Managerial Accounting Tools for Business Decision Making 7th Edition Weygandt Solutions Manu

Managerial Accounting Tools for Business Decision

Making 7th Edition Weygandt Solutions Manual

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 CHAPTER 7
Incremental Analysis

ASSIGNMENT CLASSIFICATION TABLE

Brief A
Learning Objectives Questions Exercises Do It! Exercises Problems

1. Describe management’s 1, 2, 3, 4 1, 2 1 1, 18
decision-making process and
incremental analysis.

2. Analyze the relevant costs in 5 3 2 2, 3, 4, 18 1A

accepting an order at a
special price.

3. Analyze the relevant costs in 6, 7 4 3 5, 6, 7, 8, 18 2A

a make-or-buy decision.

4. Analyze the relevant costs in 8, 9, 10 5, 6 4 9, 10, 11, 3A

determining whether to sell or 12, 18
process materials further.

5. Analyze the relevant costs to 11 7 5 13, 14, 18 4A

be considered in repairing,
retaining or replacing
equipment.

6. Analyze the relevant costs in 12 8 6 15, 16, 17, 5A

deciding whether to eliminate 18
an unprofitable segment.

Copyright © 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Solutions Manual (For Instructor Use Only) 7-1
ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time

Number Description Level Allotted (min.)

1A Use incremental analysis for special order and identify Simple 20–30
nonfinancial factors in the decision.

2A Use incremental analysis related to make or buy, Moderate 30–40

consider opportunity cost, and identify nonfinancial
factors.

3A Determine if product should be sold or processed further. Moderate 30–40

4A Compute gain or loss, and determine if equipment should Moderate 30–40

be replaced.

5A Prepare incremental analysis concerning elimination of Moderate 30–40

divisions.

7-2 Copyright © 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Solutions Manual (For Instructor Use Only)
Copyright © 2015 John Wiley & Sons, Inc.

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

*1. Describe management’s decision- Q7-1 Q7-4 BE7-1 DI7-1
making process and incremental Q7-2 E7-1 BE7-2
analysis. Q7-3 E7-18
*2. Analyze the relevant costs in Q7-5 BE7-3 DI7-2 P7-1A
accepting an order at a special E7-18 E7-2
Weygandt, Managerial Accounting, 7/e, Solutions Manual

price. E7-3
E7-4
*3. Analyze the relevant costs in a Q7-6 BE7-4 DI7-3 E7-6 P7-2A
make-or-buy decision. Q7-7 E7-5 E7-7
E7-18 E7-8
*4. Analyze the relevant costs in Q7-8 E7-18 BE7-5 E7-9 E7-12
determining whether to sell or Q7-9 BE7-6 E7-10
process materials further. Q7-10 DI7-4 E7-11
P7-3A
*5. Analyze the relevant costs to be Q7-11 BE7-7 E7-14 E7-13
considered in repairing, retaining E7-18 DI7-5 P7-4A
or replacing equipment.
*6. Analyze the relevant costs in Q7-12 BE7-8 E7-15 P7-5A
deciding whether to eliminate E7-18 DI7-6 E7-16
an unprofitable segment. E7-17
Broadening Your Perspective BYP7-1 BYP7-2 BYP7-8 BYP7-3
(For Instructor Use Only)

BYP7-4 BYP7-6
BYP7-5 BYP7-7
7-3
 ANSWERS TO QUESTIONS

1. The following steps are frequently involved in management’s decision-making process:

(1) Identify the problem and assign responsibility.
(2) Determine and evaluate possible courses of action.
(3) Make a decision.
(4) Review results of the decision.

2. My roommate is incorrect. Accounting contributes to the decision-making process at Steps 2 and 4.

Prior to the decision, accounting provides relevant revenue and cost data for each course of action.
Following the decision, internal reports are prepared to show the actual impact of the decision.

3. Disagree. Incremental analysis involves the identification of financial data that change under
alternative courses of action.

4. In incremental analysis, the important point to consider is whether costs will differ (change)
between the two alternatives. As a result, sometimes (1) variable costs do not change under the
alternative courses of action and (2) fixed costs do change.

5. The relevant data in deciding whether to accept an order at a special price are the incremental
revenues to be obtained compared to the incremental costs of filling the special order.

6. The manufacturing costs that are relevant in the make-or-buy decision are those that will change
if the parts are purchased.

7. Opportunity cost may be defined as the potential benefit that may be obtained by following an
alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the
facilities used to make the part can be used to generate additional income.

8. The decision rule in a decision to sell a product or to process it further is: Process further as
long as the incremental revenue from the additional processing exceeds the incremental
processing costs.

9. Joint products are products that are produced from a single raw material and a common
production process. An accounting issue related to joint products is how to allocate the joint costs
incurred during the production process that creates the joint products.

10. Joint costs are irrelevant to a sell-or-process-further decision because they are sunk costs and
will not change whether the decision is to sell the existing product or process it further. Therefore,
joint costs are ignored in this decision.

11. A sunk cost is a cost that cannot be changed by any present or future decision. Sunk costs, such
as the book value of an old piece of equipment, therefore, are not relevant in a decision to retain
or replace equipment.

12. Net income will be lower if an unprofitable product line is eliminated when the product line is
producing a positive contribution margin and its fixed costs cannot be avoided or reduced.
 SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7-1

The correct order is:

1. Identify the problem and assign responsibility.

2. Determine and evaluate possible courses of action.
3. Make a decision.
4. Review results of the decision.

BRIEF EXERCISE 7-2

Net Income
Alternative Alternative Increase
A B (Decrease)
Revenues $160,000 $180,000 ($ 20,000)
Costs 100,000 125,000 (25,000)
Net income $ 60,000 $ 55,000 ($ 5,000)

Alternative A is better than Alternative B.

