Study Probes

Study Probes - Chapters 20
Problem 1 Tenchavez Company makes and sells 12,000 pairs of running shoes each year. The
cost of making one pair of these shoes is
Direct material $ 11
Variable manufacturing overhead 5
Direct labor 4
Fixed manufacturing overhead 7
The fixed overhead costs are unavoidable. Tenchavez allocates fixed overhead costs based on its
annual capacity of 15,000 pairs it is able to make. An overseas company recently offered to buy
3,000 pairs of shoes at $21 per pair. Regular customers buy shoes from Tenchavez at $30 per pair.
How much is incremental income if Tenchavez accepts the special order? Should Tenchavez
accept? Use the incremental approach to justify your answer.
Variable cost = $11 + $5 + $4 = $20 per unit

Tenchavez should accept.
Incremental revenue from special order (3,000 x $21) $63,000
Incremental cost to fill special order (3,000 x $20) (60,000)
Incremental income from accepting special order $ 3,000
Problem 2 - Young Siding Co. produces computers, which sell for $400 each. A foreign
distribution wants to order 1,000 units at $300 a unit. Production costs per unit are:
Direct materials $90

Direct labor 120
Variable overhead 50
Fixed overhead 60
A. How much is the relevant cost of producing one more computer?

Relevant costs are incremental costs of making one unit.
$90 + $120 + $50 = $260
Note that fixed costs do not increase when one additional unit is produced.
B. What the effect on net income of accepting the special order? Use the incremental
approach.
Incremental revenue = $1,000 x $300 = $300,000
Incremental costs = $1,000 x 260 = ($260,000)
Increase of $40,000
Problem 3 - Scott, Inc. has a capacity of producing 300,000 units a year and sells them at $28 a
unit. At present Scott is selling 250,000 units. A foreign distributor has offered to purchase
40,000 units at $20 a unit. Variable selling costs will be reduced by 40%. The sales manager
determined that incremental costs of accepting the order are $744,000. Should Scott accept
the order? Use the incremental approach.
Yes, incremental profit is $56,000.
Incremental Revenue = 40,000 x $20 = $800,000

Incremental costs = $744,000
Incremental profit = $800,000 - $744,000 = $56,000
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Problem 4 - It costs Roy Company $14 of variable costs and $6 of allocated fixed costs to
produce a toy truck that sells for $30. A buyer offers to purchase 3,000 units at $18 each. Roy
has unused capacity. What will occur to profits is the offer is accepted and produced? Use the
incremental approach.
Incremental increase in revenue (3,000*$18) $54,000

Incremental increase in costs (3,000*$14) (42,000)
Incremental increase in profits to accept $12,000
Problem 5 - Hand Devices makes and sells hand-held computers. Each computer regularly sells
for $200. The following cost data per computer are based on a normal production of 8,000
computers produced each period. The company has the capacity to produce 12,000
computers.

Direct labor 55
Factory Overhead (75% variable, 25% 40
unavoidable fixed)
Hand Devices has received a special order for a sale of 500 computers to an overseas
customer. The customer is willing to pay $150 per computer. The only selling costs that would
be incurred on this order would be $10 per computer for shipping. Hand is now selling 8,000
computers through regular distributors each period. Should Hand Devices accept the special
order? use the incremental approach.
No. The incremental costs are $170 per computer, which exceeds the price the customer is
willing to pay.
Incremental revenue per computer = $150
Incremental cost per computer.$75 + $55 + [75% x $40] + $10 = $170
Incremental loss per computer = $150 - $170 = $20
Problem 6 - Darnell Inc. budgeted 5,000 widgets for production during 2004. Fixed factory
overhead is allocated using ABC. The following estimated costs were provided:
Direct material ($80/unit) $400,000
Direct labor ($22/hr. * 2 hrs./unit) 220,000
Variable manufacturing overhead 40,000
($8/unit)
Fixed factory overhead costs 269,000
($53.80/unit)
Total $929,000
Cost per unit = $185.80
Darnell received an order for 400 units from a new customer in a country in which Darnell has
never done business. This customer would like to spend $160 per widget. Darnell has capacity
to produce 5,500 units. Should Darnell accept the order? Support your work with an
incremental analysis.
Yes, it can make $11,200
Incremental revenue per widget $160

