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accounting principle chapter 23...

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CHAPTER 23 Incremental Analysis ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Questions

1.

Describe management’s decision-making process and incremental analysis.

1, 2, 3, 4

1, 2

1

1, 18

2.

Analyze the relevant costs in accepting an order at a special price.

5

3

2

2, 3, 4, 18

1A

3.

Analyze the relevant costs in a make-or-buy decision.

6, 7

4

3

5, 6, 7, 8, 18

2A

4.

Analyze the relevant costs in determining whether to sell or process materials further.

8, 9, 10

5, 6

4

9, 10, 11, 12, 18

3A

5.

Analyze the relevant costs to be considered in repairing, retaining or replacing equipment.

11

7

5

13, 14, 18

4A

6.

Analyze the relevant costs in deciding whether to eliminate an unprofitable segment or product.

12

8

6

15, 16, 17, 18

5A

Copyright © 2018 John Wiley & Sons, Inc.

Do It!

Weygandt, Managerial Accounting, 8/e, Solutions Manual

Exercises

A Problems

Learning Objectives

(For Instructor Use Only)

7-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

7-2

Description

Difficulty Level

Time Allotted (min.)

Simple

20–30

1A

Use incremental analysis for special order and identify nonfinancial factors in the decision.

2A

Use incremental analysis related to make or buy, consider opportunity cost, and identify nonfinancial factors.

Moderate

30–40

3A

Determine if product should be sold or processed further.

Moderate

30–40

4A

Compute gain or loss, and determine if equipment should be replaced.

Moderate

30–40

5A

Prepare incremental analysis concerning elimination of divisions.

Moderate

30–40

Copyright © 2018 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 8/e, Solutions Manual

(For Instructor Use Only)

Learning Objective

Knowledge Comprehension

Weygandt, Accounting Principles, 13/e, Solutions Manual

*1.

Describe management’s decisionmaking process and incremental analysis.

Q7-1 Q7-2 Q7-3

*2.

Analyze the relevant costs in accepting an order at a special price.

*3.

Analyze the relevant costs in a make-or-buy decision.

*4.

Analyze the relevant costs in determining whether to sell or process materials further.

*5.

*6.

Q7-4 E7-1 E7-18

Application

Analysis

Synthesis

Evaluation

(For Instructor Use Only)

BE7-1 BE7-2

DI7-1

Q7-5 E7-18

BE7-3

DI7-2 E7-2 E7-3 E7-4

P7-1A

Q7-6 Q7-7 E7-18

BE7-4

DI7-3 E7-5

E7-6 E7-7 E7-8

E7-18

BE7-5 BE7-6 DI7-4

E7-9 E7-10 E7-11 P7-3A

E7-12

Analyze the relevant costs to be considered in repairing, retaining or replacing equipment.

Q7-11 E7-18

BE7-7 DI7-5

E7-14

Analyze the relevant costs in deciding whether to eliminate an unprofitable segment or product.

Q7-12 E7-18

BE7-8 DI7-6

E7-15 E7-16 E7-17

CT7-1

CT7-2

Expand Your Critical Thinking

Q7-8 Q7-9 Q7-10

CT7-4

P7-4A

E7-13

CT7-7

CT7-3 CT7-5 CT7-6

P7-5A

P7-2A

BLOOM’S TAXONOMY TABLE

Copyright © 2018 John Wiley & Sons, Inc.

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

7-3

ANSWERS TO QUESTIONS 1.

The following steps are frequently involved in management’s decision-making process: (1) Identify the problem and assign responsibility. (2) Determine and evaluate possible courses of action. (3) Make a decision. (4) Review results of the decision.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

2.

My roommate is incorrect. Accounting contributes to the decision-making process at Steps 2 and 4. Prior to the decision, accounting provides relevant revenue and cost data for each course of action. Following the decision, internal reports are prepared to show the actual impact of the decision.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

3.

Disagree. Incremental analysis involves the identification of financial data that change under alternative courses of action.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

4.

In incremental analysis, the important point to consider is whether costs will differ (change) between the two alternatives. As a result, sometimes (1) variable costs do not change under the alternative courses of action and (2) fixed costs do change.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

5.

The relevant data in deciding whether to accept an order at a special price are the incremental revenues to be obtained compared to the incremental costs of filling the special order.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

6.

The manufacturing costs that are relevant in the make-or-buy decision are those that will change if the parts are purchased.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

7.

Opportunity cost is the potential benefit that is lost when one course of action is chosen rather than an alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

8.

The decision rule in a decision to sell a product or to process it further is: Process further as long as the incremental revenue from the additional processing exceeds the incremental processing costs.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

9.

Joint products are products that are produced from a single raw material and a common production process. An accounting issue related to joint products is how to allocate the joint costs incurred during the production process that creates the joint products.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

10.

Joint costs are irrelevant to a sell-or-process-further decision because they are sunk costs and will not change whether the decision is to sell the existing product or process it further. Therefore, joint costs are ignored in this decision.

LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

11.

A sunk cost is a cost that cannot be changed by any present or future decision. Sunk costs, such as the book value of an old piece of equipment, therefore, are not relevant in a decision to retain or replace equipment.

