Question

8. Brady Corporation (a multi-product company produces and sells 7.000 units of Product X each year. Each unit of Product X sells for $12 and has a contribution margin of $4. If Product Xis discontinued, $19,000 of the $32,000 in fixed costs charged to Product X could be eliminated. If Product X is discontinued, the company's overall operating income would: a) Decrease by $4,000 per year b) Increase by $9,000 per year c) Increase by $4,000 per year d) Decrease by $9,000 per year e) Decrease by $37,000 per year 9. Huffy Corporation makes wheels that it uses in the production of bicycles. Huffy's costs to produce 100,000 wheels annually are: Direct Materials $30,000 Direct Labor $50,000 Variable Manufacturing Overhead $20,000 Fixed Manufacturing Overhead $70,000 An outside supplier has offered to sell Huffy similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year. If Huffy chooses to buy the wheel from the outside supplier, then annual net operating income would? a) Decrease by $10,000 b) Increase by $70,000 c) Increase by $35,000 d) Increase by $45,000 e) Decrease by $35,000 10. Consider the following statements: 1. A division's net operating income, after deducting both traceable and allocated common fixed costs, is negative. II. The division's avoidable fixed costs exceed its contribution margin. III. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. Which of the above statements is a valid reason for eliminating the division? a) Only III b) Only c) Only II d) Only I and II

Answer 1

Solution 8 Contribution margin of X $ 4.00 per unit No of units sold 7000 units $28,000.00 Contribution earned -Product X $28,000.00 If product X is discontinued, Contribution lost $ 19,000.00 9,000.00 Less: Fixed cost avoidable Operating Income decrease Therefore, Option d is correct - Decrease by $9,000 per year Solution 9. Compuation of Avoidable Costs Direct Materials 30,000.00 $50,000.00 $20,000.00 $ 15,000.00 $1,15,000.00 Direct Labour Variable manufacturing overheads Fixed Manufacturing overheads Total Avoidable Costs Computation of Impact of choosing outside supplier ($1.25 x 100000) $1,25,000.00 Wheel's cost Less $1,15,000.00 Costs Avoided $ 45,000.00 Additional revenue by renting $35,000.00 Increase in Operating Income Thus, Option C)-Increase by $35000 is correct Solution 10 A Divison should be eliminated when contribution earned by it is less than its Fixed cost Answer should be C) Only II I. in first condition, Allocated common fixed costs are also considered while eliminating division which is not correct III. Traceable fixed costs plus allocated corporate costs exceeding its contribution margin is not an indicator of elimminating a division

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