BRIEF EXERCISE 7-3

Net Income
Reject Accept Increase
Order Order (Decrease)
Revenues $0 $75,000* ($ 75,000)
Costs—Variable manufacturing 0 60,000** ( (60,000)
Shipping 0 9,000*** ( (9,000)
Net income $0 $ 6,000 ($ 6,000)

The special order should be accepted.

*3,000 X $25
**3,000 X $20
***3,000 X $ 3
BRIEF EXERCISE 7-4

Net Income
Increase
Make Buy (Decrease)
Variable manufacturing costs $50,000 $ –0– $ 50,000
Fixed manufacturing costs 30,000 30,000 0
Purchase price –0– 60,000 (60,000)
Total annual cost $80,000 $90,000 ($(10,000)

The decision should be to make the part.

BRIEF EXERCISE 7-5

Process Net Income
Sell Further Increase (Decrease)
Sales price per unit $62.00 $70.00 $8.00
Cost per unit
Variable 36.00 42.00 ( (6.00)
Fixed 10.00 10.00 0
Total 46.00 52.00 ( (6.00)
Net income per unit $16.00 $18.00 $2.00

The bookcases should be processed further because the incremental

revenues exceed incremental costs by $2.00 per unit.

BRIEF EXERCISE 7-6

The allocated joint costs are irrelevant to the sell or process further
decisions. If AB1 is processed further, the company will earn incremental
revenue of $50,000 ($150,000 – $100,000) and only incur incremental costs of
$45,000. Therefore, the company should process AB1 further and sell AB2.
If XY1 is processed further, the company will earn incremental revenue of
$35,000 ($130,000 – $95,000) but will incur incremental costs of $50,000.
Therefore, the company should sell XY1 rather than process it further.
BRIEF EXERCISE 7-7
Net 5-Year
Income
Retain Replace Increase
Equipment Equipment (Decrease)
Variable manufacturing costs
for 5 years $3,000,000 $2,500,000 ($ 500,000
New machine cost (30,000) 400,000 ((400,000)
Sell old machine (30,000) 30,000
Total $3,000,000 $2,870,000 $ 130,000

The old factory machine should be replaced.

BRIEF EXERCISE 7-8

Net Income
Continue Eliminate Increase (Decrease)
Sales $200,000 $ –0– $(200,000)
Variable costs 180,000 –0– (180,000)
Contribution margin 20,000 ( –0– (20,000)
Fixed costs 30,000 20,000) ( 10,000)
Net income ($ (10,000) $(20,000) $ (10,000)
The Big Bart product line should be continued because $20,000 of
contribution margin will not be realized if the line is eliminated. This
amount is greater than the $10,000 savings of fixed costs.

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 7-1

Net Income
Alternative Alternative Increase
1 2 (Decrease) Sunk (s)
Revenues $65,000 $60,000 $(5,000)
Maintenance expense 5,000 5,000 0
Operating expenses 26,000 22,000 4,000
Equipment upgrade 17,000 0 0 S
Opportunity cost 4,000 0 4,000
$3,000
DO IT! 7-2
 Net Income
Reject Accept Increase (Decrease)
Revenues $ –0– $180,000 $180,000
Costs $ –0– 144,000* (144,000)
Net income $ –0– $ 36,000 $ 36,000
*(6,000 X $20) + (6,000 X $4)
Given the results of the above analysis, Maize Company should accept the
special order.

DO IT! 7-3

(a)
Net Income
Make Buy Increase (Decrease)
Direct materials $ 30,000 $ –0– $ 30,000
Direct labor 42,000 –0– 42,000
Variable manufacturing
costs 45,000 –0– 45,000
Fixed manufacturing
costs 60,000 45,000 15,000
Purchase price –0– 162,000* (162,000)
Total cost $177,000 $207,000 $ (30,000)

*60,000  $2.70

Given the results of the above analysis, Wilma Company will incur
$30,000 of additional costs if it buys the switches.

(b)
Net Income
Make Buy Increase (Decrease)
Total cost $177,000 $207,000 $(30,000)
Opportunity cost 34,000 –0– 34,000
Total cost $211,000 $207,000 $ 4,000
Yes, the answer is different: The analysis shows that net income will
be increased by $4,000 if Wilma Company purchases the switches.
DO IT! 7-4

Process Net Income Increase

Sell Further (Decrease)
Sales per unit $75 $100 $25
Cost per unit
Variable $40 $ 59 ($19)
Fixed 10 13 (3)
Total $50 $ 72 ($22)
Net income per unit $25 $ 28 $ 3
The tables should be processed further and Mesa Verde should finish the
tables because the incremental revenues exceed incremental costs by
$3 per unit.

DO IT! 7-5

Retain Replace Net Income

Equipment Equipment Increase (Decrease)
Operating expenses $120,000 $120,000
Repair costs 40,000 40,000
Rental revenue $ (60,000) 60,000
New machine cost 170,000 (170,000)
Sale of old machine (25,000) 25,000
Total cost $160,000 $ 85,000 75,000

DO IT! 7-6

Net Income
Continue Eliminate Increase (Decrease)
Sales $500,000 $ 0 $(500,000)
Variable costs 370,000 0 370,000
Contribution margin 130,000 0 (130,000)
Fixed costs 150,000 38,000 112,000
Net income $ (20,000) $(38,000) $ (18,000)
The analysis indicates that Gator should not eliminate the gloves and mittens
line because net income would decrease $18,000.
 SOLUTIONS TO EXERCISES
EXERCISE 7-1
1. False. The first step in management’s decision-making process is “identify
the problem and assign responsibility”.
2. False. The final step in management’s decision-making process is to
review the results of the decision.
3. True.
4. False. In making business decisions, management ordinarily considers
both financial and nonfinancial information.
5. True.
6. True.
7. False. Costs that are the same under all alternative courses of action do
not affect the decision.
8. False. When using incremental analysis, either costs or revenues or both
will change under alternative courses of action.
9. False. Sometimes variable costs will not change under alternative courses
of action, but fixed costs will.

