Question

Problem 1)

The management of VITULLO Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called FIZBE, is a component of the company’s finished product.

         The following information was collected from the accounting records and production data for the year ending December 31, 2017.

1. 5,000 units of FIZBE were produced in the machining department.
2. Variable manufacturing costs applicable to the production each FIZBE unit were: direct materials $4.75, direct labor $4.60, Indirect labor $0.45, utilities $0.35.
3. Fixed manufacturing costs applicable to the production of FIZBE were:

COST	DIRECT	ALLOCATED
Depreciation	$1,100	$900
Property Taxes	500	200
Insurance	900_____	600_____
	$2500	$1700

All variable manufacturing and direct fixed costs will be eliminated if FIZBE is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 5,000 FIZBE units from a supplier is $56,000.
5. If FIZBE units are purchased, freight and inspection costs would be $0.30 per unit, and receiving costs totaling $500 per year would be incurred by the Machining Department.

Instructions

1. Prepare an incremental analysis for FIZBE. Your analysis should have columns for (1) Make FIZBE, (2) Buy FIZBE, and (3) Net Income Increase/Decrease.
2. Based on your analysis, what decision should management make?
3. Would the decision be different if VITULLO Company has the opportunity to produce $6,000 of net income with the facilities currently being used to manufacture FIZBE? Show Computations.
4. What nonfinancial factors should management consider in making its decision?

Problem 2)

Panda Corporation has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $129,000 and the divisional results shown below.

                                                                                  Division

	I____	___II____	_III____	IV____
Sales	$510,000	$400,000	$310,000	$170,000
Cost of Goods Sold	300,000	250,000	270,000	156,000
Selling and Administration Expenses	60,000	80,000	75,000	70,000
Income (loss) from operations	$150,000	$70,000	$(35,000)	$(56,000)

Analysis Reveals the following percentages of variable costs in each division.

                                                                                  Division

	I____	___II____	_III____	IV____
Cost of Goods Sold	70%	80%	70%	90%
Selling and Administration Expenses	40%	50%	60%	70%

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

Top management is very concerned about the unprofitable divisions (III and IV). Consensus is that one or both of the divisions should be discontinued.

Instructions

1. Compute contribution margin for Divisions III and IV.
2. Prepare an incremental analysis concerning the possible discontinuance of (1) Division III and (2) Division IV. What course of action do you recommend for each division?

Extra Credit

3. Prepare a columnar condensed income statement for Panda Corporation, assuming Division IV is eliminated. (Use the CVP format). Division IV’s unavoidable fixed costs are allocated equally to the continuing divisions.
4. Reconcile the total income from operations ($129,000) with the total income from operations without Division IV.

Answer 1

Problem 1 .

Make or Buy Fibze

Make Cost Incurred

Direct Material   = 5000*4.75

Direct Labour = 5000*4.60

Indirect Labour = 5000.0.45

Utilites = 5000*.35

Total Direct Cost = 5000* 10.15 = $ 50750 + 2500+1700 = $ 54950

Buy 5000 @5

1. Make or Buy Fibze

Make Cost Incurred

Direct Material   = 5000*4.75

Direct Labour = 5000*4.60

Indirect Labour = 5000.0.45

Utilites = 5000*.35

Total Direct Cost = 5000* 10.15 = $ 50750 + 2500+1700 = $ 54950

Buy 5000 @56000 + freight $ 1500 +Receiving cost $ 500

Total Cost on buy would be $ 58000

1. If bought it would result in incremental cost of $ 58000-53250 = 4750
2. The management should continue to produce rather than procure 5000 units as buy would result in incremental cost of $ 4750
3. The direct cost to manufacture is $ 10.65 and procurement cost is 11.2 , which is higher , hence it would be advisable to produce 6000 units rather than buy.
4. The non financial factors that affect the decision of management are the capacity of production , the quality of product and the relations with the suppliers .

6000 + freight $ 1500 +Receiving cost $ 500

Total Cost on buy would be $ 58000

1. If bought it would result in incremental cost of $ 58000-53250 = 4750
2. The management should continue to produce rather than procure 5000 units as buy would result in incremental cost of $ 4750
3. The direct cost to manufacture is $ 10.65 and procurement cost is 11.2 , which is higher , hence it would be advisable to produce 6000 units rather than buy.
4. The non financial factors that affect the decision of management are the capacity of production , the quality of product and the relations with the suppliers .

Problem 2

i) Contribution Margin

Particulars	I	II	III	IV
Sales	510000	400000	310000	170000
VC	70	80	70	90
Selling Distribution	40	50	60	70
Cost of Goods Sold	300000	250000	270000	156000
SD	60000	80000	75000	70000
VC	234000	240000	234000	189400
Contribution	276000	160000	76000	-19400
Fixed Cost	126000	90000	111000	36600
Income	150000	70000	-35000	-56000

ii)

Division IV		Division III
VC	189400		234000
Sales	170000		310000
Decrease in revenue	-19400		76000

To Close down division IV would be good decision as it is generating negative contribution .

iii) if Division IV is eliminated , the income statement would be

Fixed Cost of Division IV would be 50% = 36600 *50/100 = 18300 to be allocated equally among three divisions

Sales	510000	400000	310000
VC	70	80	70
Selling Distribution	40	50	60
Cost of Goods Sold	300000	250000	270000
SD	60000	80000	75000
VC	234000	240000	234000
Contibution	276000	160000	76000
Fixed Cost	126000	90000	111000
Allocated FD	6100	6100	6100
Net Income	143900	63900	-41100

iv) The total income from operations without Division IV would be 166700 ( 143900+63900-41100)