Question

1. Part U16 is used by Mcvean Corporation to make one of its products. A total of 18,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

	Per Unit
Direct materials	$	3.90
Direct labor	$	8.50
Variable manufacturing overhead	$	9.00
Supervisor's salary	$	4.40
Depreciation of special equipment	$	2.80
Allocated general overhead	$	8.00

An outside supplier has offered to make the part and sell it to the company for $28.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $30,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

2. Two products, QI and VH, emerge from a joint process. Product QI has been allocated $31,300 of the total joint costs of $52,000. A total of 2,600 units of product QI are produced from the joint process. Product QI can be sold at the split-off point for $15 per unit, or it can be processed further for an additional total cost of $10,600 and then sold for $17 per unit. If product QI is processed further and sold, what would be the financial advantage (disadvantage) for the company compared with sale in its unprocessed form directly after the split-off point?

3.

Elfalan Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 46,000 units per month is as follows:

	Per Unit
Direct materials	$	45.60
Direct labor	$	8.70
Variable manufacturing overhead	$	1.70
Fixed manufacturing overhead	$	18.50
Variable selling & administrative expense	$	3.00
Fixed selling & administrative expense	$	14.00

The normal selling price of the product is $98.10 per unit.

An order has been received from an overseas customer for 2,600 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.80 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $82.40 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Answer 1

1. Financial advantage of buying = avoidable cost of making- cost of buying + additional segment margin

=(3.90+8.50+9+4.4)*18,000 -28.7*18,000 +30,000

=$(22,200)

I.e. disadvantage

2.financial advantage of processing = sales revenue after processing - sales revenue at split off point - cost of processing

= 2,600*17-2600*15-10,600

=$(5,400)

Disadvantage

Joint cost is sunk cost and irrelevant

3.advantage = incremental revenue - incremental costs

=(82.40-45.6-8.7-1.7-1.2)*2,600

=$65,520