ACC 202

E 12-1 1. The company chronically runs at capacity and the old Model A3000
machine is the company’s constraint. Management is considering the purchase
of a new Model B3800 machine is to use in addition to the company’s present
Model A3000 machine. The old Model A3000 machine will continue to be
used to capacity as before, with the new Model B3800 being used to expand
production. The increase in volume will be large enough to require increases
in fixed selling expenses and in general administration overhead, but not in the
general fixed manufacturing overhead. 2. The old Model A3000 machine is
not the company’s constraint, but management is considering replacing it with
a new Model B3800 machine because of the potential savings in direct
materials cost with a new machine. The Model A3000 machine would be sold
This change will have no effect on production or sales, other than some
savings in direct materials costs due to less waste.

Item Case 1 Case 2

a. Sales revenue _RELEVANT_____ RELEVANT_________
b. Direct materials RELEVANT_____ RELEVANT_________
c. Direct labor RELEVANT______ __NO___
d. Variable manufacturing RELEVANT_______ ____NO__
overhead
e. Book value—Model A3000 RELEVANT_____ __NO__
machine
f. Disposal value—Model _ RELEVANT __ __ NO ______
A3000 machine
g. Depreciation—Model A3000 _ NO _____ _ RELEVANT_____
machine
h. Market value—Model _ RELEVANT_____ ___ NO ____
B3800 machine (cost)
i. Fixed manufacturing _ RELEVANT_____ ___ NO ____
overhead
j. Variable selling expense _ RELEVANT_____ __ NO _____
k. Fixed selling expense _ RELEVANT_____ _ RELEVANT_
l. General administrative RELEVANT_____ ____NO
overhead

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 E 12-2 : 1. No, the housekeeping program should not be discontinued. It is actually
generating a positive program segment margin and is, of course, providing a valuable
service to seniors. Computations to support this conclusion follow:
INCREASE
DROPPED OR
TOTAL TOTAL DECREASE
Revenues $928,000 $678,000 $(250,000)
Variable expenses 468,000 317,000 151,000
Contribution margin 460,000 361,000 (99,000)

Fixed
expenses:
Depreciation 70,100 70,100 0
Liability insurance 43,400 28,200 15,200
administrators’ salaries 114,800 79,100 35,700
General administrative 185,600 185,600 0
overhead
Total fixed expenses 413,900 363,000 50,900
Net operating income $ 46,100 $(2,000) $(48,100)

Depreciation on the van is a sunk cost and the van has no salvage value since it would
be donated to
another organization. The general administrative overhead is allocated and none of it
would be avoided if the program were dropped; thus it is not relevant to the decision.

2.
To give the administrator of the entire organization a clearer picture of the financial
viability of each of the organization’s programs, the general administrative overhead
should not be allocated. It is a common cost that should be deducted from the total
program segment margin. Following the format introduced in an earlier chapter for a
segmented income statement, a better income statement would be:

Revenues $928,000 $270,000 $408,000 $250,000

Variable expenses 468,000 110,000 207,000 151,000
Contribution margin 460,000 160,000 201,000 99,000

Traceable
fixed
expenses:
Depreciation 70,100 8,500 40,800 20,800
Liability insurance 43,400 20,300 7,900 15,200
Program administrators’ salaries 114,800 40,100 39,000 35,700
Total traceable fixed expenses 228,300 68,900 87,700 71,700
Program segment margins 231,700 $ 91,100 $113,300 $ 27,300
General administrative overhead 185,600
Net operating income (loss) $46,100
E13-1:
(a) Current liability.
(b) Current liability.

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 (c) Current liability or long-term liability depending on term of warranty.
(d) Current liability.
(e) Current liability.
(f) Current liability.
(g) Current or noncurrent liability depending upon the time involved.
(h) Current liability.
(i) Current liability.
(j) Current liability.
(k) Current liabilities or long-term liabilities as a deduction from face value of note.
(l) Footnote disclosure (assume not probable and/or not reasonably estimable).
(m) Current liability.
(n) Current liability.
(o) Footnote disclosure.
(p) Separate presentation in either current or long-term liability section.

E13-2
(a) Sept. 1 Purchases...................................................... 50,000
Accounts Payable.............................. 50,000
Oct. 1 Accounts Payable........................................ 50,000
Notes Payable..................................... 50,000
Oct. 1 Cash.................................................................. 50,000
Discount on Notes Payable....................... 4,000
Notes Payable..................................... 54,000
(b) Dec. 31 Interest Expense........................................... 1,000
Interest Payable.................................. 1,000
($50,000 X 8% X 3/12)
Dec. 31 Interest Expense........................................... 1,000
Discount on Notes Payable............ 1,000
($4,000 X 3/12)
c) (1) Note payable $50,000
Interest payable 1,000
$51,000
(2) Note payable $54,000
Less discount ($4,000 – $1,000) 3,000
$51,000

E13-12:
1. Compute the payback period for the equipment. If the company rejects all
proposals with a payback period of more than four years, would the equipment be
purchased?
No. Payback period = 4.8 years
2. Compute the simple rate of return on the equipment. Use straight line deprerciation
based on the equipment's useful life. Would the equipment be purchased if the
company requires a rate of return of at least 14%.
No. Rate of Return = 13%

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