LO5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

Questions Chapter 7 (Continued) 12.

Net income will be lower if an unprofitable product line is eliminated when the product line is producing a positive contribution margin and its fixed costs cannot be avoided or reduced.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

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.

LO1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling

IMA: Decision Analysis

BRIEF EXERCISE 7-2

Revenues Costs Net income

Alternative A

Alternative B

$160,000 100,000 $ 60,000

$180,000 125,000 $ 55,000

Net Income Increase (Decrease) ($ 20,000) (25,000) ($ 5,000)

Alternative A is better than Alternative B because its net income is $5,000 greater. LO1 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement IMA: Decision Analysis [$20,000 - $25,000 = ($5,000)] [Incr. in net inc. – Decr. in net incr. = Decr. in net inc.]

BRIEF EXERCISE 7-3 Reject Order Revenues Costs—Variable manufacturing Shipping Net income

$0 0 0 $0

Accept Order $75,000* 60,000** 9,000*** $ 6,000

Net Income Increase (Decrease) ($ 75,000) ( (60,000) ( (9,000) ($ 6,000)

The special order should be accepted because net income will increase by $6,000. *3,000 X $25 **3,000 X $20 ***3,000 X $ 3

BRIEF EXERCISE 7-3 (Cont’d) LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [Accept order: (3,000 x $25) – ((3,000 x $20) + (3,000 x $3)) = $6,000] [Accept order: (Units sold x USP) – ((Units sold x UVC) + (Units sold x Unit shipping cost)) = Net inc.]

BRIEF EXERCISE 7-4

Variable manufacturing costs Fixed manufacturing costs Purchase price Total annual cost

Make $50,000 30,000 –0– $80,000

Buy $ –0– 30,000 60,000 $90,000

Net Income Increase (Decrease) $ 50,000 0 (60,000) ($(10,000)

The decision should be to make the part as it is $10,000 less costly. LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [(Make: $50,000 + $30,000 = $80,000); (Buy: $30,000 + $60,000 = $90,000)] [(Make: Var. mfg. costs + Fixed mfg. costs = Tot. ann. cost); (Buy: Fixed mfg. costs + Purch. price = Tot. ann. cost)]

BRIEF EXERCISE 7-5

Sales price per unit Cost per unit Variable Fixed Total Net income per unit

Sell $62.00 36.00 10.00 46.00 $16.00

Process Further

Net Income Increase (Decrease)

$70.00

$8.00

42.00 10.00 52.00 $18.00

( (6.00) 0 ( (6.00) $2.00

The bookcases should be processed further because the incremental revenues exceed incremental costs by $2.00 per unit. LO4 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [(Sell: $62 – ($36 + $10) = $16); (Process further: $70 – ($42 + $10) = $18)] [(Sell: USP – (UVC + UFC) = Net inc./unit); (Process further: USP – (UVC + UFC) = Net inc./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 $50,000 BRIEF EXERCISE 7-6 (Continued)

($150,000 – $100,000) and only incur incremental costs of $45,000. Therefore, the company should process AB1 further and sell AB2. If XY1 is processed further, the company will earn incremental revenue of $35,000 ($130,000 – $95,000) but will incur incremental costs of $50,000. Therefore, the company should sell XY1 rather than process it further. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis

BRIEF EXERCISE 7-7

Variable manufacturing costs for 5 years New machine cost Sell old machine Total

Retain Equipment

Replace Equipment

Net 5-Year Income Increase (Decrease)

$3,000,000 (30,000)

$2,500,000 400,000 (30,000) $2,870,000

($ 500,000 ((400,000) 30,000 $ 130,000

$3,000,000

The old factory machine should be replaced as it will result in $130,000 less cost. LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis ($500,000 - $400,000 + $30,000 = $130,000) (Var. mfg. cost savings for 5 yrs. – New machine cost + Sale of old machine = Tot. incr. in net inc.)

BRIEF EXERCISE 7-8

Sales Variable costs Contribution margin Fixed costs Net income

Continue

Eliminate

$200,000 180,000 20,000 30,000 ($ (10,000)

$

–0– –0– ( –0– 20,000) $(20,000)

Net Income Increase (Decrease) $(200,000) (180,000) (20,000) ( 10,000) $ (10,000)

The Big Bart product line should be continued because $20,000 of contribution margin will not be realized if the line is eliminated. This amount is greater than the $10,000 savings of fixed costs. LO6 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis (-$200,000 + $180,000 + $10,000 = -$10,000) (Lost sales + VC savings + FC savings = Decr. in net inc.)

SOLUTIONS FOR DO IT! EXERCISES DO IT! 7-1

Revenues Maintenance expense Operating expenses Equipment upgrade Opportunity cost

Alternative 1 $65,000 5,000 26,000 17,000 4,000

Alternative 2 $60,000 5,000 22,000 0 0

Net Income Increase (Decrease) $(5,000) 0 4,000 0 4,000 $3,000

Sunk (s)

S

LO1 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [Net inc. effect: ($5,000) + $0 + $4,000 + $0 +$4,000 = $3,000] [Net inc. effect: Decr. rev. + Maint. exp. change + Oper. exp. savings + Equip. upgrade (S) + Opp. cost = Net inc. incr.]

