College of Management

AE 108 (Cost Accounting and Control)

Chapter 11 Assignment – Answer Key

1. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was
determined as follows:
Direct materials £150,000
Direct labour 240,000
Variable manufacturing overhead 90,000
Fixed manufacturing overhead _120,000
Total £600,000
An outside supplier has offered to sell the component for £25.50.
What is the effect on income if Foster purchases the component from the outside supplier?
Answer:
Make Buy
DM £150,000
DL 240,000
VFOH 90,000
FFOH 120,000 120,000
Purchase Price 510,000 (20,000 x 25.50)
Total 600,000 630,000

If the company will purchase from outside supplier, there will be a decrease of 30,000 (630,000 – 600,000) on the overall
income because this option has greater cost of 30,000 compared when the company will make the component on their
own.

2. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined
as follows:
Direct materials £ 75,000
Direct labour 120,000
Variable manufacturing overhead 45,000
Fixed manufacturing overhead __60,000
Total £300,000
An outside supplier has offered to sell the component for £12.75.
What is the effect on income if Vest Industries purchases the component from the outside supplier?
Answer:
Make Buy
DM £75,000
DL 120,000
VFOH 45,000
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FFOH 60,000 60,000
Purchase Price 510,000 (40,000 x 12.75)
Total 300,000 570,000

If the company will purchase from outside supplier, there will be a decrease of 270,000 (570,000 – 300,000) on the
overall income because this option has greater cost of 270,000 compared when the company will make the component on
their own.

3. Refer to problem 2. What is the effect on income if Vest purchases the component from the outside supplier?
Answer:
Make Buy
DM £75,000
DL 120,000
VFOH 45,000
FFOH 60,000 60,000
Purchase Price 510,000 (40,000 x 12.75)
Total 300,000 570,000

If the company will purchase from outside supplier, there will be a decrease of 270,000 (570,000 – 300,000) on the
overall income because this option has greater cost of 270,000 compared when the company will make the component on
their own.

4. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing
and other costs are as follows:
Variable costs per unit: Fixed costs per month:
Direct materials £ 9.00 Factory overhead £120,000
Direct labour 4.50 Selling and admin. __60,000
Factory overhead 3.00 Total £180,000
Distribution __1.50
Total £18.00
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000
per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of £6.00 per unit. If
Miller Company accepts the offer, it will be able to reduce variable costs by 30 per cent and rent unused space to an
outside firm for £18,000 per year. All other information remains the same as the original data. What is the effect on profits
if Miller Company buys from the Tennessee firm?
Answer:
Make Buy
Sales (20k x 30) 600,000 600,000
VC (20k x 18) (360,000) (252,000) – 18 x 70% x 20k
FFOH (120,000) (120,000)
S&A ( 60,000) (60,000)
Purchase Price (120,000) (20,000 x 6)
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Revenue from Rent 18,000
Net Income 60,000 66,000

If the company will purchase from outside supplier, there will be an increase of 6,000 (66,000 – 60,000) on the overall
income because this option has greater net income of 6,000 compared when the company will make the component on
their own.

5. Refer to problem 4. A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced
price of £24 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and
administrative costs of £3,000. All other information remains the same as the original data. What is the effect on profits if
the special order is accepted?
Answer:
Differential Approach:
Increase in Sales (10,000 x 24) – 240,000
Reduced Revenues due to reduced price (30-24) x 10k (60,000)
Increase in VC (18 – 1.50 x 10k) – (165,000)
Increase in FS&A (3,000)
Net Increase in Profit 12,000

6. Refer to problem 4. An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special
price of £25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and
administrative costs of £6,000. In addition, assume that overtime production is not possible and that all other information
remains the same as the original data. What is the effect on profits if the special order is accepted?

