Question

    Question 8 refers to the following:

Wintertime Company produces the handles which are used in the production of their snow shovels. Wintertime’s costs to produce 80,000 handles annually are as follows:

                                         Direct materials              $25,000

                                         Direct labor                      42,000

                                         Variable overhead            28,000

                                         Fixed overhead                 65,000

                                         TOTAL                       $160,000

An outside supplier has offered to sell Wintertime similar handles for $1.50 per handle. If the handles are purchased from the outside supplier, $50,000 of annual fixed factory overhead will continue, and the facilities now being used to make the handles could be rented to another company for $40,000 per year.

8.           If Wintertime chooses to buy the handles from the outside supplier, then the change in annual net income due to accepting the offer is a:

a. $30,000 decrease.

b. $80,000 increase.

c. $30,000 increase.

d. $65,000 increase.

9.          Hanna Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 15,000 units per year is:

                                        Direct materials                   $1.30

                                        Direct labor                           2.10

                                        Variable overhead                   .40

                                        Fixed overhead                        .25

                                        Variable selling and

                                        administrative expense          .50

                                        Fixed selling and

                                          administrative expense          .70

The normal selling price is $12 per unit. The company’s capacity is 20,000 units per year. An order has been received from a mail-order house for 5,000 units at a special price of $6 per unit. This order would not disturb regular sales. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company’s total fixed costs.)

a. $8,500 increase

b. $8,500 decrease

c. $3,750 increase

d. $3,750 decrease

10.        Refer to the data in #9. Assume the company has 1,500 units of this product left over from last year that are vastly inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost figure is relevant for establishing a minimum selling price for these units?

a. $4.30

b. $ .50

c. $5.25

d. none of the costs are relevant

Answer 1

8.

The change in the annual net income would be $ 30,000 increase. Looking at the calculations as below:

Earlier Company is spending $ 160,000 as the cost of manufacturing 80,000 handles. If the company purchases it from outside, the cost involved is $ 120,000 (at the rate of $ 1.50 per handle) but fixed factory overheads of $ 40,000 will be still there as additional cost so, the total cost for the company is $ 170,000 if they purchase it from outside rather than manufacturing.

Also, the company is earning an additional $ 40,000 as rental income so, the total cost for the company for outsourcing the handles would be $ 130,000 ($ 170,000 less $ 40,000) while the company is spending $ 160,000 as the cost of manufacturing the handles and so, the company's income will increase by $ 30,000 so, (c) is the correct answer.

9.

in this case, the normal activity level of the company is 15,000 units of production with a total cost of $ 78,750 but the full capacity of production of the company is 20,000 units. that is, if a special order of 5,000 units is received then it can be produced without disturbing the regular activity of the company.

Cost of Manufacturing at a regular capacity of 15,000 units:

Particulars	Per Unit Cost	Total Cost
Direct Material	$ 1.30	$ 19,500
Direct Labor	$ 2.10	$ 31,500
Variable Overheads	$ 0.40	$ 6000
Fixed Overheads	$ 0.25	$ 3,750
Variable Selling and Administrative Expense	$ 0.50	$ 7,500
Fixed Selling and Administrative Expense	$ 0.7	10,500
Total Cost		$ 78,750

Cost of Manufacturing at a regular capacity of 20,000 units:

Particulars	Per Unit Cost	Total Cost
Direct Material	$ 1.30	$ 26,000
Direct Labor	$ 2.10	$ 42,000
Variable Overheads	$ 0.40	$ 8,000
Fixed Overheads		$ 3,750
Variable Selling and Administrative Expense	$ 0.50	$ 10,000
Fixed Selling and Administrative Expense		10,500
Total Cost		$ 100,250

if we compare the total cost of production at 15,000 units ($ 78,750) and at 20,000 ($ 100,250) units and their respective sales revenue:

for 15,000 units sold at the rate of $ 12 per unit is $ 180,000

for 20,000 units:

first 15,000 units sold at the rate of $ 12 per unit is $ 180,000

additional 5,000 units sold at the rate of $ 6 per unit is $ 30,000

so, the total sales revenue for 20,000 units sold is $ 210,000 (Sum of $ 180,000 and $ 30,000)

$Profit = Sales Revenue - Total Cost$

Adding values to the equation:

$Profit = $ 180,000 - $ 78,750$

Profit by selling 15,000 units is $ 101,250 as calculated below:

$Profit = $ 101,250$

Similarly, calculating the profit by selling 20,000 units:

$Profit = Sales Revenue - Total Cost$

Adding Values to the equation for 20,000 units sold:

$Profit = $ 210,000 - $ 100,250$

So the profit calculated is $ 109,750 by selling 20,000 units

$Profit = $ 109,750$

Now, the difference between profit by selling 20,000 units ($ 109,750) and 15,000 units ($ 101,250) is $ 8,500 that is, the profit increases by $ 8,500 if there is a sale of a special order of 5,000 units at a special price of $ 6 per unit without impacting the regular 15,000 units of production and sale.

10.

As per the data in 9 above, if 1,500 units are still left to be sold and should be sold with minimum pricing than the company should think of covering the variable costs and if we consider only the variable costs for these 1,500 units, than the total cost comes to $ 6,450 and the per-unit cost is $ 4.30 so, (a) is the correct answer.

Direct Material Cost per unit is given as $ 1.30

Direct Labor Cost per unit is given as $ 2.10

Variable Overheads Cost per unit is given as $ 0.40

Variable Selling and administrative Cost per unit is given as $ 0.50

if we total these per unit variable costs given in the question, then also the per-unit cost is $ 4.30 to be considered for selling the 1,500 leftover units to be sold in the market.