Acc 720 Incremental Solution

8/2/2019 Acc 720 Incremental Solution

1/17

BRIEF EXERCISE 7-1ALTERNATIVE ALTERNATIVE NET INCOME

INCREASE(DECREASE)

A

RM

B

RM RM

Sales 150,000 185,000 35,000

Costs 100,000 125,000 25,000

Netincome

50,000 60,000 10,000

Alternative B is better that Alternative A by net income of


2/17

EXERCISE 7-2/ 7.3REJECT

ORDER

RM

ACCEPT

ORDER

RM

NET INCOMEINCREASE

(DECREASE)

RM

Revenues 0 420,000

(60,000 x RM7)

420,000

Cost of goods sold

(RM2,800,000 x70%/400,000 x60,000)

0 294,000 (1) (294,000)

Operating expenses

(RM900,000 x60%/400,000 x60,000)

Shipping costs

0 81,000

8,000

(2)

(3)

(81,000)

(8,000)

Net income 0 37,000 37,000


3/17

Continue .

(1)

Variable cost of goods sold = RM2,800,000 x 70% = RM1,960,000

Variable cost of goods sold per unit = RM1,960,000 / 400,000 =RM4.90

Variable cost of goods sold for the special order = RM4.90 x60,000 = RM294,000

(2)

Variable operating expenses = RM900,000 x 60% = RM540,000

RM540,000 / 400,000 = RM1.35 per unit

60,000 x RM1.35 = RM81,000

(b)

As shown in the incremental analysis, Yenn Co. should accept thespecial order because it will result into contributing a net profit ofRM 37,000


4/17

BRIEF EXERCISE 7-3/7.4MAKE

RM

BUY

RM

NET INCOMEINCREASE

(DECREASE)RM

Variablemanufacturing costs

(RM4.50 x 10,000)

45,000 0 45,000

Fixedmanufacturing costs

30,000 30,000 0

Purchase price

(RM5 x 10,000)

0 50,000 (50,000)

Total annual cost 75,000 80,000 (5,000)

The decision should be to make the part, cost saving byRM5,000


5/17

EXERCISE 7-4/7-5

MAKE

RM

BUY

RM

NET INCOMEINCREASE

(DECREASE)Direct materials(30,000 x RM5)

150,000 0 150,000

Direct labor (30,000x RM6)

180,000 0 180,000

Variablemanufacturing costs

(RM180,000 x 70%)

126,000 0 126,000

Fixed manufacturingcosts

45,000 45,000 0

Purchase price

(30,000 x RM15.50)

0 465,000 (465,000)

Total annual cost 501,000 510,000 (9,000)


6/17

Continue .

No, Stahl Inc should not purchase theshades. As indicated by the incremental

analysis, it would cost the company RM9,000more to purchase the lamp shades

Yes, by purchasing the lamp shades, a totalcost saving of RM61,000 will result as shownbelow


7/17

Continue ..

MAKE

RM

BUY

RM

NET INCOMEINCREASE

(DECREASE)

Total annualcost

OpportunityCost

Income

501,000

35,000

510,000

(35,000)

(9,000)

35,000

35,000

Total cost 536,000 475,000 61,000


8/17

Continue ..

MAKE

RM

BUY

RM

NET INCOMEINCREASE

(DECREASE)

Total annualcost

Income

501,000 510,000

(35,000)

(9,000)

35,000

Total cost 501,000 475,000 26,000


9/17

BE 7-5

SECRET RAW

MATERIAL

1 TON

RM60,000

AB1

RM25,000

SELL

RM90,000

XY1

RM35,000

SELL

RM90,000

PROCESS

RM50,000

PROCESS

RM50,000

AB2

SELL

RM150,000

XY2

SELL

RM130,000


10/17

ANALYSIS OF SELLING AB1 ORFURTHER PROCESS TO AB2

SELL PROCESS

FURTHER

NET INCOMEINCREASE/

(DECREASE)

SALES RM90,000 RM150,000 RM60,000

PROCESS

FURTHER

RM50,000 (RM50,000)

NETINCOME

RM90,000 RM100,000 RM10,000

FURTHER PROCESS AB1 AND SELL AB2, HIGHER NET INCOME BY

RM10,000


11/17

ANALYSIS OF SELLING XY1 ORFURTHER PROCESS TO XY2

SELL PROCESS

FURTHER

NET INCOMEINCREASE/

(DECREASE)

SALES RM90,000 RM130,000 RM40,000

PROCESS

FURTHER

RM50,000 (RM50,000)

NETINCOME

RM90,000 RM80,000 (RM10,000)

NOT TO FURTHER PROCESS XY1, SELL AT THE SPLIT-OFF POINT


12/17

EXERCISE 7-10Retain

machineReplacemachine

Net income

Increase

(decrease)

Operatingcosts

RM120,000 (1) RM90,000 (2) RM30,000

Newmachinecost (Depr)

0 RM25,000 (RM25,000)

Salvagevalue (old)

0 (RM5,000) RM5,000

Total Cost RM120,000 RM110,000 RM10,000

(1) RM24,000 x 5 ; (2) RM18,000 x 5; The current machine should be replaced. The

incremental analysis shows that net income for the five-year period will beRM10,000 higher by replacing the current machine


13/17

EXERCISE 7-11Continue Eliminate Net income

increase(decrease)

Sales RM100,000 RM0 (RM100,000)

Variable expenses

Cost of goods sold RM60,000 RM0 RM60,000

Operating expenses 25,000 0 25,000

Total variable 85,000 0 85,000

Contribution margin 15,000 0 (15,000)

Fixed expenses

Cost of goods sold 16,500 RM16,500 0

Operating expenses 23,000 23,000 0

Total fixed 39,500 39,500 0

Net income (loss) (24,500) (39,500) (RM15,000)


14/17

Continue .Maggie is incorrect. The incremental analysisshows that net income will be RM15,000 less

if the Eric Division is eliminated. This amountequals the contribution margin that would belost through discontinuing the division

Note: None of the fixed costs can be avoided


15/17

E 6 - 11A B C

SELLING PRICE RM 9 RM12 RM14

VARIABLE COST &

EXPENSES(3) (9.50) (12)

CONTRIBUTION/UNIT 6 2.50 2

MACHINE HOUR/UNIT 2MH 1MH 2MH

CONTRIBUTION/MACH. HOUR RM3.00/MH

RM2.50/

MH

RM1/

MH

RANKING 1 2 3

(a)

(b)

Product A should be produced from the additional 1,500 machine hours


16/17

ADDITIONAL 1,500 MH DIVIDED EQUALLY

A B C

EQUALLY DIVIDED MH 500MH 500MH 500MH

MACHINE HOUR/UNIT 2 1 2

UNITS PRODUCED 250

UNITS

500UNITS

250UNITS

CONTRIBUTION/UNIT RM6 RM2.50 RM2.00

TOTAL CONTRIBUTION RM1,500 RM1,250 RM500

RM3,250


17/17

ADDITIONAL 1,500 MH TO PRODUCE ONLYPRODUCT AA B C

EQUALLY DIVIDED MH 1,500MH

MACHINE HOUR/UNIT 2

UNITS PRODUCED 750UNITS

CONTRIBUTION/UNIT RM6

TOTAL CONTRIBUTION RM4,500

RM4,500

THE ADDITIONAL 1,500 MH SHOULD BE USED TO PRODUCE ONLY PRODUCT A

Documents

Acc 720 Incremental Solution