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ACC560 Chapter 7

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E7-2 E7-5 E7-9 E7-17 P7-1A P7-4A

E7-2 Gruden Company produces golf discs which it normally sells to retailers for $7 each.
The cost of manufacturing 20,000 golf discs is:

Materials  10,000
Labor  30,000
Variable overhead  20,000
Fixed overhead  40,000
Total  100,000

Gruden also incurs 5% sales commission ($0.35) on each disc sold.
McGee Corporation offers Gruden $4.80 per disc for 5,000 discs. McGee would sell the
discs under its own brand name in foreign markets not yet served by Gruden. If Gruden
accepts the offer, its fixed overhead will increase from $40,000 to $46,000 due to the purchase
of a new imprinting machine. No sales commission will result from the special order.

(a) Prepare an incremental analysis for the special order.
(b) Should Gruden accept the special order? Why or why not?
(c) What assumptions underlie the decision made in part (b)?

E7-5 Schopp Inc. has been manufacturing its own shades for its table lamps. The company
is currently operating at 100% of capacity, and variable manufacturing overhead is
charged to production at the rate of 70% of direct labor cost. The direct materials and
direct labor cost per unit to make the lamp shades are $4 and $5, respectively. Normal
production is 30,000 table lamps per year.

A supplier offers to make the lamp shades at a price of $12.75 per unit. If Schopp Inc.
accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the
$45,000 of fixed manufacturing overhead currently being charged to the lamp shades will
have to be absorbed by other products.

(a) Prepare the incremental analysis for the decision to make or buy the lamp shades.
(b) Should Schopp Inc. buy the lamp shades?
(c) Would your answer be different in (b) if the productive capacity released by
not making the lamp shades could be used to produce income of $25,000?

E7-9 Rachel Rey recently opened her own basketweaving studio. She sells fi nished baskets
in addition to the raw materials needed by customers to weave baskets of their own.
Rachel has put together a variety of raw material kits, each including materials at various
stages of completion. Unfortunately, owing to space limitations, Rachel is unable to carry
all varieties of kits originally assembled and must choose between two basic packages.
The basic introductory kit includes undyed, uncut reeds (with dye included) for weaving
one basket. This basic package costs Rachel $14 and sells for $30. The second kit,
called Stage 2, includes cut reeds that have already been dyed. With this kit the customer
need only soak the reeds and weave the basket. Rachel is able to produce the second kit
by using the basic materials included in the first kit and adding one hour of her own time,
which she values at $18 per hour. Because she is more efficient at cutting and dying reeds
than her average customer, Rachel is able to make two kits of the dyed reeds, in one hour,
from one kit of undyed reeds. The Stage 2 kit sells for $35.

Determine whether Rachel’s basketweaving shop should carry the basic introductory kit
with undyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut. Prepare
an incremental analysis to support your answer.

E7-17 Twyla Company operates a small factory in which it manufactures two products: C
and D. Production and sales results for last year were as follows.
Units sold 9,000 20,000
Sellingprice per unit 95 75
Variable cost per unit 50 40
Fixed cost per unit 22 22

For purposes of simplicity, the firm averages total fixed costs over the total number of
units of C and D produced and sold.
The research department has developed a new product (E) as a replacement for product
D. Market studies show that Twyla Company could sell 10,000 units of E next year at a price
of $115; the variable cost per unit of E is $40. The introduction of product E will lead to a
10% increase in demand for product C and discontinuation of product D. If the company
does not introduce the new product, it expects next year’s results to be the same as last year’s.

Should Twyla Company introduce product E next year? Explain why or why not. Show
calculations to support your decision.

P7-1A ShurShot Sports Inc. manufactures basketballs for the National Basketball Association
(NBA). For the first 6 months of 2014, the company reported the following operating
results while operating at 80% of plant capacity and producing 120,000 units.

Sales  4,800,000
Cost of goods sold  3,600,000
Selling and administrative expenses  405,000
Net income  795,000

Fixed costs for the period were cost of goods sold $960,000, and selling and administrative
expenses $225,000.
In July, normally a slack manufacturing month, ShurShot Sports receives a special
order for 10,000 basketballs at $27 each from the Greek Basketball Association (GBA).
Acceptance of the order would increase variable selling and administrative expenses $0.50
per unit because of shipping costs but would not increase fixed costs and expenses.

(a) Prepare an incremental analysis for the special order.
(b) Should ShurShot Sports Inc. accept the special order? Explain your answer.
(c) What is the minimum selling price on the special order to produce net income of $4.00
per ball?

P7-4A Last year (2013), Richter Condos installed a mechanized elevator for its tenants.
The owner of the company, Ron Richter, recently returned from an industry equipment
exhibition where he watched a computerized elevator demonstrated. He was impressed
with the elevator’s speed, comfort of ride, and cost efficiency. Upon returning from the exhibition,
he asked his purchasing agent to collect price and operating cost data on the new
elevator. In addition, he asked the company’s accountant to provide him with cost data on
the company’s elevator. This information is presented below.

Old ElevatorNew Elevator
Purchase price $120,000$160,000
Estimated salvage value 00
Estimated useful life 5 years 4 years 
Depreciation method Straight-line Straight-line 
Annual operating costs 
other than depreciation:
 Variable $35,000$10,000
 Fixed 23,0008,500

Annual revenues are $240,000, and selling and administrative expenses are $29,000,
regardless of which elevator is used. If the old elevator is replaced now, at the beginning of
2014, Richter Condos will be able to sell it for $25,000.

(a) Determine any gain or loss if the old elevator is replaced.
(b) Prepare a 4-year summarized income statement for each of the following assumptions:
(1) The old elevator is retained.
(2) The old elevator is replaced.
(c) Using incremental analysis, determine if the old elevator should be replaced.

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