Chapter 23 – Relevant Cos2ng for Managerial Decisions · PDF fileChapter 23 –...

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Exercise23-2page1033 Decisiontoacceptaddi2onalbusinessornot Exercise23-2 Exercise23-2Alt.

Exercise23-3page1033 Acceptnewbusinessornot Exercise23-3 Exercise23-3Alt.

Exercise23-4page1034 Makeorbuydecision Exercise23-4 Exercise23-4Alt.

Exercise23-5page1034 Makeorbuy Exercise23-5 Exercise23-5Alt.

Exercise23-6page1034 Scraporrework Exercise23-6 Exercise23-6Alt.

Exercise23-7page1034 Scraporrework Exercise23-7 Exercise23-7Alt.

Exercise23-8page1034 Sellorprocessdecision Exercise23-8 Exercise23-8Alt.

Exercise23-9page1034 Salesmixdetermina2onandanalysis Exercise23-9 Exercise23-9Alt.

Exercise23-10page1034 Analysisofincomeeffectsfromelimina2ngdepartments

Exercise23-10 Exercise23-10Alt.

Exercise23-11page1035 Salesmix Exercise23-11 Exercise23-11Alt.

Exercise23-12page1035 Keeporreplace Exercise23-12 Exercise23-12Alt.

Exercise23-13page1035 Analysisofincomeeffectsfromelimina2ngdepartments

Exercise23-13 Exercise23-13Alt.

Copyright © 2016 by McGraw-Hill Education, Inc. All rights reserved.

Exercise23-2page1033

23-2

Exercise 23-2 page 1033

Sales Costs and expenses

Direct materials Direct labor Overhead Selling expenses Administrative expenses

Total costs and expenses Net income $589,500

The company has an opportunity to sell 15,000 additional units at $12 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 15% and (2) administrative expenses would increase by $64,500.

Farrow Co. expects to sell 150,000 units of its product in the next period with the following results.

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit.

225,000 385,500

1,660,500

300,000 600,000 150,000

Normal Volume (150,000 units)

$2,250,000

23-3


Combined Total

Sales $2,430,000 Costs and expenses

Direct materials 330,000 Direct labor 660,000 Overhead 172,500 Selling expenses 225,000 Administrative expenses 450,000

Total costs and expenses 1,837,500 Net income $592,500

The company should accept the special order, as it increases income by $3,000.


22,500

64,500 177,000

$3,000

225,000


$2,250,000

300,000

1,660,500 $589,500

Additional Volume (15,000 units)

$180,000

30,000 60,000 600,000

150,000

385,500

($2 per unit) ($4 per unit)

23-4

Exercise 23-2 page 1033 Alternate

Sales Costs and expenses

Direct materials Direct labor Overhead Selling expenses Administrative expenses

Total costs and expenses Net income $1,311,000


Farrow Co. expects to sell 300,000 units of its product in the next period with the following results.

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit.

450,000 639,000

3,189,000

600,000 1,200,000

300,000


$4,500,000 ($15 per unit) ($2 per unit)

($4 per unit)

23-5


The company has an opportunity to sell 30,000 additional units at $12 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 16% and (2) administrative expenses would increase by $130,000. Combined

Total Sales $4,860,000 Costs and expenses

Direct materials ($2 per unit) 660,000 Direct labor ($4 per unit) 1,320,000 Overhead 348,000 Selling expenses 450,000 Administrative expenses 769,000

Total costs and expenses 3,547,000 Net income $1,313,000

48,000

130,000 358,000

$2,000

1,200,000 300,000

639,000 3,189,000

$1,311,000

Additional Volume (30,000 units)

$360,000

60,000 120,000

450,000


$4,500,000

600,000

The company should accept the special order, as it increases income by $2,000.