Answer:
Differential Approach:
Increase in Sales (7,000 x 25.20) – 176,400
Lost Revenue (24,000)
Increase in VC (18 – 1.50 x 7k) – (115,500)
Increase in FS&A (6,000)
Net Increase in Profit 30,900

Lost Revenue = Regular CM x Units to be Produced as Special Order instead of regular

= 12 x 2,000 = 24,000

CM = SP – VC = 30 – 18 = 12
Excess Capacity = Normal Capacity – Regular Capacity – Special Order
= 25,000 – 20,000 = 5,000

Since the special order is 7,000, only 5,000 can be accommodated for special order, the remaining 2,000 will be
taken from the regular production and this will result into lost revenues.
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7. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume
is as follows:
Direct materials £10.00
Direct labour 14.00
Variable overhead 6.00
Fixed overhead __4.00
Total £34.00
An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of £31.00. If Harris
Company accepts this offer, it can eliminate 50 per cent of the fixed costs assigned to part AA1. Furthermore, the space
devoted to the manufacture of part AA1 would be rented to another company for £24,000 per year. If Harris Company
accepts the offer of the outside supplier, annual profits will
Answer:

Make Buy
DM (5k x 10) 50,000
DL (5k x 14) 70,000
VFOH (5k x 6) 30,000
FFOH (5k x 4) 20,000 10,000 (20k x 50%)
Purchase Price 155,000 (5,000 x 31)
Rent Revenue (24,000)
Total 170,000 141,000

If the company will purchase from outside supplier, there will be an increase of 29,000 (170,000 – 141,000) on the overall
income because this option has lesser cost of 29,000 compared when the company will make the component on their
own.

8. Houston Ltd. manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows:
Direct materials £ 32
Direct labour 40
Variable overhead 16
Fixed overhead __32
Total £120
Johnson Company has offered to sell Houston Ltd. 5,000 units of the part for £112 per unit. If Houston Ltd. accepts
Johnson Company's offer, total fixed costs will be reduced to £60,000. What alternative is more desirable and by what
amount is it more desirable?

Answer:

Make Buy
DM (5k x 32) 160,000
DL (5k x 40) 200,000
VFOH (5k x 16) 80,000
FFOH (5k x 32) 160,000 60,000
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Purchase Price 560,000 (5,000 x 112)
Total 600,000 620,000

It is better off to make the part by 20,000 (620,000 – 600,000).

9. The operations of Smits Ltd. are divided into the Childs Division and the Jackson Division. Projections for the next
year are as follows:
Childs Jackson
Division Division Total
Sales £250,000 £180,000 £430,000
Variable costs __90,000 _100,000 _190,000
Contribution margin £160,000 £ 80,000 £240,000
Direct fixed costs __75,000 __62,500 _137,500
Segment margin £ 85,000 £_17,500 £102,500
Allocated common costs __35,000 __27,500 __62,500
Operating income (loss) £ 50,000 £(10,000) £ 40,000
Operating income for Smits Ltd. as a whole if the Jackson Division were dropped would be
Answer:
Childs
Division
Sales £250,000
Variable costs __90,000
Contribution margin £160,000
Direct fixed costs __75,000
Segment margin £ 85,000
Allocated common costs __62,500
Operating income (loss) £ 22,500

10. The operations of Knickers Ltd. are divided into the Pacers Division and the Bulls Division. Projections for the next
year are as follows:
Pacers Bulls
Division Division Total
Sales £420,000 £252,000 £672,000
Variable costs _147,000 _115,500 _262,500
Contribution margin £273,000 £136,500 £409,500
Direct fixed costs _126,000 _105,000 _231,000
Segment margin £147,000 £ 31,500 £178,500
Allocated common costs __63,000 __47,250 _110,250
Operating income (loss) £ 84,000 £(15,750) £ 68,250
Operating income for Knickers Ltd. as a whole if the Bulls Division were dropped would be
Answer: Pacers

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 Division
Sales £420,000
Variable costs _147,000
Contribution margin £273,000
Direct fixed costs _126,000
Segment margin £147,000
Allocated common costs __110,250
Operating income (loss) £ 36,750

11. The following information pertains to Ewing Company's three products:

D E F
Unit sales per month 900 1,400 800

Selling price per unit £6.00 £11.25 £ 7.50

Variable costs per unit _3.00 __9.00 __7.80
Unit contribution margin £3.00 £ 2.25 £(0.30)
Assume that product F is discontinued and the space used to produce product F is rented for £600 per month. Monthly
profits will

Answer:
Continue Discontinue
D (900 x 3) 2,700 2,700
E (1,400 x 2.25) 3,150 3,150
F (800 x -.30) (240) 600
NI 5,610 6,450

If the product F will be discontinued, there will be an 840 increase (6,450 – 5,610) in the overall profits.

