Question

6.          A merchandising company has two departments, Y and Z. A recent monthly income statement for the company follows:

                                                                                                    Department                                 .

                                                                         Total                                    Y                                   Z

Sales                                              $3,300,000               $2,500,000                    $800,000

Less variable expenses                  2,000,000                                                     1,400,000                                                                  600,000

             Contribution margin                        1,300,000                1,100,000                                                      200,000

             Less fixed expenses                         830,000             525,000                       305,000

             Net income (loss)                          $ 470,000             $575,000                    $(105,000)

A study indicates that $150,000 of the fixed expenses being charged to department Z are sunk costs and allocated costs that will continue even if Z is dropped. In addition, the elimination of department Z will result in a 10 percent decrease in the sales of department Y. If department Z is dropped, what will be the effect on the income of the company as a whole?

a. $155,000 increase

b. $155,000 decrease

c. $295,000 increase

d. $295,000 decrease

7.          For many years Donner Company has purchased the motors that it installs in its standard line of hair dryers.

             Due to a reduction in output of certain of its products, the company has idle capacity that could be used to

             produce the motors. The chief engineer has recommended against this move, however, pointing out that

the cost to produce the motors would be greater than the current $16.45 per unit purchase price, based on production of 40,000 units:

                                                                            Per Unit                Total

                   Direct materials                                $5.25

                   Direct labor                                        4.10

                   Supervision                                        4.00              $160,000

                   Depreciation                                         .75              $ 30,000

                   Variable overhead                              2.50

                   Rent                                                   0.50              $ 20,000

                                    TOTAL COST                $17.10

A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge above is allocated based on space utilized in the plant. The total rent on the plant is $100,000 per period. The dollar advantage or disadvantage per period of making the widgets would be:

a. $24,000 disadvantage

b. $24,000 advantage

c. $26,000 disadvantage

d. $26,000 advantage

Answer 1

   option b as per the workings below      
          
6)   if department z is dropped      
          
loss from department z      
          
   contribution lost from dept z   $2,00,000.00   
   (-) avoidable fixed expenses   $(1,55,000.00)  
          
$45,000.00   
          
1)   net loss from department z       $45,000
   unavoidable fixed cost or sunkscost are not relevant for decision making      
          
loss from department y     
          
   contribution lost @ 10% of total contribtuion   $1,100,000*10%  
$ 110000  
          
2)   net loss from department y       $1,10,000.00
          
   total net loss (1+2)       $1,55,000.00
          
   so option is b there is a decrease of $155000      

7)   Answer is option b  
      
   statement showing the incremental profit  
      
per unit
   direct material   $5.25
   direct labour   $4.10
   supervsison   $4
   variable ovderhead   $2.50
      
   total   $15.85
   DEPRICIATION AND RENT ARE IRREVELVANT FOR   
   DECISION MAKING THEY ARE NOT CONSIDERED  
   SUPERVISIORS SALARY IS RELEVANT FOR DECISION MAKING  
      
   PURCHASE PRICE OF PRODUCT   $16.45
      
   LESS:UNIT PRICE TO PRODUCE   $15.85
      
   NET BENEFIT PER UNIT   $0.60
      
      
   TOTAL PROFIT FOR 40000 UNITS(40000*.60)   $24,000.00
      
   there will be profit of $24000