23-6


23-7

Exercise 23-3 page 1033 23-8

Per Unit

Costs at 80,000 Units

Direct materials $12.50 $1,000,000 Direct labor 15.00 1,200,000 Variable manufacturing overhead 10.00 800,000 Fixed manufacturing overhead 17.50 1,400,000 Variable selling and administrative expenses 14.00 1,120,000 Fixed selling and administrative expenses 13.00 1,040,000 Total costs and expenses $82.00 $6,560,000

Normal Additional Combined 80,000 units 20,000 units Total

Sales $8,000,000 $1,500,000 $9,500,000 Costs and expenses

Direct materials 1,000,000 250,000 1,250,000 Direct labor 1,200,000 300,000 1,500,000 Variable manufacturing overhead 800,000 200,000 1,000,000 Fixed manufacturing overhead 1,400,000 1,400,000 Variable selling and administrative expenses 1,120,000 380,000 1,500,000 Fixed selling and administrative expenses 1,040,000 1,040,000 Total costs and expenses 6,560,000 1,130,000 7,690,000

Net income $1,440,000 $370,000 $1,810,000

Goshford Company produces a single product and has capacity to produce 100,000 units per month. Costs to produce its current sales of 80,000 units follow. The regular selling price of the product is $100 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for $75 per unit. If the order is accepted, there will be no additional fixed manufacturing overhead, and no additional fixed selling and administrative expenses. The customer is not in the company’s regular selling territory, so there will be a $5 per unit shipping expense in addition to the regular variable selling and administrative expenses. Determine whether management should accept or reject the new business.

Exercise 23-3 page 1033 Alternate 23-9

Per Unit

Costs at 20,000 Units

Direct materials $5.00 $100,000 Direct labor 3.00 60,000 Variable manufacturing overhead 2.50 50,000 Fixed manufacturing overhead 2.00 40,000 Variable selling and administrative expenses 3.00 60,000 Fixed selling and administrative expenses 1.50 30,000 Total costs and expenses $17.00 $340,000

Normal Additional Combined 20,000 units 5,000 units Total

Sales $500,000 $100,000 $600,000 Costs and expenses

Direct materials 100,000 25,000 125,000 Direct labor 60,000 15,000 75,000 Variable manufacturing overhead 50,000 12,500 62,500 Fixed manufacturing overhead 40,000 0 40,000 Variable selling and administrative expenses 60,000 25,000 85,000 Fixed selling and administrative expenses 30,000 0 30,000 Total costs and expenses 340,000 77,500 417,500

Net income $160,000 $22,500 $182,500

Goshford Company produces a single product and has capacity to produce 25,000 units per month. Costs to produce its current sales of 20,000 units follow. The regular selling price of the product is $25 per unit. Management is approached by a new customer who wants to purchase 5,000 units of the product for $20 per unit. If the order is accepted, there will be no additional fixed manufacturing overhead, and no additional fixed selling and administrative expenses. The customer is not in the company’s regular selling territory, so there will be a $2 per unit shipping expense in addition to the regular variable selling and administrative expenses. Determine whether management should accept or reject the new business.


23-10


Calculate the total incremental cost of making 65,000 units.

Relevant variable

costs

Relevant fixed costs

Total

Variable costs (65,000 units @ $1.95) $126,750 $126,750 Incremental fixed costs $65,000 65,000

Total incremental cost to make $191,750

Calculate the total incremental cost of buying 65,000 units.

Relevant variable

costs


Total

Purchase Price (65,000 units @ $3.50) $227,500 $227,500 Total incremental cost to buy $227,500

Gilberto should make the 65,000 units, as the incremental cost is $35,750 less than buying. Notice that the allocated fixed costs of $58,500 are not relevant costs.

Gilberto Company currently manufactures one of its crucial parts at a cost of $4.45 per unit. This cost is based on a normal production rate of 65,000 units per year. Variable costs are $1.95 per unit, fixed costs related to making this part are $65,000 per year, and allocated fixed costs are $58,500 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.50 per unit guaranteed for a three- year period.

23-11



Relevant variable

costs


Total




Relevant variable

costs


Total


Gilberto should buy the 40,000 units, as the incremental cost is $4,000 less than making.

Gilberto Company currently manufactures one of its crucial parts at a cost of $5.15 per unit. This cost is based on a normal production rate of 40,000 units per year. Variable costs are $2.90 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $50,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.80 per unit guaranteed for a three- year period.

23-12


23-13



Relevant variable

costs


Total




Relevant variable

costs


Total


Gelb should buy the 40,000 units, as the incremental cost is $3,000 less than making.