EXERCISE 7-2

(a) Net Income

Reject Accept Increase
Order Order (Decrease)
Revenues ($4.80) $ –0– $24,000 $24,000
Materials ($0.50) –0– (2,500) (2,500)
Labor ($1.50) –0– (7,500) (7,500)
Variable overhead ($1.00) –0– (5,000) (5,000)
Fixed overhead –0– (6,000) (6,000)
Sales commissions –0– –0– –0–
Net income $ –0– $ 3,000 $ 3,000
(b) As shown in the incremental analysis, Gruden should accept the special
order because incremental revenue exceeds incremental expenses by
$3,000.
(c) It is assumed that sales of the golf discs in other markets would not be
affected by this special order. If other sales were affected, Gruden would
have to consider the lost sales in making the decision. Second, if Gruden
is operating at full capacity, it is likely that the special order would be
rejected.
EXERCISE 7-3

(a) Net Income

Reject Accept Increase
Order Order (Decrease)
Revenues (15,000 X $7.60) $0 $114,000 ($114,000)
Cost of goods sold 0 78,000 (1) ( (78,000)
Operating expenses 0 31,800 (2) ( (31,800)
Net income $0 $ 4,200 ($ 4,200)

(1) Variable cost of goods sold = $2,600,000 X 70% = $1,820,000.

Variable cost of goods sold per unit = $1,820,000 ÷ 350,000 = $5.20
Variable cost of goods sold for the special order = $5.20 X 15,000
= $78,000.

(2) Variable operating expenses = $840,000 X 80% = $672,000

$672,000 ÷ 350,000 = $1.92 per unit
15,000 X $1.92 = $28,800
$28,800 + $3,000 = $31,800

(b) As shown in the incremental analysis, Moonbean Company should accept

the special order because incremental revenues exceed incremental
expenses by $4,200.

EXERCISE 7-4

Net Income
Reject Accept Increase
Order Order (Decrease)
Revenues $0 $1,187,500 (1) $1,187,500
Variable costs:
Direct materials 0 500,000 (500,000)
Direct labor 0 187,500 (187,500)
Variable overhead 0 250,000 (250,000)
Total variable costs 0 937,500 (937,500)
Net income $0 $ 250,000 $ 250,000
(1) [($2.00 + $0.75 + $1.00 + $1.00) X 250,000]
Klean Fiber should accept the Army’s offer since it would increase net
income by $250,000.
EXERCISE 7-5

(a) Net Income

Increase
Make Buy (Decrease)
Direct materials (30,000 X $4.00) $120,000 $ 0 $ 120,000
Direct labor (30,000 X $5.00) 150,000 0 150,000
Variable overhead costs
($150,000 X 70%) 105,000 0 105,000
Fixed manufacturing costs 45,000 45,000 0
Purchase price (30,000 X $12.95) 0 388,500 ( (388,500)
Total annual cost $420,000 $433,500 ($ (13,500)
(b) No, Pottery Ranch should not purchase the finials. As indicated by the
incremental analysis, it would cost the company $13,500 more to pur-
chase the finials.

(c) Yes, by purchasing the finials, a total cost saving of $6,500 will result
as shown below.
Net Income
Increase
Make Buy (Decrease)
Total annual cost (above) $420,000 $433,500 $(13,500)
Opportunity cost 20,000 0 (20,000)
Total cost $440,000 $433,500 $( 6,500)

EXERCISE 7-6

(a) 1.
Net Income
Increase
Make Buy (Decrease)
Direct materials $1,000,000 $ –0– $ 1,000,000
Direct labor 800,000 –0– 800,000
Variable overhead 120,000 –0– 120,000
Fixed overhead 600,000 195,000 405,000
Purchase price 0 2,300,000 (2,300,000)
Total annual cost $2,520,000 $2,495,000 $ 25,000

Yes. The offer should be accepted as net income will increase by $25,000.
EXERCISE 7-6 (Continued)

2.
Net Income
Increase
Make Buy (Decrease)
Direct materials $1,000,000 $ 0 $ 1,000,000
Direct labor 800,000 0 800,000
Variable overhead 120,000 0 120,000
Fixed overhead 600,000 600,000 0
Opportunity cost 375,000 0 375,000
Purchase price 0 2,300,000 (2,300,000)
Totals $2,895,000 $2,900,000 $ (5,000)

No. The offer should not be accepted as net income would be $5,000 less.

(b) Qualitative factors include the possibility of laying off those employees
that produced the robot and the resulting poor morale of the remaining
employees, maintaining quality standards, and controlling the purchase
price in the future.

EXERCISE 7-7

(a) Net Income

Increase
Make Sails Buy Sails (Decrease)
Direct materials $100 $ 0 $ 100
Direct labor 80 0 80
Variable overhead 25 0 25
Purchase price 0 250 (250)
Total unit cost $205 $250 $ (45)

Riggs should be making the sails, because they could save $45 per
unit or $54,000. The president was including the fixed overhead cost
in the calculation. Variable overhead = Total overhead ($90) – Fixed
overhead ($78,000 ÷ 1,200) = $25. This amount has been allocated, so
Riggs will incur the cost whether or not they make the sails. This is an
example of an irrelevant cost, because it does not differ between the
two alternatives.
EXERCISE 7-7 (Continued)

(b) The best decision would be to rent out the space as shown below.
The differential savings would be $77,000 – $54,000 = $23,000.

Net Income
Per Make Increase
(Based on 1,200 units) Unit Sails Buy Sails (Decrease)
Manufacturing cost $205 $246,000 $ 0 $ 246,000
Purchase price $250 0 300,000 (300,000)
Opportunity cost 77,000 0 77,000
Total annual cost $323,000 $300,000 $ 23,000

(c) Qualitative factors to consider would be (1) whether Riggs will be able
to exercise control over the future price of the product (2) whether Riggs
will be able to exercise control over the quality of the product and
(3) the potential for interruptions in the supply of the product.