Incremental cost per widget:
$80 + ($22 x 2) + $8 = 132
Incremental profit per unit $ 28
Total incremental profit = $28 x 400 = $11,200
Problem 7- Zweig, Inc. produces batches of chocolate chip cookies:

Batch
Cost
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Direct materials $ 8.00
Direct labor 3.00
Variable overhead 1.00
Fixed common overhead 4.00
An outside supplier has offered to produce the cookies for $14 per batch. What is the
minimum amount that Zweig would sell additional batches of cookies if the company is
under capacity?
$8 + $3 + $1 = $12; Relevant = incremental. Note that avoidable means it is a cost that will not
be incurred if the product is bought instead of made, i.e., it is a cost savings. The direct
costs are saved as well. Only the costs that are different if the cookies are made instead
of bought are relevant.
Problem 8 - Sally Industries can produce 100 units of a necessary component part with the following
costs:
Direct Materials $30,000
Direct Labor 13,000
Variable Overhead 32,000
Fixed Overhead 12,000
If Sally Industries purchases the component externally, $3,000 of the fixed costs can be avoided. At
what external price for the 100 units is the company indifferent between making or buying?
The company is indifferent when the cost of making the part equals the cost of buying the part, which
is $78,000:
Incremental savings: Effect on Profit
($30,000 + $13,000 + $32,000 + $3,000) $78,000
Multiple Choice Questions
1. Which one of the following is an important assumption that is made when considering the decision
to accept an order at a special price?
A. There are no mixed costs.
B. The company's overall economic growth will continue at historical rates.
C. The company has only fixed costs.
D. The company is operating at less than capacity.
In all costs systems, there will always be mixed costs, and the nature of the costs does not impact
whether a special order is accepted. Growth of the company has no effect on whether the company
will increase or not.
2.Which of the following describes one aspect of incremental analysis?

A. Both costs and revenues that stay the same between alternate courses of action will be analyzed.
B. Only differential costs and differential revenues will be analyzed.
C. Only costs that differ between alternate courses of action will be analyzed. Revenues are not
relevant.
D. Only costs relating to the decisions at hand are analyzed.
Differential = incremental = relevant. Incremental analysis involves both incremental revenues and
incremental costs--only items that differ between alternatives.
3.When deciding to accept a special order from a new customer, which one of the following is not
necessary by management?
A. Reallocate overhead costs to additional products
B. Consider the special order’s impact on demand of other products
C. Determine whether excess capacity is available
D. Determine product costs
Allocated costs, most often fixed costs, are unavoidable, and therefore, not relevant, i.e., they will
continue to be a cost regardless of what decision is made. All relevant (incremental) costs are ignored
in incremental analysis since they are not incremental. If demand of other products fall, the special
order may not increase profits. If capacity is not available to manufacture the special order, additional
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costs will be necessary, so the special order may not increase profits. Since most product costs are
variable, determining their cost is necessary to incremental decisions such as special orders.
4. Which of the following is most often a differential cost?

