Question

1) Markson Company had the following results of operations for the past year:

Sales (8,000 units at $20.70)				$	165,600
Variable manufacturing costs	$	88,800
Fixed manufacturing costs		15,700
Variable selling and administrative expenses		14,800
Fixed selling and administrative expenses		20,700			(140,000	)
Operating income				$	25,600

A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $15.05 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,670 for the purchase of special tools. Markson’s annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

2) Granfield Company has a piece of manufacturing equipment with a book value of $36,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,200. Granfield can purchase a new machine for $112,000 and receive $21,200 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,200 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Answer 1

Page ① Date: Page No. Markson Company Total capacity = 12000 units Existing capacity utilization = 8000 units Sperre capocity 4000 units foreign company's orde = 2000 units Statement from of cost Benefit add honal order ? $ 30100 ($ 22200) Revenue (2000 x $15.05) - Variable manufacturing cost ( $88800 x 2000) 8000 Inercare in fixed overhead (Avoidable fixed overhead) $ 1670) Net Benckit $ 6230 - If - Markson accepts its profts will this additional business increase by $6230 A the order unan As spore capacity is available enough to produce Ordeu unavoidable fixed overhead are not relevant for decision making as there are sunk Lost in continue to our Whether or not order is aceepted

Page ② Date: -1 _Page No. current mochine is replored with new machine Existing Machine's Depreuation: $36000 - 0 Nuo Machines Deprecation = $112000-0 = $28000 Increan in annual depreciation : & 19ooo saving in annual variable - manufacturing cost = $18200 Decrease in Ne et Income $800 lear Income Lors on sale ($36000 - 821200 = $14800 Decrease in $800 $ 800 $ 800 $ poo 2 in Income Year Total deerean & 15600 $ 800 Total Decrean $ 18000