12. Refer to problem 11. Assume that product F is discontinued and the space is used to produce E. Product E's production
is increased to 2,200 units per month, but E's selling price of all units of E is reduced to £10.20. Monthly profits will
Answer:
Continue Discontinue
D (900 x 3) 2,700 2,700
E (1,400 x 2.25) 3,150 2,640 [2,200 x (10.20 – 9)]
F (800 x -.30) (240) .
NI 5,610 5,340

If the product F will be discontinued, there will be a 270 decrease (5,610 – 5,340) in the overall profits.

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13. The following information pertains to Dodge Company's three products:
A B C
Unit sales per year 250 400 250

Selling price per unit £9.00 £12.00 £ 9.00

Variable costs per unit _3.60 __9.00 __9.90
Unit contribution margin £5.40 £ 3.00 £(0.90)
Contribution margin ratio 60% 25% (10)%
Assume that product C is discontinued and the extra space is rented for £300 per month. All other information remains the
same as the original data. Annual profits will
Answer:
Continue Discontinue
A (250 x 5.40) 1,350 1,350
B (400 x 3) 1,200 1,200
C (250 x -.90) (225) 300
NI 2,325 2,850

If the product F will be discontinued, there will be a 525 increase (2,850 – 2,325) in the overall profits.

14. Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units:
Direct materials £2,400
Direct labour 960
Factory overhead (30% variable) 1,800
Selling expenses (50% variable) 900
Administrative expenses (10% variable) ____840
Total per unit £6,900
Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to
dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses
would be incurred on the special order.
What is the profit earned by Reggie Ltd. on the original 1,000 units?
Answer:
Sales Revenue (1,000 x 7,800) 7,800,000
Less: VC [2,400 + 960 + (1,800 x 30%) + (900 x 50%) + (840 x 10%)] x 1,000 4,434,000
CM 3,366,000
Less: FC [(1,800 x 70%) + (900 x 50%) + (840 x 90%) x 1,000 2,466,000
NI 900,000

15. Refer to problem 14. How much will income change if the special order is accepted?

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Answer:
Sales (100 x 5,100) 510,000
Less: VC [2,400 + 960 + (1,800 x 30%) + (840 x 10%)] x 100 398,400
NI 111,600

16. Refer to problem 14. If Reggie Ltd. wants to increase its profit by £18,000 on the special order, what is the minimum
price it should charge per unit?

Answer:

Minimum Price = Profit + VC = Sales / Number of Units

= 18,000 + 398,400 = 416,400 / 100 = 4,164

17. The following information relates to a product produced by Creamer Company:

Direct materials £24
Direct labour 15
Variable overhead 30
Fixed overhead _18
Unit cost £87
Fixed selling costs are £500,000 per year, and variable selling costs are £12 per unit sold. Although production capacity is
600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for £120
each. A customer has offered to buy 60,000 units for £90 each.
The incremental cost per unit associated with the special order is
Answer:

Direct materials 24
Direct labour 15
Variable overhead 30
Variable Selling 12
Unit cost 81

18. Refer to problem 17. If the firm produces the special order, the effect on income would be a
Answer:

SP – VC x Units = NI
(90 – 81) x 60,000 = 540,000 increase

19. Meco Company produces a product that has a regular selling price of £360 per unit. At a typical monthly production
volume of 2,000 units, the product's average unit cost of goods sold amounts to £270. Included in this average is £120,000
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of fixed manufacturing costs. All selling and administrative costs are fixed and amount to £30,000 per month.

Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay transportation, and
the regular selling price will not be affected if Meco accepts the order.
Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be

Answer:

VCU = 270 x 2,000 = 540,000 – 120,000 = 420,000 / 2,000 = 210

(240 – 210) x 1,000 = 30,000 increase

20. Refer to problem 19. Assuming Meco Company is operating at capacity and accepting the order would require an
offsetting reduction in regular sales, the effect on profits of accepting the order would be a
Answer:

(360 – 210) x 1,000 = 150,000 – 30,000 = 120,000 decrease

21. Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units:
Direct materials £4
Direct labour 12
Variable manufacturing overhead 6
Fixed manufacturing overhead 8
The company has the capacity to produce 40,000 units. The product regularly sells for £40. A wholesaler has offered to
pay £32 a unit for 2,000 units.