A.Depreciation
B.Rent
C.Variable overhead
D.Fixed overhead
Fixed costs are rarely incremental since they do not differ between alternatives.
5. UNF Bookstore usually closes at 5:00 pm, but the manager wants to know about the extra costs
involved by letting the store stay open until 9:00 pm. The store manager has listed the following
monthly expenditures and their related costs:
1. Manager salary $40,000 per year
2. Store rent $5,000 per month
3. Sales’ associates $9 per hour
wages
4. Store utilities $4 per hour
Which of the above cost items would be relevant to the decision about staying open extra hours?
A.1, 2, 3, and 4
B.2, 3, and 4
C.2 and 3
D.3 and 4
Relevant costs are those that will differ between alternatives. The salary and rent will stay the same
regardless if the store stays open longer. The other costs will increase because wages are hourly and
more hours of wages will be required, and more hours of utilities will be needed which increase total
costs.
6. Which one of the following costs should not be taken into consideration when making a decision?
A.Opportunity costs.
B.Relevant costs
C.Differential costs
D.Unavoidable costs
Answers A, B, and C all have the same meaning.These are terms for costs that differ between
alternatives. Unavoidable costs never differ between alternatives since they are the same regardless
of decision.
7. A company is within plant capacity. It is contemplating whether a special order should be accepted.
The order will not impact regular sales. If the company accepts a special order, what will occur?
a.Incremental costs will not be affected.
b.Net income will increase if the special sales price per unit exceeds the unit variable costs.
c. There are no incremental revenues.
d.Both fixed and variable costs will increase.
If a special order is accepted, the company will be selling more products, so both sales and variable
costs increase. Since fixed costs are generally common, they must be absorbed by the company
regardless of whether the special order is accepted or not. Most often fixed costs are not relevant.
8.When deciding to accept a one-time-only special order from a wholesaler, management should do
all EXCEPT
A. analyze product costs.
B. consider the special order’s impact on future prices of their products.
C. determine whether excess capacity is available.
D. verify past design costs for the product.
Past design costs are sunk since they stay the same no matter if the one time order is accepted or
not.
9. When there is excess capacity, it makes sense to accept a one-time-only special order for less than the
current selling price when
A. incremental revenues exceed incremental costs.
B. additional fixed costs must be incurred to accommodate the order.
C. the company placing the order is in the same market segment as your current customers.
D. it never makes sense.
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Only direct costs are incremental.
10. Three weeks ago, Brian Schwan paid $30 for a non-refundable ticket to tonight’s concert. Now
he’s been invited to a party, too. He can’t go to both, but the party sounds like more fun than the
concert. In deciding whether to attend the concert or the party, which of the following is(are) relevant?
A. The $30 cost of the ticket.
B. His grade on the Accounting test he took earlier today.
C. The $50 his roommate will pay him for the concert ticket.
D. All of these
E. None of these
The $30 paid to buy the ticket is a cost regardless if he goes to the concert or not. The test grade will
not change regardless if he goes to the concert.
11.Given the following list of costs, which one should be ignored in a decision to produce additional
units of product for a factory that is operating at less than 100% capacity, and the additional business
will not use up the remainder of the plant capacity?
A. Fixed administrative expenses
B. Variable factory overhead
C. Per hour cost of direct labor
D. Variable selling expenses
Fixed administrative costs are not avoidable and as such, are not relevant to the decision. These
amount will continue regardless if the company produces additional units or not.
12.A company was evaluating the differences between two copiers. Which one of the following would
be a qualitative aspect of making the decision?
A. The number of copies produced per minute is different.
B. The dimensions of one of the printers require purchasing a new table.
C. The printers will collate output at different rates.
D. The color of one of the printers matches the color of the computer it will be attached to.
Choosing a blue versus a red copier does not change the cost. The other alternatives would affect the
cost or production ability of the company.
13. Which one of the following is an important assumption that is made when considering the decision
to accept an order at a special price?
A. There are no mixed costs.
B. The company is not currently operating at full capacity
C. Overall economic growth will continue at historical rates.
D. The company will continue to receive similar orders in the future.
If a company has no capacity, it must incur additional fixed costs in order to accept the order.
14. Which costs are always incremental and relevant in decision analysis?
A. Avoidable costs and opportunity costs
B. Common fixed costs and avoidable costs
C. Sunk costs and avoidable costs
D. Common fixed costs and opportunity costs
Sunk costs are never relevant. Common fixed costs are most often unavoidable so they are not
incremental to the decision.
15. Relevant costs in accepting an order at a special price include all of the following except
A. Direct materials.
B. Direct labor.
C. Fixed manufacturing overhead
D.Variable manufacturing overhead.
Fixed overhead costs continue.
16.An example of a qualitative performance measure is

A. increase in incremental revenues.
B. opportunity costs.
C. output per hour.
D. warmth of the hospital staff.
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17. Why are sunk costs not considered relevant when choosing among alternatives?
A. GAAP considers them to be irrelevant.
B. They remain the same among alternatives and do not add useful information for selecting an
alternative.
C. They are avoidable.
D. They are considered future incremental costs.
18.Under what conditions might a manufacturing firm sell a product for less than its regular price?
A. When the price offered for a short-term order is less than the contribution margin.
B. If a firm has excess capacity that is sitting idle, and it can recover its incremental costs.
C. When a company wants to obtain greater market share, even if the differential costs exceed
differential revenue.
D. If the incremental revenue exceeds the total variable costs.
Note that answer D does not consider 'relevant' variable costs.
19. Which of the following is an example of a sunk cost?