Gelb Company currently manufactures 40,000 units per year of a key component for its manufacturing process. Variable costs are $1.95 per unit, fixed costs related to making this component are $65,000 per year, and allocated fixed costs are $58,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. Gelb is considering buying the part from a supplier for $3.50 per unit. Should it continue to manufacture the component, or should it buy this component from the outside supplier?



Relevant variable

costs


Total




Relevant variable

costs


Total


Gelb should buy the 50,000 units, as the incremental cost is $22,500 less than making.

Gelb Company currently manufactures 50,000 units per year of a key component for its manufacturing process. Variable costs are $2.00 per unit, fixed costs related to making this component are $40,000 per year, and allocated fixed costs are $80,000 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. Gelb is considering buying the part from a supplier for $2.35 per unit. Should it continue to manufacture the component, or should it buy this component from the outside supplier?


23-16


What is the incremental income from selling the units as scrap and reworking and selling the units?

Sale as scrap Rework Sales of scrap units (22,000 units x $2.50) $55,000 Sales of reworked units (22,000 units x $8.50) $187,000 Cost to rework units (22,000 units x $4.50) (99,000) Opportunity cost of not making new units (22,000 units x ($8.50 - $6.00)) (55,000) Incremental income (loss) $55,000 $33,000

A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6.00 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will have to build 22,000 replacement units at a cost of $6.00 each, and sell them at the full price of $8.50 each.

The company should sell as is.

23-17



Sale as scrap Rework Sales of scrap units (18,000 units x $2.50) $45,000 Sales of reworked units (18,000 units x $9.90) $178,200 Cost to rework units (18,000 units x $3.50) (63,000) Opportunity cost of not making new units (18,000 units x ($9.90 - $5.40)) (81,000) Incremental income (loss) $45,000 $34,200

A company must decide between scrapping or reworking units that do not pass inspection. The company has 18,000 defective units that cost $5.40 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $3.50 each and then sold for the full price of $9.90 each. If the units are sold as is, the company will have to build 18,000 replacement units at a cost of $5.40 each, and sell them at the full price of $9.90 each.


23-18


23-19



Revenue if process further (7,000 units x $25) $175,000 Revenue if sold as is (7,000 units x $8) 56,000 Incremental revenue 119,000 Less incremental cost of processing (125,000) Incremental income (loss) ($6,000)


Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of $22 each. This year's model is superior to last year's and the 7,000 units cannot be sold at last year's regular selling price of $35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $8 each, or (2) they can be reworked at a cost of $125,000 and then sold for $25 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.



Revenue if process further (10,000 units x $18) $180,000 Revenue if sold as is (10,000 units x $6) 60,000 Incremental revenue 120,000 Less incremental cost of processing (130,000) Incremental income (loss) ($10,000)

Varto Company has 10,000 units of its sole product in inventory that it produced last year at a cost of $20 each. This year's model is superior to last year's and the 10,000 units cannot be sold at last year's regular selling price of $35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $6 each, or (2) they can be reworked at a cost of $130,000 and then sold for $18 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.



23-22


Prepare an analysis that shows whether the 28,000 units of Product A should be processed further or not.

Sell as is Process further

Sale as is (28,000 units x $25.00) $700,000 Process further (5,600 units x $105) + (11,200 x $70) $1,372,000 Cost to process further (420,000) Incremental income (loss) $700,000 $952,000

The company should process the units further.

Cobe Company has already manufactured 28,000 units of Product A at a cost of $28 per unit. The 28,000 units can be sold at this stage for $700,000. Alternatively, the units can be further processed at a $420,000 total additional cost and be converted into 5,600 units of Product B and 11,200 units of Product C. Per unit selling price for Product B is $105 and for Product C is $70.

23-23


Prepare an analysis that shows whether the 23,000 units of Product A should be processed further or not.

Sell as is Process further

Sale as is (23,000 units x $22.00) $506,000 Process further (5,300 units x $92) + (13,000 x $70) $1,397,600 Cost to process further (629,000) Incremental income (loss) $506,000 $768,600

Cobe Company has already manufactured 23,000 units of Product A at a cost of $10 per unit. The 23,000 units can be sold at this stage for $506,000. Alternatively, the units can be further processed at a $629,000 total additional cost and be converted into 5,300 units of Product B and 13,000 units of Product C. Per unit selling price for Product B is $92 and for Product C is $70.

