I Love Casing

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Ex. 24–5 (FIN MAN); Ex. 9–5 (MAN)

The flaw in the decision was the failure to focus on the differential revenues and costs, which indicate that operating income would be reduced by $30,000 if Chil- dren’s Shoes is discontinued. This differential income from sales of Children’s Shoes can be determined as follows:

Differential revenue from annual sales of Children’s
Shoes:
Revenue from sales ......................................................$150,000 Differential cost of annual sales of Children’s Shoes:
|Variable cost of goods sold ......................................... |$90,000 | | |Variable selling and administrative expenses ............ | 30,000 | 120,000 |

Annual differential income from sales of Children’s
Shoes .............................................................................$ 30,000

Ex. 24–6 (FIN MAN); Ex. 9–6 (MAN)

a.
Proposal to Manufacture Carrying Case
June 5, 2008

Purchase price of carrying case ..................................$68.00 Differential cost to manufacture carrying case:
Direct materials..........................................................$25.00 Direct labor.................................................................32.00 Variable factory overhead (25% × $32) .................... 8.00 65.00 Cost savings from manufacturing carrying case .......$ 3.00

b.It would be advisable to manufacture the carrying cases because the cost savings would be $3.00 per unit. Fixed factory overhead is irrelevant, since it will continue whether the carrying cases are purchased or manufactured.

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Ex. 24–7 (FIN MAN); Ex. 9–7 (MAN)

a.
Proposal to Purchase Outside Layout Services December 15, 2007

Differential revenue:
Salvage of computer equipment .....................................$ 5,000 Differential expenses: Purchase price of layout work
Number of pages ..........................................................17,500 Price per page...............................................................× $18.00 Total ..................................................................................$315,000 Differential cost to perform internally:

|Salaries.......................................................................... |$225,000 | | |Benefits ......................................................................... |38,000 | | |Supplies ........................................................................ |32,000 | | |Office expenses ............................................................ | 25,000 | 320,000 | |Cost savings from purchasing layout services ............. | |$ 5,000 | |Total benefit from using an outside service .................. | |$ 10,000 |

b.The benefit from using an outside service is shown to be $10,000 greater than performing the layout work internally. The fixed costs in the budget are irrele- vant to the decision. Thus, the work should be purchased from the outside on a strictly financial basis. In addition, the decision to purchase from the out- side...
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