A. Direct materials for products
B. Variable overhead for the current year
C. Equipment depreciation for last year
D. Future costs that might be saved
Sunk costs are those that cannot be changed and already been incurred.
Short Answer Questions

Answers can be found in chapters 20. It is much more beneficial if you look up the
answers in the chapter as you will get more insight by reading the concept in context of
the chapter compared to if I would provide you a one sentence answer. Hence, I will not
post answers to the following questions. If you want confirmation of your interpretation of
the answer, feel free to ask.
Chapter 20
1. What is a special order decision?
2. Under what situations are special orders accepted? rejected?
3. What amounts are relevant and what amounts are not relevant in special order
decision?
4. What is meant by the incremental approach in determining if a special order should be
accepted?
5. Why are fixed costs most often ignored when determining if a special order should be
accepted?
6. Is a special order decision long or short-term?
7. What are qualitative versus quantitative considerations? Identify some qualitative considerations of
special order decisions.
8. What role does capacity play in accounting for special order decisions?
9. If a company is deciding whether to accept a special order, what costs should be
included in determining the minimum pricing it will be willing to accept?
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Study Probes - Chapters 21 Solutions
Problem 1 - Monk Company manufactures widulators. Watson Company has approached Monk
with a proposal to sell the company a component use in its widulators at a price of $12,000 for 4,000
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units. Monk is currently making these components in its own factory. The following costs are
associated annually with this part of the process when 4,000 units are produced:
Direct material $4,000

Direct labor 2,000
Manufacturing overhead (fixed & variable) 6,800
Total $12,800
All but $3,000 of the manufacturing overhead costs will continue if Monk discontinues making the
components. Monk will be able to eliminate machine rental of $1,800 per year if the components are
no longer manufactured.
A. How much are the incremental cost or savings if Monk outsources? Use the incremental approach
to justify your answer.
Of the $6,800, $3,000 is avoidable, and $3,800 will
continue.
Incremental cost to buy 4,000 components ($

12,000)
Incremental manufacturing savings if bought:
Machine rental $ 1,800
Direct materials 4,000
Direct labor 2,000
Overhead – avoidable portion 3,000
Total Incremental savings 10,800
Incremental cost of buying ($1,200)
components
B. What is the amount of avoidable costs if Monk buys rather than makes the components?
$10,800 – from part A above….the costs that can be avoided if the alternative course of action—
buying—is taken.
C. Which costs/amounts from above are opportunity costs, if any?