The company should process the units further.

23-24


23-25


Product TLX Product MTV Selling price per unit $15.00 $9.50 Variable costs per unit $4.80 $5.50

Product TLX Product MTV Total Contribution margin per unit $10.20 $4.00 Units produced per hour 2 5 Contribution margin per production hour $20.40 $20.00

Maximum number of units to be sold 4,700 2,500 Production per hour 2 5 Hours required to produce maximum units 2,350 500 2,850 hours

For most profitable sales mix Hours dedicated to the production of each product 2,350 400 2,750 hours

Units produced for most profitable sales mix 4,700 2,000 Contribution margin per unit $10.20 $4.00 Total contribution margin $47,940 $8,000 $55,940

Colt Company owns a machine that can produce two specialized products. Production time for Product TLX is 2 units per hour and for Product MTV is 5 units per hour. The machine’s capacity is 2,750 hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 4,700 units of Product TLX and 2,500 units of Product MTV. Selling prices and variable costs per unit to produce the products follow.

Determine the company's most profitable sales mix and the contribution margin that results from that sales mix.

23-26


Product TLX Product MTV Total Contribution margin per unit $9.80 $3.20 Units produced per hour 3 4 Contribution margin per production hour $29.40 $12.80 Maximum number of units to be sold 4,200 4,000 Production per hour 3 4 Hours required to produce maximum units 1,400 1,000 2,400

For most profitable sales mix Hours dedicated to the production of each product 1,400 600 2,000

Units produced for most profitable sales mix 4,200 2,400 Contribution margin per unit $9.80 $3.20 Total contribution margin $41,160 $7,680 $48,840

Colt Company owns a machine that can produce two specialized products. Production time for Product TLX is 3 units per hour and for Product MTV is 4 units per hour. The machine’s capacity is 2,000 hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 4,200 units of Product TLX and 4,000 units of Product MTV. Selling prices and variable costs per unit to produce the products follow.

Determine the company's most profitable sales mix and the contribution margin that results from that sales mix.

Product TLX Product MTV Selling price per unit $14.00 $8.00 Variable costs per unit $4.20 $4.80

23-27


23-28


Dept. M Dept. N Dept. O Dept. P Dept. T Sales $63,000 $35,000 $56,000 $42,000 $28,000 Avoidable 9,800 36,400 22,400 14,000 37,800 Unavoidable 51,800 12,600 4,200 29,400 9,800 Total expenses 61,600 49,000 26,600 43,400 47,600 Net income (loss) $1,400 ($14,000) $29,400 ($1,400) ($19,600)

(1) Management does not eliminate any department.

Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $224,000 $63,000 $35,000 $56,000 $42,000 $28,000 Avoidable 120,400 9,800 36,400 22,400 14,000 37,800 Unavoidable 107,800 51,800 12,600 4,200 29,400 9,800 Total expenses 228,200 61,600 49,000 26,600 43,400 47,600 Net income (loss) ($4,200) $1,400 ($14,000) $29,400 ($1,400) ($19,600)

Suresh Co. expects its five departments to yield the following income for next year. Recompute and prepare the departmental income statements (including a combined total column) for the company under each of the following separate scenarios.

23-29


Dept. M Dept. N Dept. O Dept. P Dept. T Sales $63,000 $35,000 $56,000 $42,000 $28,000 Avoidable 9,800 36,400 22,400 14,000 37,800 Unavoidable 51,800 12,600 4,200 29,400 9,800 Total expenses 61,600 49,000 26,600 43,400 47,600 Net income (loss) $1,400 ($14,000) $29,400 ($1,400) ($19,600)

(2) Management eliminates departments with expected net losses.

Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $119,000 $63,000 $56,000 Avoidable 32,200 9,800 22,400 Unavoidable 107,800 51,800 12,600 4,200 29,400 9,800 Total expenses 140,000 61,600 12,600 26,600 29,400 9,800 Net income (loss) ($21,000) $1,400 ($12,600) $29,400 ($29,400) ($9,800)

(3) Management eliminates departments with sales dollars that are less than avoidable expenses.

Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $161,000 $63,000 $56,000 $42,000 Avoidable 46,200 9,800 22,400 14,000 Unavoidable 107,800 51,800 12,600 4,200 29,400 9,800 Total expenses 154,000 61,600 12,600 26,600 43,400 9,800 Net income (loss) $7,000 $1,400 ($12,600) $29,400 ($1,400) ($9,800)

23-30


Dept. M Dept. N Dept. O Dept. P Dept. T Sales $41,000 $16,000 $35,000 $35,000 $18,000 Avoidable 4,000 12,800 11,900 9,800 19,800 Unavoidable 23,000 8,000 2,800 17,000 6,300 Total expenses 27,000 20,800 14,700 26,800 26,100 Net income (loss) $14,000 ($4,800) $20,300 $8,200 ($8,100)

(1) Management does not eliminate any department.

Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $145,000 $41,000 $16,000 $35,000 $35,000 $18,000 Avoidable 58,300 4,000 12,800 11,900 9,800 19,800 Unavoidable 57,100 23,000 8,000 2,800 17,000 6,300 Total expenses 115,400 27,000 20,800 14,700 26,800 26,100 Net income (loss) $29,600 $14,000 ($4,800) $20,300 $8,200 ($8,100)

Suresh Co. expects its five departments to yield the following income for next year. Recompute and prepare the departmental income statements (including a combined total column) for the company under each of the following separate scenarios.

23-31


(2) Management eliminates departments with expected net losses.

Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $111,000 $41,000 $35,000 $35,000 Avoidable 25,700 4,000 11,900 9,800 Unavoidable 57,100 23,000 8,000 2,800 17,000 6,300 Total expenses 82,800 27,000 8,000 14,700 26,800 6,300 Net income (loss) $28,200 $14,000 ($8,000) $20,300 $8,200 ($6,300)

Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $145,000 $41,000 $16,000 $35,000 $35,000 $18,000 Avoidable 58,300 4,000 12,800 11,900 9,800 19,800 Unavoidable 57,100 23,000 8,000 2,800 17,000 6,300 Total expenses 115,400 27,000 20,800 14,700 26,800 26,100 Net income (loss) $29,600 $14,000 ($4,800) $20,300 $8,200 ($8,100)

(3) Management eliminates departments with sales dollars that are less than avoidable expenses. Total Dept. M Dept. N Dept. O Dept. P Dept. T

Sales $127,000 $41,000 $16,000 $35,000 $35,000 Avoidable 38,500 4,000 12,800 11,900 9,800 Unavoidable 57,100 23,000 8,000 2,800 17,000 6,300 Total expenses 95,600 27,000 20,800 14,700 26,800 6,300 Net income (loss) $31,400 $14,000 ($4,800) $20,300 $8,200 ($6,300)

23-32


23-33 23-33


K1 S5 G9 Selling price per unit $160.00 $112.00 $210.00 Variable costs per unit 96.00 85.00 144.00

K1 S5 G9 Selling price per unit $160.00 $112.00 $210.00 Variable costs per unit 96.00 85.00 144.00 Contribution margin per unit $64.00 $27.00 $66.00 Pounds per unit 4.0 3.0 6.0 Contribution margin per pound $16.00 $9.00 $11.00

Order in which products should be produced and filled: First Third Second

Childress Company produces three products, K1, S5, and G9. Each product uses the same type of direct material. K1 uses 4.0 pounds of the material, S5 uses 3.0 pounds of the material, and G9 uses 6.0 pounds of the material. Demand for all products is strong, but only 50,000 pounds of material are available. Information about the selling price per unit and variable cost per unit of each product follows.

Calculate the contribution margin per pound for each of the three products and determine in which order the products should be produced and filled.