If the firm is at capacity and the special order is accepted, the effect on operating income would be
Answer:
Special Order Regular
Sales (2,000 x 32) 64,000 (2,000 x 40) 80,000
VC [2,000 x (4+12+6)] (44,000) (44,000)
NI 20,000 36,000

If the company will accept the special order, it will have a 16,000 decrease (36,000 – 20,000) effect on the overall net
income.

22. Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000
units:
Direct materials £12
Direct labour 36
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Variable manufacturing overhead 18
Fixed manufacturing overhead 24
The company has the capacity to produce 90,000 units. The product regularly sells for £120.
A wholesaler has offered to pay £110 a unit for 7,500 units. If the special order is accepted, the effect on operating income
would be a

Answer:

Increase in Revenue [110 – (12+36+18) x 7,500) 330,000

Lost Revenue due to special order [(120 – 66) x (7,500 – 6,000)] (81,000)
NI 249,000

23. Refer to problem 22. If a wholesaler offered to buy 4,500 units for £100 each, the effect of the special order on income
would be a
Answer:

Increase in Revenue [100 – (12+36+18) x 4,500) 153,000

24. Rose Manufacturing Company had the following unit costs:

Direct materials £24
Direct labour 8
Variable factory overhead 10
Fixed factory overhead (allocated) 18
A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated by accepting the special order?
Answer:

Increase in Revenue [48 – (24+8+10) x 2,000) 12,000

25. Boone Products had the following unit costs:

Direct materials £24
Direct labour 10
Variable factory overhead 8
Fixed factory overhead (allocated) 18

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A one-time customer has offered to buy 1,000 units at a special price of £48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated from the special order?
Answer:
Increase in Revenue [48 – (24+10+8) x 1,000) 6,000

26. Refer to problem 25 A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Because of
capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is £8 per unit. How much
additional profit (loss) will be generated by accepting the special order?
Answer:

Increase in Revenue [48 – (24+8+10) x 2,000) – (1,000 x 8) 4,000

27. Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units:
Direct materials £2,400
Direct labour 960
Factory overhead (30% variable) 1,800
Selling expenses (50% variable) 900
Administrative expenses (10% variable) ___840
Total per unit £6,900
Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to
dealers for £7,800.

Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in
order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the net
income if the special order of 100 units is accepted?
Answer:

Regular VC = 2,400 + 960 + (1,800 x 30%) + (900 x 50%) + (840 x 10%) = 4,434
Special VC = 4,434 – 450 = 3,984
Special FC = (1,800 x 70%) + (900 x 50%) + (840 x 90%) = 2,466

Regular Sales (960 x 7,800) 7,488,000

Regular VC (960 x 4,434) (4,256,640)
Regular FC (1,000 x 2,466) (2,466,000)
Regular NI 765,360
Special Revenue (100 x 5,100) 510,000
Special VC (100 x 3,984) (398,4000)
Special NI 111,600
Total NI 876,960

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28. Zandy Beverage Company plans to eliminate a branch that has a contribution margin of £50,000 and fixed costs of
£75,000. Of the fixed costs, £55,000 cannot be eliminated. The effect of eliminating this branch on net income would be
a(n)
Answer:

Branch CM – 50,000
Avoidable FC (75,000 – 55,000) 20,000
Net Decrease in NI 30,000

29. Salish Industries manufactures a product with the following costs per unit at the expected production of 60,000 units:
Direct materials £8
Direct labour 15
Variable manufacturing overhead 10
Fixed manufacturing overhead 12
The company has the capacity to produce 70,000 units. The product regularly sells for £60. A wholesaler has offered to
pay £55 each for 5,000 units.

If the special order is accepted, the effect on operating income would be a

Answer:

Increase in Revenues = [55 – (8+15+10) x 5,000] = 110,000

30. Bridge Industries manufactures a product with the following costs per unit at the expected production of 78,000 units:
Direct materials £15
Direct labour 22
Variable manufacturing overhead 12
Fixed manufacturing overhead 19
The company has the capacity to produce 80,000 units. The product regularly sells for £90. A wholesaler has offered to
pay £75 each for 2,000 units.

If Bridge's special order is accepted, the effect on operating income would be a

Answer:

Increase in Revenues = [75 – (15+22+12) x 2,000] = 52,000

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