EXERCISE 7-8

(a) Net Income

Increase
Make IMC2 Buy IMC2 (Decrease)
Direct materials $ 65.00 $ 0 $ 65.00
Direct labor 45.00 0 45.00
Material handling 6.50 0 6.50
Variable overhead 72.00* 0 72.00
Purchase price 0 200.00 (200.00)
Total unit cost $188.50 $200.00 $ (11.50)

*Variable overhead = 60% X ($126.50 – 6.50)

The unit should not be purchased from the outside vendor, as the per
unit cost would be $11.50 greater than if they made it.
EXERCISE 7-8 (Continued)

(b) In order for Innova to make an accurate decision, they would have to
know the opportunity cost of manufacturing the other product. As
determined in (a), purchasing the product from outside would cost
$11,500 more (1,000 X $11.50). Innova would have to increase their
contribution margin by more than $11,500 through the manufacture of
the other product, before it would be economical for them to purchase
the IMC2 from the outside vendor.

(c) Qualitative factors to consider would be (1) quality of the component

(2) on-time delivery, and (3) reliability of the vendor.

EXERCISE 7-9

Net Income
Sell Process Further Increase
(Basic Kit) (Stage 2 Kit) (Decrease)
Sales per unit $30 ( )$36( ) $(6)
Costs per unit
Direct materials $16 ( ) $ 8 (1) $(8)
Direct labor 0 ( ) 9 (2) (9)
Total $16 ( ) $17 ( ) $(1)

Net income per unit $14 ( ) $19 ( ) $(5)

(1) The cost of materials decreases because Anna can make two Stage
2 Kits from the materials for a basic kit.

(2) The total time to make the two kits is one hour at $18 per hour or
$9 per unit.
EXERCISE 7-9 (Continued)

Anna should carry the Stage 2 Kits. The incremental revenue, $6, exceeds
the incremental processing costs, $1. Thus, net income will increase by
processing the kits further.

EXERCISE 7-10

(a) Sales ($60,000 + $15,000 + $55,000) $ 130,000

Joint costs (100,000)
Net income $ 30,000

(b) Sales ($190,000 + $35,000 + $215,000) $ 440,000

Joint costs (100,000)
Additional costs ($100,000 + $30,000 + $150,000) (280,000)
Net income $ 60,000

(c)
Product 10 Product 12 Product 14
(1)
Incremental revenue $ 130,000 $ 20,000 $ 160,000
Incremental costs (100,000) (30,000) (150,000)
Incremental profit (loss) $ 30,000 $(10,000) $ 10,000
(1)
Sales value after further processing – Sales value @ split-off point

Products 10 and 14 should be processed further and product 12 should be

sold at the split-off point.

(d) Sales ($190,000 + $15,000 + $215,000) $ 420,000

Joint costs (100,000)
Additional costs ($100,000 + $150,000) (250,000)
Net income $ 70,000

Net income is $10,000 ($70,000 – $60,000) higher in (d) than in (b) because
product 12 is not processed further, thereby increasing overall profit $10,000.
EXERCISE 7-11

To determine whether each of the three joint products should be sold as is,
or processed further, we must determine the incremental profit or loss that
would be earned by each. The allocated joint costs are irrelevant to the
decision since these costs will not change whether or not the products are
sold as is or processed further.
Spock Uhura Sulu
Incremental revenue $ 90,000* $100,000** $345,000***
Incremental cost (110,000) (85,000) (250,000)
Incremental profit (loss) $ (20,000) $( 15,000 $ 95,000
From this analysis we see that Uhura and Sulu should be processed further
because the incremental revenue exceeds the incremental costs, but Spock
should be sold as is.
*$300,000 – $210,000 **$400,000 – $300,000 ***$800,000 – $455,000

EXERCISE 7-12

(a) The costs that are relevant in this decision are the incremental revenues
and the incremental costs associated with processing the material
past the split-off point. Any costs incurred up to the split-off point are
sunk costs, and therefore, irrelevant to this decision.
(b) Revenue after further processing:
Product D—$60,000 (4,000 units X $15.00 per unit)
Product E—$97,200 (6,000 units X $16.20 per unit)
Product F—$45,200 (2,000 units X $22.60 per unit)
Revenue at split-off:
Product D—$40,000 (4,000 units X $10.00 per unit)
Product E—$69,600 (6,000 units X $11.60 per unit)
Product F—$38,800 (2,000 units X $19.40 per unit)

D E F
Incremental revenue $20,000 $27,600 $ 6,400
Incremental cost (14,000) (20,000) (9,000)
Increase (decrease) in profit $ 6,000 $ 7,600 $(2,600)
Products D and E should be processed further.
(c) The decision would remain the same. It does not matter how the joint
costs are allocated because joint costs are irrelevant to this decision.
EXERCISE 7-13

(a) Cost $100,000

Accumulated depreciation (25,000*)
Book value 75,000
Sales proceeds 50,000
Loss on sale $ 25,000

*One year’s depreciation: ($100,000 – $0) ÷ 4 years

(b)
Net Income
Retain Replace Increase
Scanner Scanner (Decrease)
Annual operating costs $315,000* $240,000** $ 75,000
New scanner cost 110,000 (110,000)
Old scanner salvage (50,000) 50,000
Total $315,000 $300,000 $ 15,000

*(3 years X $105,000)

**[3 years X ($105,000 – $25,000)]

Yes. Twilight Hospital should replace the old scanner because it will
result in a savings of $15,000 over the next three years.

(c) As shown in (a) above, replacing the old scanner will result in
reporting a loss of $25,000. Reluctance to report losses of this nature
is the usual reason for not recognizing that a poor decision was made
in the past. The remaining book value of the old scanner ($75,000) is
a sunk cost. It will be deducted in the future, if the scanner is retained,
or written off now if it is replaced. However, if it is replaced now, that
cost will be partially offset by the salvage value that Dyno is willing to
pay ($50,000).
EXERCISE 7-14

Net Income
Retain Replace Increase
Machine Machine (Decrease)
Operating costs $125,000 (1) ($100,000) (2) ($ 25,000
New machine cost 0 ( 25,000) ( (25,000)
Salvage value (old) 0 ( (6,000) ( 6,000
Total $125,000 ($119,000) ($ 6,000

(1) $25,000 X 5.
(2) $20,000 X 5.

