Workshop Solutions Topic 10 PDF

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Workshop Topic 10 In-Class WS Questions Textbook Questions Ch.11: 11-20, 21, 24, 25.

In-Class WS Questions – Session 10 A local clothing manufacturer, Polo Pty Ltd, has been approached to supply a special order for 20 000 polo shirts at a price of $6 per polo shirt. The current cost of producing a shirt is made up of direct costs of $4 per shirt plus an allocation of fixed costs of $7.00 per shirt. Polo Pty Ltd has sufficient spare capacity to manufacture the order without affecting its normal production. Should Polo Pty Ltd accept the order? a. b. c. d.

No, as the price being offered of $6 per shirt is not sufficiently above the full cost of production of $5.50 per shirt. Yes, as long as there are no adverse long-term effects of accepting the order that outweigh the short-term benefit of a contribution of $40 000 towards overhead costs. There is insufficient information to tell whether Polo Pty Ltd should accept the order or not. Yes, as profits will be increased by $120 000.

ANSWER: B

A local clothing manufacturer, Polo Pty Ltd, has been approached by Wally to supply a special order for 20 000 polo shirts at a price of $6 per polo shirt. The cost of producing a shirt is made up of direct costs of $4 per shirt plus an allocation of fixed costs of $7.00 per shirt. Polo Pty Ltd has no spare capacity to manufacture the order without affecting its normal production. If the sale price for each polo shirt currently produced is $12.00, should Polo Pty Ltd accept the order? a. b. c. d.

There is not enough information to decide whether Polo Pty Ltd should accept the order or not. No. Yes, as long as there are no adverse long-term effects that outweigh the shortterm benefits. Yes.

ANSWER: B

A local manufacturer has been approached to supply a special order for 20 000 mobile phones at a price of $20 per phone. The current cost of producing the phones is made up of direct materials of $8 per phone, direct labour costs of $6 per phone, direct overhead costs of $7 per phone plus fixed overhead costs of $5 each. The company has sufficient spare capacity to manufacture the order without affecting its normal production. Should they accept the order?

a. b. c. d.

Yes. No. Yes, as long as there are no adverse long-term effects of accepting the order that outweigh the short-term benefits. Yes, as long as the customer pays for the order in cash.

ANSWER: B

Hint for the following questions: the key in discontinuation case is that if it doesn't change the fixed costs, then the fixed costs stay and the only change, then, is to do with the elimination of the revenue and the variable costs; so, we can just calculate the new income by taking these items from the original the total income; so in this case, to get the new income, add back the variable costs and take away sales revenue for the discontinued operation from the current income. 1. The condensed income statement for a Ziggy Ltd. for the past year is as follows:

Sales Costs: Variable costs Fixed costs Total costs Income (loss)

Product F G $300,000 $210,000

H $340,000

Total $850,000

-$180,000 -$180,000 - $220,000 -$580,000 -50,000 -50,000 -40,000 -140,000 $230,000 $230,000 $260,000 $730,000 $ 70,000 $ (20,000) $ 80,000 $130,000

Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products F and H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G? a. $20,000 increase b. $30,000 increase c. $20,000 decrease d. $30,000 decrease (new income (in 000) = $130-$210+$180 = $100; thus the change is $130 -100; decrease from$30)

ANSWER: D; Explanation

Sales Costs: Variable costs Fixed costs Total costs Income (loss)

Product F G $300,000 $0

H $340,000

Total $640,000

-$180,000 -$0 -$220,000 -$400,000 - 50,000 -50,000 - 40,000 -140,000 $230,000 ($50,000) $260,000 $540,000 $ 70,000 $ (50,000) $ 80,000 $100,000

Income decrease from $130,000 to $100,000, decrease by $30,000.

