Managerial Account

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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1 The correct order is: 1. 2. 3. 4. Identify the problem and assign responsibility. Determine and evaluate possible courses of action. Make a decision. Review results of the decision.

BRIEF EXERCISE 7-2 Net Income Increase (Decrease) ($ 35,000) (25,000) $ 10,000

Alternative A Revenues Costs Net income $150,000 100,000 $ 50,000

Alternative B $185,000 125,000 $ 60,000

Alternative B is better than Alternative A.

BRIEF EXERCISE 7-3 Net Income Increase (Decrease) ($ 72,000) ( (60,000) ( (6,000) ($ 6,000)

Revenues Costs—Variable manufacturing Shipping Net income

Reject Order $0 0 0 $0

Accept Order $72,000 * 60,000 ** 6,000 *** $ 6,000

The special order should be accepted. *3,000 X $24 **3,000 X $20 ***3,000 X $ 2

BRIEF EXERCISE 7-4 Net Income Increase (Decrease) $ 45,000 0 (50,000) ($ (5,000)

Make Variable manufacturing costs Fixed manufacturing costs Purchase price Total annual cost $45,000 30,000 –0– $75,000

Buy $ –0– 30,000 50,000 $80,000

The decision should be to make the part.

BRIEF EXERCISE 7-5 Sell Sales price per unit Cost per unit Variable Fixed Total Net income per unit $60.00 35.00 10.00 45.00 $15.00 Process Further $70.00 43.00 10.00 53.00 $17.00 Net Income Increase (Decrease) $10.00 ( (8.00) 0 ( (8.00) $ 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 $60,000 ($150,000 – $90,000) and only incur incremental costs of $50,000. Therefore, the company should process AB1 further and sell AB2. If XY1 is processed further, the company will earn incremental revenue of $40,000 ($130,000 – $90,000) but will incur incremental costs of $50,000. Therefore, the company should sell XY1 rather than process it further.

BRIEF EXERCISE 7-7 Net 4-Year Income Increase (Decrease) ($ 400,000) ( (250,000) ($ 150,000)

Retain Equipment Variable manufacturing costs for 4 years New machine cost Total $2,400,000 00,000,000 $2,400,000

Replace Equipment $2,000,000 250,000 $2,250,000

The old factory machine should be replaced. BRIEF EXERCISE 7-8 Continue Sales Variable costs Contribution margin Fixed costs Net income $200,000 175,000 25,000 30,000 ($ (5,000) Eliminate $ –0– –0– ( –0– 20,000) $(20,000) Net Income Increase (Decrease) $(200,000) (175,000) (25,000) ( 10,000) $ (15,000)

The Big Bart product line should be continued because $25,000 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 Increase (Decrease) $186,000 (132,000) $ 54,000

Revenues Costs Net income

Reject $ –0– $ –0– $ –0–

Accept $186,000 132,000* $ 54,000

*(6,000 X $20) + (6,000 X $2) Given the results of the above analysis, Corn Company should accept the special order.

DO IT! 7-2 (a) Make $ 30,000 42,000 45,000 60,000 –0– $177,000 Buy $ –0– –0– –0– 40,000 165,000 $205,000 Net Income Increase (Decrease) $ 30,000 42,000 45,000 20,000 (165,000) $ (28,000)

Direct materials Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price Total cost

Given the results of the above analysis, Barney Company will incur $28,000 of additional costs if it buys the switches. (b) Make $177,000 30,000 $207,000 Buy $205,000 –0– $205,000 Net Income Increase (Decrease) $(28,000) 30,000 $ 2,000

Total Cost Opportunity cost Total cost

Yes, the answer is different: The analysis shows that net income will be increased by $2,000 if Barney Company purchases the switches. DO IT! 7-3 Process Further $99 $57 13 $70 $29

Sell Sales per unit Cost per unit Variable Fixed Total Net income per unit $75 $39 10 $49 $26

Net Inc/Dec $24 ($18) (3) ($21) $ 3

The tables...
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