DO IT! 7-2

Revenues Costs Net income

Reject $ –0– $ –0– $ –0–

Accept $180,000 144,000* $ 36,000

Net Income Increase (Decrease) $180,000 (144,000) $ 36,000

*(6,000 X $20) + (6,000 X $4) Given the results of the above analysis, Maize Company should accept the special order as net income will increase by $36,000. LO2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [Net inc. effect: $180,000 – ((6,000 x $20) + (6,000 x $4)) = $36,000] [Net inc. effect: Incr. rev. – ((units sold x Var. mfg. costs/unit) + (Units sold x Add’l. costs/unit)) = Net inc. incr.]

DO IT! 7-3 (a)

Direct materials Direct labor Variable overhead Fixed overhead Purchase price Net income

Make $ 30,000 42,000 45,000 60,000 –0– $177,000

Buy $ –0– –0– –0– 45,000 162,000* $207,000

Net Income Increase (Decrease) $ 30,000 42,000 45,000 15,000 (162,000) $ (30,000)

*60,000  $2.70 Given the results of the above analysis, Wilma Company will incur $30,000 of additional costs if it buys the switches, therefore, Wilma should continue to make the switches. [Net inc. effect: $30,000 + $42,000 + $45,000 + $15,000 – (60,000 x $2.70) = ($30,000)] [Net inc. effect: DM cost savings + DL cost savings + VOH cost savings + FOH cost savings – (Units sold x New USP) = Decr. in net inc.]

(b) Total cost Opportunity cost Total cost

Make $177,000 34,000 $211,000

Buy $207,000 –0– $207,000

Net Income Increase (Decrease) $(30,000) 34,000 $ 4,000

Yes, the answer is different: The analysis shows that net income is expected to increase by $4,000 if Wilma Company purchases the switches. LO3 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis

DO IT! 7-4 Sell

Process Further

Net Income Increase (Decrease)

Sales price per unit Cost per unit Variable Fixed Total

$75

$100

$25

$40 10 $50

$ 59 13 $ 72

($19) (3 ) ($22)

Net income per unit

$25

$ 28

$ 3

The tables should be processed further and Mesa Verde should finish the tables because the incremental revenues are expected to exceed incremental costs by $3 per unit. LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [Net inc. effect: $25 – ($19 + $3) = $3] [Net inc. effect: Incr. in USP – (Incr. in UVC + Incr. in UFC) = Inc. in net inc./unit]

DO IT! 7-5 Retain Replace Net Income Equipment Equipment Increase (Decrease) Operating expenses $120,000 $120,000 Repair costs 40,000 40,000 Rental revenue $ (60,000) 60,000 New machine cost 170,000 (170,000) Sale of old machine (25,000) 25,000 Total $160,000 $ 85,000 75,000 The equipment should be replaced because it is expected to increase net income by $75,000 over retaining and repairing it. LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [Net inc. effect: $120,000 + $40,000 + $60,000 - $170,000 + $25,000 = $75,000] [Net inc. effect: Oper. exp. savings + Repair cost savings + Rental rev. – New machine cost + Sale of old machine = Incr. in net inc.]

DO IT! 7-6

Sales Variable costs Contribution margin Fixed costs Net income

Continue $500,000 370,000 130,000 150,000 $ (20,000)

Eliminate $ 0 0 0 38,000 $(38,000)

Net Income Increase (Decrease) $(500,000) 370,000 (130,000) 112,000 $ (18,000)

The analysis indicates that Gator should not eliminate the gloves and mittens line because net income is expected to decrease $18,000. LO6 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis [Net inc. effect: ($500,000) + $370,000 + $112,000 = ($18,000) [Net inc. effect: Lost sales + VC savings + FC savings = Decr. in net inc.]

SOLUTIONS TO EXERCISES EXERCISE 7-1 1. 2. 3. 4. 5. 6. 7. 8. 9.

False. The first step in management’s decision-making process is “identify the problem and assign responsibility”. False. The final step in management’s decision-making process is to review the results of the decision. True. False. In making business decisions, management ordinarily considers both financial and nonfinancial information. True. True. False. Costs that are the same under all alternative courses of action do not affect the decision. False. When using incremental analysis, either costs or revenues or both will change under alternative courses of action. False. Sometimes variable costs will not change under alternative courses of action, but fixed costs sometimes will.

LO1 BT: C Difficulty: Easy TOT: 15 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis

EXERCISE 7-2 (a) Reject Order

Accept Order

Net Income Increase (Decrease)

Revenues ($4.80 x 5,000) $24,000 $24,000 $ –0– Materials ($0.50* x 5,000) (2,500) (2,500) –0– Labor ($1.50** x 5,000) (7,500) (7,500) –0– Variable overhead ($1.00*** x 5,000) (5,000) (5,000) –0– Fixed overhead (6,000) (6,000) –0– Sales ...