The current machine should be replaced. The incremental analysis shows

that net income for the five-year period will be $6,000 higher by replacing the
current machine.

EXERCISE 7-15
Net Income
Increase
Continue Eliminate (Decrease)
Sales $100,000) $( 0) $(100,000)
Variable costs
Cost of goods sold ( 61,000) ( 0) (61,000)
Operating expenses (30,000) ( 0) (30,000)
Total variable (91,000) ( 0) (91,000)
Contribution margin (9,000) ( 0) (9,000)
Fixed costs
Cost of goods sold (15,000) (15,000) ( 0)
Operating expenses (20,000) (20,000) ( 0)
Total fixed (35,000) (35,000) ( 0)
Net income (loss) $(26,000) $(35,000) $ (9,000)

Veronica is incorrect. The incremental analysis shows that net income will
be $9,000 less if the Percy Division is eliminated. This amount equals the
contribution margin that would be lost through discontinuing the division.

(Note: None of the fixed costs can be avoided.)

EXERCISE 7-16

(a) $30,000 + $70,000 – $40,000 = $60,000

(b) Tingler Shocker Total
Sales $300,000 $500,000 $800,000
Variable expenses 150,000 200,000 350,000
Contribution margin 150,000 300,000 450,000
Fixed expenses 142,500* 267,500** 410,000
Net income $ 7,500 $ 32,500 $ 40,000
*$30,000 + [($300,000 ÷ $800,000) X $300,000]
**$80,000 + [($500,000 ÷ $800,000) X $300,000]
(c) As shown in the analysis above, Cawley should not eliminate the
Stunner product line. Elimination of the line would cause net income
to drop from $60,000 to $40,000. The reason for this decrease in net
income is that elimination of the product line would result in the loss
of $55,000 of contribution margin while saving only $35,000 of fixed
expenses.

EXERCISE 7-17

Calculation of contribution margin per unit:

C D E
Selling price per unit $95 $75 $115
Less: variable costs/unit 50 40 45
Contribution margin/unit $45 $35 $ 70

Fixed costs = $24 X (9,000 + 20,000) = $696,000

Company profit with Products C and D:

C D Total
Units sold 9,000 20,000

Sales revenue $855,000 $1,500,000 $2,355,000

Less: Variable costs 450,000 800,000 $1,250,000
Contribution margin $405,000 $ 700,000 1,105,000
Less: Fixed costs 696,000
Net income $ 409,000
EXERCISE 7-17 (Continued)

Company profit with Products C and E:

C E Total
Units sold 9,900* 10,000

Sales revenue $940,500 $1,150,000 $2,090,500

Less: Variable costs 495,000 450,000 945,000
Contribution margin $445,500 $ 700,000 1,145,500
Less: Fixed costs 696,000
Net income $ 449,500

*Product C sales increase by 10%, (9,000 X 110%)

Yes they should introduce Product E since net profit would increase by
$40,500 ($449,500 – $409,000).

EXERCISE 7-18

1. Irrelevant. Unavoidable costs will be incurred regardless of the

decision made.

2. Relevant.

3. Irrelevant. This is a sunk cost and all sunk costs are irrelevant.

4. Irrelevant. These are sunk costs.

5. Relevant.

6. Relevant.

7. Relevant.

8. Relevant.

9. Irrelevant. If there is no change in the direct materials charge regardless

of the decision made, the cost is irrelevant.

10. Relevant.
 SOLUTIONS TO PROBLEMS

PROBLEM 7-1A

(a) Net Income

Reject Accept Increase
Order Order (Decrease)
Revenues (10,000 X $28) $0 $280,000 $ 280,000
Cost of goods sold 0 220,000 (1) ( (220,000)
Selling and administrative
expenses 0 22,500 (2) ( (22,500)
Net income $0 $ 37,500 $ 37,500

(1) Variable costs = $3,600,000 – $960,000 = $2,640,000;

$2,640,000 ÷ 120,000 units = $22.00 per unit;
10,000 X $22.00 = $220,000.

(2) Variable costs = $405,000 – $225,000 = $180,000;

$180,000 ÷ 120,000 units = $1.50 per unit;
10,000 X ($1.50 + $0.75) = $22,500.

(b) Yes, the special order should be accepted because net income will
increase by $37,500.

(c) Unit selling price = $22.00 (variable manufacturing costs) + $2.25 variable
selling and administrative expenses + $5.00 net income = $29.25.

(d) Nonfinancial factors to be considered are: (1) possible effect on domestic

sales, (2) possible alternative uses of the unused plant capacity, and
(3) ability to meet customer’s schedule for delivery without increasing
costs.
 PROBLEM 7-2A

(a) Net Income

Increase
Make CISCO Buy CISCO (Decrease)
Direct materials
(8,000 X $4.80) $38,400 $ 0 ($38,400)
Direct labor
(8,000 X $4.30) 34,400 0 ( 34,400)
Indirect labor
(8,000 X $.43) 3,440 0 ( 3,440)
Utilities (8,000 X $.40) 3,200 0 ( 3,200)
Depreciation 3,000 900 ( 2,100)
Property taxes 700 200 ( 500)
Insurance 1,500 600 ( 900)
Purchase price 0 80,000 ( (80,000)
Freight and inspection
(8,000 X $.35) 0 2,800 ( (2,800)
Receiving costs 0 1,300 ( (1,300)
Total annual cost $84,640 $85,800 ($ (1,160)

(b) The company should continue to make CISCO because net income
would be $1,160 less if CISCO were purchased from the supplier.

