Q1.

Q2. Scrooge Company produces a part that is used in the manufacture of one of its products. The
costs associated with the production of 11,000 units of this part are as follows:

DIRECT MATERIAL: $25,000;

DIRECT LABOR: $34,000;
VARIABLE FACTORY OVERHEAD: $65,000;
FIXED FACTORY OVERHEAD: $50, 000.
TOTAL MANUFACTURING COSTS ARE $174,000.

Of the fixed factory overhead costs, $ 9,000 is avoidable

a. Assuming that Scrooge has no viable alternative use for the factory space. Should Scrooge accept
the offer from the supplier who has quoted a price of $12,50 each for the part or not?

b. Would your answer to part A change if the facilities could be rented for $ 10.000 a year?

Answer:
a.
MAKE: $25,000 + $34,000 + $65,000 + $9,000 = $133,000
BUY: $12.50 x 11,000 units = $137,500
Company should continue to make the part.

b.
Net cost to buy: $137,500 - $10,000 = $127,500
Net cost to make: $133,000
Company should buy the part to save the company $5,500
 Q3. Mariam Corporation has the following budgeted sales for the next six-month period:

Month Unit Sales

June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an
inventory of finished products that equal 20% of the unit sales for the next month.

Five pounds of materials are required for each unit produced. Each pound of material costs
$8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory
on June 1 was 15,000 pounds.

Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both
pounds and dollars for each month.

Answer:
a. July August September
Budgeted sales 120,000 210,000 150,000
Add: Required ending inventory 42,000 30,000 36,000

Total inventory requirements 162,000 240,000 186,000

Less: Beginning inventory 24,000 42,000 30,000

Budgeted production 138,000 198,000 156,000

b. July August September

Production in units 138,000 198,000 156,000

Targeted ending inventory in lbs.* 297,000 234,000 252,000

**

Production needs in lbs.*** 690,000 990,000 780,000

Total requirements in lbs. 987,000 1,224,000 1,032,000

Less: Beginning inventory in lbs. 207,000
****
297,000 234,000

Purchases needed in lbs. 780,000 927,000 798,000

Cost ($8 per lb.) x $8 x $8 x $8

Total material purchases $6,240,000 $7,416,000 $6,384,000

*
0.3 times next month's needs
**
(180,000 + 24,000 - 36,000) times 5 lbs. x 0.3
***
5 lbs. times units to be produced
****
(690,000 x .3) = 207,000 lbs.
Q4.
Q5.
Q6. A study has been conducted to determine if one of the departments of Sparrow Company should
be discontinued. The contribution margin in the department is $150,000 per year. Fixed expenses
charged to the department are $130,000 per year. It is estimated that $120,000 of these fixed
expenses could be eliminated if the department is discontinued.

Part (a) If the department is discontinued, what will be the impact on the company’s overall net
operating income?

Part (b) Which costs are irrelevant to this decision?

Part (a) Solution:

CM that would be lost if department is discontinued $(150,000)

Less fixed costs that can be avoided if department is 120,000
discontinued
Increase (decrease) in net operating income $ (30,000)

Part (b) Solution:

Based on this information alone, because the company’s net operating income would
decrease by $30,000 per year, they should not discontinue this department. The common
fixed costs of $10,000 (or $130,000 - $120,000) are irrelevant to this decision.
Q7. Lavender Company produces 2,000 parts per year, which are used in the assembly of one of its
products. The unit product cost of these parts is:
Variable manufacturing cost $64
Fixed manufacturing cost 36
Unit product cost $100
The part can be purchased from an outside supplier at $80 per unit. If the part is purchased from
the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated.
Part (a) What costs are irrelevant to this decision?
Part (b) What would the annual impact on the company’s net operating income be as a result of
buying the part from the outside supplier?