$1,800......the rent savings are given up if the alternative action--buying--is undertaken. Note that the
cost of the products--whether bought or made is still a 'cost' for the company.
D. Should Monk make or buy the components? Briefly justify your answer.
Monk should make the components. There is an additional cost of $1,200 if Monks buys the
components. Increases in costs are bad choices in decision making because the cost must be
passed on to the customer or absorbed as lower profits by the seller.
Problem 2 -Temple, Inc. produces grandfather clocks and sells 100 per year.
:
Unit
Cost
Direct materials $ 200
Direct labor 240
Fixed overhead (40% 300
avoidable)
An outside supplier has offered to produce the clocks for Temple for $700. Use the incremental
approach.
Relevant costs are the incremental costs of making one clock:
Incremental Cost to buy ($70,000)
Incremental DM cost savings +20,000
Incremental DL cost savings +24,000
Incremental VOH cost savings +16,000
Incremental FOH cost savings (40%*$300*100clocks) +12,000
Incremental Net savings to buy per unit
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Problem 3- Chapman Company manufactures widgets. Embree Company has approached
Chapman with a proposal to sell the company widgets at a price of $100,000 for 50,000 units.
Chapman is currently making these components in its own factory. The following costs are
associated with this part of the process when 50,000 units are produced:
Direct labor 20,000
Manufacturing 60,000
overhead
Total $124,000
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components
are no longer produced by Chapman. The remaining manufacturing overhead will continue whether
or not Chapman makes the components. From Chapman’s point of view, what is the amount of
avoidable costs if it buys rather than makes the components?
$44,000 + $20,000 + $32,000 = $96,000
Problem 4 - Darnell Inc. budgeted 5,000 widgets for production during 2004. Fixed factory
overhead is allocated using ABC. The following estimated costs were provided:
($8/unit)
($53.80/unit)
Total $929,000
B. Darnell received an offer from another company to manufacture the same quality widgets
for them at $140. Should Darnell let someone else manufacture all 5,000 widgets and focus on
only distribution? Support your work with an incremental analysis.
No, Darnell can expect profitability to decline $40,000 if it outsources production.
Incremental Cost to buy per widget ($140*5,000) ($700,000)
Incremental Cost to make per widget/savings if buy widgets:
$80 + ($22 x 2) + $8 = $132*5,000 +660,000
Incremental savings if manufactured $ 40,000
C. While evaluating the offer to outsource, Darnell realized it could rent its manufacturing
space for $ 50,000. Now, should Darnell outsource the manufacture of the widgets? Support
your work with an incremental analysis.
Yes, Darnell can expect profitability to increase $10,000 if they outsource production
Cost to buy all 5,000 widgets: $140 x 5,000 = ($700,000)
Opportunity cost of renting facility +50,000
Cost to make per widget: $132 x 5,000 = +660,000
Incremental savings if outsourced +$10,000
Problem 5 - Barry Corporation currently manufactures a subassembly for its main product.
The costs per unit are as follows:
Direct labor 10.00
Fixed overhead 8.00
Total $24.00
Funkhouser Company has contacted Barry with an offer to sell it 5,000 of the subassemblies
for $18.00 each. Total relevant costs if Barry makes the subassemblies are $85,000. Should
Barry make or buy the subassemblies? Support your answer with an incremental analysis.
Cost to make - costs to buy = incremental cost
$85,000 (given) - (5,000 x $18) = ($5,000) Cost savings if made.
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Note that you do not know how much of the fixed overhead is avoidable per unit, so you can't
use per unit amounts. In addition, since the relevant cost to make is given, it is much easier to
find the answer than calculating.
Problem 6 - The cost to produce Part A was $10 per unit in 2003. During 2004, it has increased to
$11 per unit. In 2004, Supplier Company has offered to supply Part A for $9 per unit. For the
make-or-buy decision, identify the following amounts that are relevant:
A. Incremental revenues
There are never any incremental revenues with make or buy decisions.
B. Differential costs are $2 per unit.
Cost to make - cost to buy = $11 - $9 = $2 per unit
Problem 7 - Temple, Inc. produces several models of grandfather clocks. An outside supplier
has offered to produce the economy clocks for Temple for $350 each. Temple needs 1,200
clocks annually. Temple has provided the following unit costs for its economy model:
Unit
Cost
Direct labor 120
avoidable)
Using good form, prepare an incremental analysis which shows the effect of the make or buy
decision. Show calculations to support your answers in the space outside the answer box.
Incremental analysis: Incremental effect
Incremental Cost to buy (1,200 x $350) ($420,000)
Incremental Cost savings:
Savings of DM $100 x 1,200 = $120,000
Savings of DL $120 x 1,200 = 144,000
Savings of VOH $80 x 1,200 = 96,000
Savings of FOH 40% x $150 x 1,200 = 72,000
Incremental total cost savings +432,000
Incremental cost saving if clocks are bought instead of made $12,000
Problem 8 - Sally Industries can produce 100 units of a necessary component part with the
following costs:
Direct Labor 13,000
If Sally Industries purchases the component externally, $3,000 of the fixed costs can be
avoided. At what external price for the 100 units is the company indifferent between making or
buying?
The company is indifferent when the cost of making the part equals the cost of buying the
part, which is $78,000:
Effect on Profit
Incremental savings:
($30,000 + $13,000 + $32,000 + $3,000) $78,000
Problem 9 - Hernandez, Inc. manufactures 3 models of picture frames. Hernandez Corporation