23-34 23-34


K1 S5 G9 Selling price per unit $71.20 $52.32 $106.88 Variable costs per unit 20.00 12.00 24.00

K1 S5 G9 Selling price per unit $71.20 $52.32 $106.88 Variable costs per unit 20.00 12.00 24.00 Contribution margin per unit $51.20 $40.32 $82.88 Pounds per unit 3.2 4.2 7.4 Contribution margin per pound $16.00 $9.60 $11.20

Order in which products should be produced and filled: First Third Second

Childress Company produces three products, K1, S5, and G9. Each product uses the same type of direct material. K1 uses 3.2 pounds of the material, S5 uses 4.2 pounds of the material, and G9 uses 7.4 pounds of the material. Demand for all products is strong, but only 40,000 pounds of material are available. Information about the selling price per unit and variable cost per unit of each product follows.

Calculate the contribution margin per pound for each of the three products and determine in which order the products should be produced and filled.

23-35 23-35


23-36


Alternative A Alternative B Cost $115,000 $125,000 Variable manufacturing costs per year 19,000 15,000 Calculate the total change in net income if Alternative A is adopted.

Cost to buy new machine ($115,000) Cash received to trade in old machine 52,000 Reduction in variable manufacturing costs

($36,000 - $19,000) x 5 years 85,000 Total change in net income $22,000

Calculate the total change in net income if Alternative B is adopted.



Xinhong should replace the existing machine with Alternative B.

Alternative A

Alternative B

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows.

23-37


Alternative A Alternative B Cost $158,000 $143,000 Variable manufacturing costs per year 27,600 12,800

Calculate the total change in net income if Alternative A is adopted.


($42,500 - $27,600) x 4 years 59,600 Total change in net income ($28,400)

Calculate the total change in net income if Alternative B is adopted.



Xinhong should replace the existing machine with Alternative B.

Alternative A

Alternative B

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $50,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $70,000. Variable manufacturing costs are $42,500 per year for this machine. Information on two alternative replacement machines follows.

23-38


23-39


Sales $2,000,000 Variable costs

Direct materials $450,000 Direct labor 500,000 Variable manufacturing overhead 300,000 Variable selling and administrative expenses 200,000 Total variable costs 1,450,000

Contribution margin 550,000 Fixed costs

Direct fixed costs 375,000 Indirect fixed costs 300,000

Total fixed costs 675,000 Net income (loss) ($125,000)

If canoes are discontinued, calculate the net income.

Marinette Company Income Statement - Canoe Segment

Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is available regarding its canoe segment.

23-40



Direct materials $450,000 Direct labor 500,000 Variable manufacturing overhead 300,000 Variable selling and administrative expenses 200,000 Total variable costs 1,450,000




Sales $2,000,000 $0 Costs and expenses

Direct materials 450,000 0 Direct labor 500,000 0 Variable manufacturing overhead 300,000 0 Variable selling and administrative expenses 200,000 0 Direct fixed costs 375,000 0 Indirect fixed costs 300,000 300,000

Total costs and expenses 2,125,000 300,000 Net income (loss) ($125,000) ($300,000) If the segment is eliminated, net income will be lower by $175,000.

Keep the segment

Eliminate the segment


The Canoe Segment should be kept, as its contribution margin of $550,000 is greater than its direct fixed costs (avoidable fixed costs) of $375,000.

23-41



Direct materials $280,000 Direct labor 280,000 Variable manufacturing overhead 220,000 Variable selling and administrative expenses 80,000 Total variable costs 860,000




If canoes are discontinued, calculate the net income.

Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is available regarding its canoe segment.


23-42


Sales $1,100,000 $0 Costs and expenses

Direct materials 280,000 0 Direct labor 280,000 0 Variable manufacturing overhead 220,000 0 Variable selling and administrative expenses 80,000 0 Direct fixed costs 140,000 0 Indirect fixed costs 160,000 160,000

Total costs and expenses 1,160,000 160,000 Net income ($60,000) ($160,000) If the segment is eliminated, net income will be lower by $100,000.

Keep the segment

Eliminate the segment

23-43



Direct materials $280,000 Direct labor 280,000 Variable manufacturing overhead 220,000 Variable selling and administrative expenses 80,000 Total variable costs 860,000





The Canoe Segment should be kept, as its contribution margin of $240,000 is greater than its direct fixed costs (avoidable fixed costs) of $140,000.

23-44

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