Part (a) Solution:

The avoidable cost = $36*1/3 = $12
The product costs related to making the parts that can be eliminated are the variable
manufacturing costs ($48 per unit) and two-thirds of the fixed manufacturing costs (2/3 x $36 =
$24) for a total of $72 (or $48 + $24) per unit. Those are the costs that are relevant to the “make”
decision. The cost that is relevant to the “buy” decision is the purchase price of $80 per unit.

Since one-third of the fixed manufacturing costs cannot be eliminated, they are irrelevant to this
decision.
The avoidable cost = $36*1/3 = $12

Part (b) Solution:

The annual impact on the company’s net operating income as a result of buying the part from the
outside supplier is determined as follows:

Per Unit
Differential Total Differential
Costs Costs–2,000 Units
Production
“Cost” per
Unit Make Buy Make Buy
Variable manufacturing costs $ 64 $64 $128,000
Fixed manufacturing costs 36
Outside purchase price $80 $160,000
Fixed manufacturing costs
eliminated (24) (48,000)
Total cost $100 $64 $56 $128,000 $112,000
Difference in favor of
purchasing $8 $16,000

The net income will be increased by 2000 * ($100 – ($80 + $12)) = $16000
Q8. Golden Company sells its product for $42 per unit. The company’s unit product cost based on
the full capacity of 400,000 units is as follows.

Direct materials $ 8
Direct labor 10
Manufacturing overhead 12
Unit product cost $30

A special order offering to buy 40,000 units has been received from a foreign distributor. The
only selling costs that would be incurred on this order would be $6 per unit for shipping. The
company has sufficient idle capacity to manufacture the additional units. Two-thirds of the
manufacturing overhead is fixed and would not be affected by this order. Assume that direct
labor is an avoidable cost in this decision. In negotiating a price for the special order, what is the
minimum acceptable selling price per unit?

The minimum acceptable selling price per unit is determined as follows.

Direct materials $ 8
Direct labor 10
Variable manufacturing overhead ($12 x 4
1/3)
Variable selling costs (shipping) 6
Minimum selling price $28
Q9. The financial statements of Dumock, Inc., provide the following information for the current
year:
Dec.31 Jan.1
Accounts receivable....................................................... $35,000 $40,000
Inventory....................................................................... 55,000 51,000
Prepaid expenses............................................................ 12,000 14,000
Accounts payable (for merchandise)................................ 33,000 32,000
Accrued expenses payable.............................................. 15,000 10,000
Net sales........................................................................ 260,000
Cost of goods sold.......................................................... 130,000
Operating expenses (including depreciation of $18,000).... 30,000

1. Refer to the above data. Compute the amount of cash received from customers during the current
year.
Answer
Cash Collections Receipts from Sales
= Sales + Decrease (or - increase) in Accounts Receivable

= Sales + AR " Accounts receivable"

= 260.000 + ( 40.000- 35.000 )

= 265.000

2. Refer to the above data. Compute the amount of Dumock 's cash payments for purchases of
merchandise during the current year.
Answer
Cash payments for purchases = cost of goods sold + increase (or - decrease) in inventory +
decrease (or - increase) in accounts payable
= COGS + Inventory - AP

130.000 + (55.000 – 51.000) – ( 33.000 – 32.000) = $ 133.000

3. Refer to the above data. Compute the amount of Dumock 's cash payments for operating expenses.
Answer
Cash payments for operating expenses = operating expenses + increase (or - decrease) in
prepaid expenses + decrease (or - increase) in accrued liabilities

80.000 – 18.000 – ( 14.000 -12.000) + ( 20.000 -15.000 ) = $ 65.000

Q.10 Trump Corporation is considering the replacement of a piece of equipment that it bought three
years ago for $150,000. At the time of purchase, the equipment was expected to have a useful life of
five years. Trump, whose tax rate is 40%, uses straight-line depreciation.

A: If Trump is able to sell the equipment for $70,000, the net cash flows from the sale are _____.

B: If Trump is able to sell the equipment for $25,000, the net cash flows from the sale are _____.

Answers:

A. $66,000.

B. $39,000.