(c) The decision would be different. Because of the opportunity cost of

$3,000, net income will be $1,840 higher if CISCO is purchased as
shown below:
Net Income
Increase
Make CISCO Buy CISCO (Decrease)
Total annual cost $84,640 $85,800 $(1,160)
Opportunity cost 3,000 0 (3,000)
Total cost $87,640 $85,800 $(1,840)

(d) Nonfinancial factors include: (1) the adverse effect on employees if

CISCO is purchased, (2) how long the supplier will be able to satisfy
the Shatner Manufacturing Company’s quality control standards at the
quoted price per unit, and (3) whether the supplier will deliver the units
when they are needed by Shatner.
 PROBLEM 7-3A

(a) (1) Table Cleaner Not Processed Further

Sales:
FloorShine (600,000 ÷ 30) X $20 $400,000
Table Cleaner (300,000 ÷ 25) X $17 204,000
Total revenue $604,000
Costs:
CDG 210,000
Additional costs of FloorShine 240,000
Total costs 450,000
Gross profit $154,000

(2) Table Cleaner Processed Further

Sales:
FloorShine $400,000
Table Stain Remover (300,000 ÷ 25) X $14 168,000
Table Polish (300,000 ÷ 25) X $14 168,000
Total revenue $736,000
Costs:
CDG 210,000
Additional costs of FloorShine 240,000
TCP 100,000
Total costs 550,000
Gross profit $186,000

(3) If the table cleaner is processed further overall company profits will
be $32,000 higher. Therefore, management made the wrong decision
by choosing to not process table cleaner further.
PROBLEM 7-3A (Continued)

(b) Don’t Process Process Net Income

Table Cleaner Table Cleaner Increase
Further Further (Decrease)
Incremental revenue $204,000 $336,000 $132,000
Incremental costs 0 100,000 (100,000)
Totals $204,000 $236,000 $ 32,000

When trying to decide if the table cleaner should be processed further into
TSR and TP, only the relevant data need be considered. All of the costs that
occurred prior to the creation of the table cleaner are sunk costs and can
be ignored. The decision should be made by comparing the incremental
revenue from further processing to the incremental costs.
 PROBLEM 7-4A

(a) Cost $120,000

Accumulated depreciation (24,000*)
Book value 96,000
Sales proceeds (25,000)
Loss on sale $ 71,000
*$120,000 ÷ 5 years = $24,000

(b) (1) Retain Old Elevator

Revenues ($240,000 X 4 yrs.) $960,000
Less costs:
Variable costs ($35,000 X 4) $140,000
Fixed costs ($23,000 X 4) 92,000
Selling & administrative 116,000*
Depreciation 96,000 444,000
Net income $516,000
*($29,000 X 4)

(2) Replace Old Elevator

Revenues $960,000
Less costs:
Variable costs ($10,000 X 4) $ 40,000
Fixed costs ($8,500 X 4) 34,000
Selling and administrative 116,000
Depreciation 160,000 350,000
Operating income 610,000
Less: Loss on old elevator 71,000
Net income $539,000

(c) Net Income

Retain Replace Increase
Old Elevator Old Elevator (Decrease)
Variable operating costs $140,000 $ 40,000 $ 100,000
Fixed operating costs 92,000 34,000 58,000
New elevator cost 160,000 (160,000)
Salvage on old elevator . (25,000) 25,000
Totals $232,000 $209,000 $ 23,000
PROBLEM 7-4A (Continued)

(d) MEMO

TO: Ron Richter

FROM: Student

SUBJECT: Relevant Data for Decision to Replace Old Elevator

When deciding whether or not to replace any old equipment, the analysis
should only include cost data relevant to the replacement decision. The
$71,000 loss that would be experienced if we replace the old elevator with
the newer model is related to a sunk cost, namely the cost of the old
elevator. Sunk costs are irrelevant in decision making.

The loss occurs when comparing the book value of the old elevator to the
cash proceeds that would be received. The book value of $96,000 would be
deducted as depreciation expense over the next four years if the elevator
were retained. If the elevator is replaced with the newer model, the book
value will be expensed in the current year, less the cash proceeds received
on disposal. Therefore, the $96,000 book value will be expensed under
either alternative, making it irrelevant.
 PROBLEM 7-5A

(a) Division I Division II

Sales $250,000 $200,000
Variable costs
Cost of goods sold 140,000 172,800
Selling and administrative 30,000 36,000
Total variable expenses 170,000 208,800
Contribution margin ($ 80,000) $ (8,800)

(b) (1) Net Income

Increase
Division I Continue Eliminate (Decrease)
Contribution margin (above) $(80,000) $( 0) $(80,000)
Fixed costs
Cost of goods sold (60,000) (30,000) 30,000
Selling and administrative (45,000) (22,500) 22,500
Total fixed expenses (105,000) (52,500) 52,500
Income (loss) from operations $(25,000) $(52,500) $(27,500)

(2) Net Income

Increase
Division II Continue Eliminate (Decrease)
Contribution margin (above) $ (8,800) $( 0) $ 8,800
Fixed costs
Cost of goods sold (19,200 ( 9,600) ( 9,600
Selling and administrative ( 24,000 (12,000) 15,000
Total fixed expenses ( 43,200 (21,600) 21,600
Income (loss) from operations $(52,000) $(21,600) $30,400

Division II should be eliminated as its negative contribution margin is

$8,800. Income from operations would increase $30,400 if Division II is
eliminated.

Division I should be continued because it is producing positive con-

tribution margin of $80,000. Income from operations will decrease
$27,500 by discontinuing this division.
PROBLEM 7-5A (Continued)

(c) BRISLIN COMPANY

CVP Income Statement
For the Quarter Ended March 31, 2017

Divisions
I III IV Total
Sales $250,000 $500,000 $450,000 $1,200,000
Variable costs
Cost of goods sold 140,000 240,000 187,500 567,500
Selling and
administrative 30,000 30,000 30,000 90,000
Total variable
costs 170,000 270,000 217,500 657,500
Contribution margin 80,000 230,000 232,500 542,500
Fixed costs
Cost of goods sold (1) 63,200 63,200 65,700 192,100
Selling and
administrative (2) 49,000 34,000 24,000 107,000
Total fixed
costs 112,200 97,200 89,700 299,100
Income (loss) from
operations $(32,200) $132,800 $142,800 $ 243,400

(1) Division’s fixed cost of goods sold plus 1/3 of Division II’s
unavoidable fixed cost of goods sold [$192,000 X (100% – 90%) X
50% = $9,600]. Each division’s share is $3,200.