2. The condensed income statement for a Hayden Corp. for the past year is as follows:

Sales Costs: Variable costs Fixed costs Total costs Income (loss)

Product T U $680,000 $320,000 $540,000 145,000 $685,000 $ (5,000)

$220,000 40,000 $260,000 $ 60,000

Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U. What is the amount of change in net income for the current year that will result from the discontinuance of Product T? a. $140,000 increase b. $5,000 increase c. $5,000 decrease d. $140,000 decrease (new income (in000) $60-$680+540 =-80 loss. Difference= 55-(-85)=140

ANSWER: D Explanation Product T Sales $0 Costs: Variable costs $0 Fixed costs 145,000 Total costs $145,000 $ (145,000) Income (loss) The difference in income is $55,000 - (-$85,000) = $140,000 decrease

U $320,000 $220,000 40,000 $260,000 $ 60,000

11-20 If Jenni gets sick and leaves work two hours early one day, two hours of production time will be lost. This loss of time will reduce the number of self-flushing toilets which can be sold by 8 toilets (each toilet requires 1/4 hour of processing on the machine). Thus the business incurs an opportunity cost equal to the lost contribution margin on 8 self-flushing toilets, $240 (8 x $30). Note to Instructors: Some students may think the opportunity cost is $160 [$240 – $80 (Jenni’s hourly pay x 2)] but the $40/hour is included in the contribution margin because Jenni’s pay is direct labour, a variable cost.

11-21 No, the $40 per unit manufacturing cost which was incurred to produce the 60 000 clotheslines is not relevant. This is a past cost. It has already been incurred and its total amount cannot be affected by a decision regarding to whom to sell the clothesline. The only costs and revenues which would be relevant are the future costs and revenues which differ between the alternatives. The following would be relevant:  Sales revenue  Sales promotion or advertising costs  Shipping costs  Storage and handling costs  Property taxes and insurance on the clotheslines in inventory  Clerical costs associated with prolonged domestic sales. 11-22 Alternative 1: to store the tubes and sell them next year Float Boat

Keep and sell later or sell now at discount price Keep and sell later (Alternative 1) 56,000* Revenues Costs: Storage Advertising Income (loss)

Sell now at discount price (Alternative 2) $60,000

-6,500 0 $49,500

0 -12,000 $48,000

Differential Effect on Income (Alternative 2) $4,000 6,500 -12,000 $1,500

*(70% x 10,000units) @$8 **10,000 units @ $6.00

It would be better for Float Boat to store the tubes and sell them next year. Note that the manufacturing costs incurred prior to the time of the decision are ‘sunk’ (past) costs and are not relevant to the decision.

11-24 Roy Parker Price per doughnut

Revenues? Costs: Incremental costs of driving to the plant Income (loss)

Selling Doughnuts to workers $12 $2* $10

* 8Km @$0.25 Required total sales revenue= $12 Selling price per doughnut = $12 = 60 doughnuts* = $0.20 per doughnut *6 dozen – 1 dozen workers will not pay for; 5 dozen Note that the cost of the doughnuts is irrelevant to Roy’s decision because it is a past (sunk) cost. 11-25 Incremental costs to fill the order for 700 engines: Direct materials cost 700 x $13.00 = $ 9 100 Direct labour cost 700 x 11.50 = 8 050 Variable overhead cost 700 x 8.50 = 5 950 Packing cost 700 x 1.50 = 1 050 Total incremental cost $24 150 Note that no additional (incremental) fixed overhead costs would be incurred because of filling the order (Assuming enough capacity to fill the order). Also the business would not incur the variable selling costs ($3.00 per unit) normally incurred to obtain and fill orders for local customers.

Electro Company Accept or reject a special order

Revenues Costs per unit: Variable Fixed costs Income (loss)

Reject Order (Alternative 1) $0

Accept Order (Alternative 2) $24,000

0 0 $0

-24,150 0 -$150

Differential Effect on Income (Alternative 2) $24,000 -24,150 0 -$150

Electro company should not accept the offer. Note that the $80 000 cost of advertising in the international trade magazine was incurred prior to the time of the decision. Thus, it is a ‘sunk’ (past) cost and is not relevant in the decision whether or not to accept the offer from the French Company....