Bates Motel current room rate is $105, and sales volume is current proposed
10,000 rooms per year. Its variable cost per unit is $35, Revenue 1,050,000 1,080,000
total fixed costs are $ 530,000, Variable costs 350,000 420,000
Contrib. Margin 700,000 660,000
The company estimates that a $15 reduction in room rate
fixed costs 530,000 538,000
2 and an $8,000 increase in advertising will cause sales
net income 170,000 122,000
volume to increase by 2,000 units. What is the incremental
profit or loss?
Incremental income (loss) (48,000)
Conclusion: do not make the change
Coffee Grinder, which has excess capacity, received a
special order for 3,000 units at a price of $14 per unit. 3,000 units
Currently, production and sales are budgeted for 10,000 $ 14
units without considering the special order. Budget Incremental revenue 42,000
information for the current year follows. Variable costs
Sales $170,000
3 Variable costs 100,000
(3000* $10) 30,000
Incremental income 12,000
Fixed costs 30,000
Net income $ 40,000
Conclusion: accept the special offer
What will be the effect on income if the order is accepted?
Torrey Pines is studying whether to outsource its Human
Resources (H/R) activities. Salaried professionals who earn Avoidable costs
$390,000 would be terminated; in contrast, administrative Employees 390,000
assistants who earn $120,000 would be transferred Supplies, etc. 30,000
elsewhere in the organization. Supplies, copy charges, and avoidable costs 420,000
4 long distance are expected to decrease by $30,000, and
outsourcing costs (450,000)
$25,000 of corporate overhead, previously allocated to
additional cost (30,000)
Human Resources, would be picked up by other
departments. If Torrey Pines can secure needed H/R
services locally for $450,000, how much would the Conclusion: do not outsource
company benefit by outsourcing?
Problem 5 Solution:
The financial advantage of accepting the supplier’s offer is computed as follows:
Make Buy
Cost of purchasing (30,000 units × $21.00
per unit)....................................................... $630,000
Direct materials (30,000 units × $3.60 per
unit)............................................................. $108,000
Direct labor (30,000 units × $10.00 per unit) 300,000
Variable manufacturing overhead
(30,000 units × $2.40 per unit)................... 72,000
Fixed manufacturing overhead (30,000 units
× $3.00 per unit*)........................................ 90,000
Rent (Opportunity cost).................................. 80,000
Total costs...................................................... $650,000 $630,000
Financial advantage of accepting the offer.... $20,000
* The remaining $6 of fixed overhead cost ($9 per unit × 2/3
= $6 per unit) would not be relevant, because it will
continue regardless of whether the company makes or
buys the parts.
Problem 6 Solution
Contribution margin lost if the Linens Department is
dropped:
$(600,00
Lost from the Linens Department.................................. 0)
Lost from the Hardware Department (10% × (210,000
$2,100,000)................................................................ )
Total lost contribution margin.......................................... (810,000)
Fixed costs that can be avoided ($800,000 – $340,000).. 460,000
Financial (disadvantage) of discontinuing the Linens $(350,00
Department................................................................... 0)
Problem 7 Solution
1. Because the fixed costs will not change as a result of the order, they are not relevant to
the decision. The cost of the new machine is relevant, and this cost will have to be
recovered by the current order because there is no assurance of future business from the
retail chain.
Total—
Uni 5,000
t units
Sales from the order ($50 × 84%)................ $42 $210,000
Less costs associated with the order:
Direct materials.......................................... 15 75,000
Direct labor................................................ 8 40,000
Variable manufacturing overhead.............. 3 15,000
Variable selling expense ($4 × 25%).......... 1 5,000
Special machine ($10,000 ÷ 5,000 units). . 2 10,000
Total costs..................................................... 29 145,000
Financial advantage of accepting the order.. $13 $ 65,000
2. Sales from the order:
Reimbursement for production costs (variable
production costs of $26 plus fixed overhead
cost of $9 = $35 per unit; $35 per unit ×
5,000 units)..................................................... $175,000
Fixed fee ($1.80 per unit × 5,000 units)............ 9,000
Total revenue........................................................ 184,000
Less incremental costs—variable production
costs
($26 per unit × 5,000 units)............................... 130,000
Financial advantage of accepting the order.......... $ 54,000
3. Sales:
From the U.S. Army (above)............................... $184,000
Lost sales from regular channels ($50 per unit
× 5,000 units).................................................. (250,000)
Net decrease in revenue....................................... (66,000)
Less variable selling expenses avoided if the
Army’s order is accepted ($4 per unit × 5,000
units).................................................................. 20,000
Financial (disadvantage) of accepting the order... $(46,000)
Note: This answer assumes that regular customers will return after this one-time special
order rather than buy from a competitor in the future.