(2) Division’s fixed selling and administrative expense plus 1/3 of

Division II’s unavoidable fixed selling and administrative expenses
[$60,000 X (100% – 60%) X 50% = $12,000]. Each division’s share
is $4,000.

(d) Income from operations with Division II of $213,000 (given) plus

incremental income of $30,400 from eliminating Division II = $243,400
income from operations without Division II.
 CD7 CURRENT DESIGNS

Situation #1

(a) Current Designs should accept the special order based on the following
calculations:

Net Income
Reject Order Accept Order Increase (Decrease)
Revenues $0 $25,000* $25,000
Costs 0 (19,000)** (19,000)
Net Income $0 $ 6,000 $ 6,000
*(100 X $250)
**(($80 + $60 + $20) X 100) + ($1,000 + $2,000)

(b) Assuming that Current Designs is currently operating with excess

capacity, it should accept the order based on the calculations shown
in part (a). If Current Designs is currently operating at full capacity, it
would have to weigh its options. If it displaced production of regular
kayaks in order to fill this order, it would have to consider the opportu-
nity costs associated with this decision. The opportunity cost, when
operating at full capacity, would be the lost contribution margin from
regular sales given up in order to fulfill the special order. Alternatively,
rather than reject the special order, it might consider temporarily expand-
ing the plant’s capacity by adding an additional production shift to
handle the special order. If this option were considered, it would have
to identify all additional incremental costs (for example, overtime pay)
that would be incurred.
CD7 (Continued)

Situation #2

(a) Current designs should not replace the Rotomold oven based on the
following calculations:

Net Income
Retain Replace Increase
Oven Oven (Decrease)
Variable manufacturing costs $110,500* $ 97,500** $ 13,000
New oven cost 0 250,000 (250,000)
Proceeds from scrapping old oven 0 (10,000) 10,000
Total $110,500 $337,500 ($ 227,000)

*(17,000 therms/year X $0.65/therm X 10 years)

**(15,000 therms/year X $0.65/therm X 10 years)

(b) Even with the cost of natural gas increasing at a faster than expected
rate, Current Designs still should not replace the Rotomold oven as the
rate increase does not cover the cost of the new oven based on the
following calculations:

Net Income
Retain Replace Increase
Oven Oven (Decrease)
Variable manufacturing costs $144,500* $127,500** $ 17,000
New oven cost 0 250,000 (250,000)
Proceeds from scrapping old oven 0 (10,000) 10,000
Total $144,500 $367,500 ($ 223,000)

*(17,000 therms/year X $0.85/therm X 10 years)

**(15,000 therms/year X $0.85/therm X 10 years)
CD7 (Continued)

Situation #3

(a) Current Designs should make the seats based on the following calcu-
lations:

Net Income
Increase
Make Buy (Decrease)
Direct materials $ 60,000 $ 0 $ 60,000
Direct labor 45,000 0 45,000
Variable manufacturing 36,000 0 36,000
costs
Fixed manufacturing costs 20,000 15,000 5,000
Purchase price ($50 X 3,000) 0 150,000 (150,000)
Total annual cost $161,000 $165,000 ($ 4,000)

(b) When the opportunity cost of $20,000 is considered, Current Designs

should buy the seats based on the following calculations:

Net Income
Increase
Make Buy (Decrease)
Total annual cost $161,000 $165,000 ($ 4,000)
Opportunity cost 20,000 0 20,000
Total cost $181,000 $165,000 $16,000
 BYP 7-1 DECISION-MAKING ACROSS THE ORGANIZATION

Net Income
Retain Purchase Increase
Old Machine New Machine (Decrease)
Sales $6,000,000 (1) $6,600,000 (2) ($ 600,000
Costs and expenses
Cost of goods sold 4,500,000 (3) 4,620,000 (4) ( (120,000)
Selling expenses 900,000 990,000 ( (90,000)
Administrative expenses 500,000 565,000 ( (65,000)
Purchase price — 150,000 (5) ( (150,000)
Total costs and expenses 5,900,000 6,325,000 ( (425,000)
Net income $ 100,000 $ 275,000 ($ 175,000

(1) 12,000 X $100 X 5 years = $6,000,000.

(2) $6,000,000 X 110% = $6,600,000.
(3) $6,000,000 X (100% – 25%) = $4,500,000.
(4) $6,600,000 X (100% – 30%) = $4,620,000.
(5) $140,000 + $4,000 + $6,000 = $150,000.

The new machine should be purchased. The incremental analysis shows

that net income will increase from $100,000 to $275,000 over the five years
with the new machine.
 BYP 7-2 MANAGERIAL ANALYSIS

(a) Buy— Buy—

Make Trans- Omega
Tech
Sales Revenue $ 14.50 $ 14.50 $ 14.50
Variable Manufacturing Cost:
Circuit Board 2.00 0 0
Plastic Case 0.80 0 0
Alarms (4 @ $.15 each) 0.60 0 0
Labor 3.00 0 0
Overhead 0.50 0 0
Purchase Cost 0 10.00 5.00
Fixed Manufacturing Cost: — 0.20* 0.20
Total Manufacturing Cost 6.90 10.20 5.20
Profit per Unit $ 7.60 $ 4.30 $ 9.30
Total Profit $38,000 $21,500 $46,500

*The $1,000 cost that will continue to be incurred, even if the product is
not manufactured, divided by the 5,000 units.

