materials 8.00 Direct labor 2.00 Variable manufacturing overhead Fixed manufacturing overhead 1.00 4.00 Mattoon uses 100,000 units of 65A per year. Joliet, Inc. has offered to sell Mattoon 100,000 units of 65A per year for $12 per unit. If the company buys the part from Joliet, fixed manufacturing overhead in total will not change. Should Mattoon make or buy the part? (a) Make the part because it will save $100,000. (b) Buy the part because it will save $100,000. (c) Make the part because it will save $300,000. (d) Buy the part because it will save $300,000.

Answer 1

Solution We shall prepare the differential analysis to analyse the financial advantage (disadvantage) of buying the parts from the outside supplier (Joliet, Inc.), as under: Differential Analysis Buy from Outside supplier Continue to make the part Differential Effect on Income 100,000 100,000 No. of units Unit cost: Purchase price ($12 x 100,000) Direct material cost ($8 x 100,000) Direct labor cost ($2 x 100,000) Variable manufacturing overhead ($1 x 100,000) Fixed manufacturing overhead ($4 x 100,000) Total cost $1,200,000 SO $0 $0 $400,000 $1,600,000 $0 $800,000 $200,000 $100,000 $400,000 $1,500,000 ($1,200,000) $800,000 $200,000 $100,000 $0 ($100,000) The financial disadvantage of buying the Parts from outside supplier is $100,000. If the Mattoon Company buys the parts from outside supplier, it would incurr incremental losses of $100,000. Hence, the Mattoon Company should continue to make the Parts as it will save $100,000. The correct option is, (a) Make the part because it will save $100,000.