The company will make the most profit if the clocks are purchased
from Omega Company. The company will make $8,500 less if the clocks
are manufactured by MiniTek. The company will make $25,000 less if
the clocks are purchased from Trans-Tech.

(b) There are several important nonfinancial factors described in the case.
Other factors might be identified as well. The factors described are:
The company is having serious difficulty manufacturing the clocks.
Therefore, it would probably be willing to have someone else manu-
facture the clocks, even if it cost more to do so. The most promising
company appears to be Omega; however, there is a serious question
about Omega’s ability to remain in business. However, the company
could purchase just this one order from Omega, and then continue to
search for another manufacturer, or stop manufacturing the clocks.
Trans-Tech’s stringent requirements for preferred customer status, in
the form of large sales requirements, appear to limit the possibilities
for MiniTek to use it as a supplier. However, if MiniTek does desire to
continue to offer the clocks because of their popularity, then perhaps
Trans-Tech could be used in the future.
BYP 7-2 (Continued)

(c) Many answers are possible, depending upon each student’s assessment
of the seriousness of the issues mentioned in (b). One answer would
be: The company should use Omega to manufacture the Kmart order.
After that, the company should not offer the clocks any longer. Espe-
cially since the clocks are no longer very profitable, it does not seem
like a good idea to keep spending money to modify the process.
 BYP 7-3 REAL-WORLD FOCUS

(a) Before building the special-order new ceiling fans, company manage-
ment must consider the effect of the new lines on current production
capacity, existing and available channels of distribution, the effect on
manufacturing efficiency, the effect on sales of current lines of product,
and the supply of materials and labor.

(b) Incremental analysis would provide a financial comparison of income

with the special-order ceiling fans to income without the special orders.
 BYP 7-4 REAL-WORLD FOCUS

(a) The types of outsourcing services that the company provides assis-
tance on are:

Information technology outsourcing, finance and accounting, human re-

source outsourcing, business process outsourcing, procurement, and
call centers.

(b) Insourcing means to take work that is currently being performed by an

outside service provider back in-house. For example, collections of
accounts receivable might currently be performed by a collection
agency, and you might decide to establish a collection group within
your company.

(c) Some of the benefits of insourcing include:

• Greater control over resources
• Greater ability to control intellectual property
• Increased visibility of accountability within the organization
 BYP 7-5 COMMUNICATION ACTIVITY

To: Preston Thiese—Plant Manager

From: Hank Jewel—Production Manager

I have spent considerable time thinking about the dilemma created by the
new PDD1130 machine. Clearly, it is far superior to our existing machine.
There is no question that it would save us tremendous amounts of money.
I hope I am not overstepping my bounds here, but I just reviewed a chapter
in my managerial accounting text on incremental analysis which has made
me think we need to reconsider this decision.

The key to incremental analysis is identifying relevant costs. Relevant

costs are those costs that vary depending on the course of action taken. In
our situation, a relevant cost would be the savings that we would
experience were we to purchase the new machine. The book value of the
existing machine is not a relevant cost since it would not be changed by
purchasing or not purchasing the new machine. Costs incurred in the past
that do not change are referred to as sunk costs. Sunk costs are irrelevant
to incremental analysis.

I would really like to lay out an analysis of our options to decide the proper
course of action. I am concerned that by using the old machine for a couple
of years the profitability of the plant could be impacted negatively.
 BYP 7-6 ETHICS CASE

(a) Many factors need to be considered when determining whether to

close a division. The loss of jobs can have a devastating impact on a
community and on the morale of remaining employees. From a
financial perspective, closing a division that is reporting losses will not
necessarily increase the reported net income of the company. The
reason: if fixed costs that have been allocated to a division that is
closed are reallocated to the remaining divisions, the company’s net
income might actually decrease. This sounds like it would most likely
be the case at Peters.

(b) It is not unusual to reevaluate fixed cost allocations periodically. However,

the allocation should be based on the underlying economics of the
situation rather than the motives of individuals.

(c) Blake should explain to the board of directors that the change in
income is due to a reallocation and that closing the plumbing division
is not advisable. In this case, being honest is not only the ethical thing
to do, but it will also maximize the company’s net income.
 BYP 7-7 ALL ABOUT YOU

(a) Chronic homelessness is defined as being on the streets for a year

or more.

(b) Homelessness costs cities money because the chronic homeless have
frequent jail time, shelter costs, emergency room visits and hospital stays.
Some costs per city per homeless person are: New York $40,000; Dallas
$50,000; San Diego $150,000.

(c) The first step is to try to identify the size of the problem by doing street
counts. From this count, benchmarks can be set, enabling a reward
system for meeting goals. Next is to identify what the homeless people
want. What do they think they need to help them address their problem?
They typically want adequate housing with some privacy.

(d) It has been estimated that in New York this approach costs about $22,000
per year. New York has documented an 88% success rate (defined as
not returning to the streets for five years).

(e) In terms of incremental analysis, two alternatives are to either continue

with the current situation, with the costs presented in part (b) or to imple-
ment the approach outlined in part (d). From a purely financial perspective
the approach in (d) appears to have significant merit. Also (d) does not
even take into account the intangible benefits of improving the quality
of life for this segment of the population.
Managerial Accounting Tools for Business Decision Making 7th Edition Weygandt Solutions Manu

BYP 7-8 CONSIDERING YOUR COSTS AND BENEFITS

Discussion guide: This is a very difficult decision. All of the evidence

suggests that your short-term and long-term prospects will be far greater
with some form of post–high-school degree. Because of this, we feel strongly
that you should make every effort to continue your education. Many of the
discussions provided in this text present ideas on how to get control of
your individual financial situation. We would encourage you to use these
tools to identify ways to reduce your financial burden in order to continue
your education. We also want to repeat that even taking only one course a
semester is better than dropping out. Your instructors and advisors fre-
quently provide advice to students who are faced with the decision about
whether to continue with their education. If you are in this situation, we would
encourage you to seek their advice since the implications of this decision
can be long-lasting.

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