manufactures 5,000 frames per year. The unit cost to produce a metal frame follows:
Direct Materials $6
Direct Labor 7
Variable Overhead 2
Fixed Overhead (70% 5
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unavoidable)
Total $20
A local company has offered to supply Hernandez the 5,000 metal frames it needs for $16
each. In good form, create an incremental analysis for the make or buy decision.
Incremental cost to buy ($80,000) 5,000 x $16 = $80,000
Direct materials savings +$30,000 5,000 x $6 = $30,000
Direct labor savings +35,000 5,000 x $7 = $35,000
Variable overhead savings +10,000 5,000 x $2 = $10,000
Fixed overhead savings - avoidable portion +7,500 5,000 x $5 x 30% = $7,500
Incremental savings if 'buy' decision is made $2,500
Problem 10 - Evans Corporation currently manufactures 3,000 subassemblies annually for its
main product. The costs per unit are as follows:
Direct labor 8.00
Variable 4.00
overhead
Fixed overhead 7.00
Total $22.00
Howard Company has contacted Evans with an offer to sell it 3,000 subassemblies for $18.00
each. $5 of the fixed overhead per unit is unavoidable. In good form in the answer box below,
create an incremental analysis for the make or buy decision. (Do not include extraneous
information/calculations inside the answer box.)
Incremental analysis: Calculations (not part of analysis):
Incremental cost to buy ($54,000) 3,000 x $18
Incremental savings on direct materials +9,000 3,000 x $3
Incremental savings on direct labor +24,000 3,000 x $8
Incremental savings on variable MOH +12,000 3,000 x $4
Incremental savings on fixed MOH +6,000 3,000 x $2*
Incremental net cost to buy ($3,000)
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*The unavoidable portion of this cost ($5) exists whether or not the company makes or buys
the subassemblies. If the subassemblies are bought, the company saves the avoidable portion
of the cost, $2 per unit.
Problem 11 - A company uses 10,000 units of Part A in producing its products. A supplier offers to
make Part A for $70. Max Company has relevant costs of $80 a unit to manufacture Part A. There
is excess capacity. How much is the opportunity cost of buying Part A from the supplier?
Zero. Opportunity costs are the value of benefits forgone by selecting one alternative over
another. There are no opportunity costs in this problem.
1. Which costs are usually avoidable in a make-or-buy decision?

A. Direct materials, direct labor, and fixed and variable overhead
B. Direct labor, direct material, and variable overhead
C. All costs allocated to the production process of the product that will not be made
D. Fixed and variable manufacturing overhead
Fixed overhead must be absorbed by the other divisions within a company.
2.Which one of the following is a qualitative advantage of making rather than buying a component?
A. factory supervisor’s salaries
B. opportunity costs
C. delivery schedules
D. costs of transportation-in
The other costs are monetary.
3.Outsourcing
A. is the acceptance of a special order.
B. occurs when a company’s avoidable costs exceed its unavoidable costs.
C. costs are often called opportunity costs.
D. decisions involves incremental revenues.
E. is another name for buying, in a make or buy situation
Answer A describes special orders.
4.Lakewood Industries is considering outsourcing a paint-spraying operation that is performed in

manufacturing auto parts. The company has painting equipment with a book value of $100,000. If the
operation is outsourced, the equipment will be scrapped for an amount equal to the cost of removing
the equipment. Ignoring income taxes, is the book value of $100,000 relevant to the outsourcing
decision?
A. Yes, because it can be sold.
B. No, because it is an incremental cost savings.
C. Yes, because it is a sunk cost.
D. No, because it is not differential.

A. Direct materials, direct labor, and fixed and variable overhead
B. Direct labor, direct material, and variable overhead
C. All costs allocated to the production process of the product that will not be made
D. Fixed and variable manufacturing overhead
6. What is the role of opportunity costs in a make-or-buy decision?
A. They are not considered because they are sunk costs.
B. They are always incremental costs and should be considered.
C. They are avoidable so should not be considered in these decisions.
D. They are irrelevant because they never involve out of pocket expenses in these decisions.
7.An example of a qualitative performance measure is
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A. increase in incremental revenues.
B. opportunity costs.
C. output per hour.
D. warmth of the hospital staff.
8.A disadvantage of using an outside supplier is that
A. they may be able to produce a component at a lower cost.
B. there is a loss of control over the production process.
C. there may be an opportunity to expand other parts of the company.
D. the supplier assumes some of the risk of a downturn in business activity.
The materials may not be received on time, or may be of poorer quality.

A.Direct materials, direct labor, variable overhead, and often a portion of fixed manufacturing
overhead
B. Only direct materials, direct labor, and variable overhead, and not fixed manufacturing overhead
C. All the direct and allocated costs incurred to manufacture a product
D. Only fixed manufacturing costs related to the product.
Allocated fixed costs are most often not avoidable. Since product costs include some allocated fixed
costs, answer C cannot be correct.
10.Which decision will involve no incremental revenues?
A.Outsourcing versus insourcing decision
B. Drop a product line
C. Accept a special order
D. Additional processing decision
This is the same as a make or buy decision. Only incremental costs are concerned. The decision
does not affect the amount of revenue.
11. Sunk costs

A. are relevant.
B. are differential.
C. have future implications.
D. are ignored when evaluating alternatives.
Differential means incremental.
12.For make-or-buy decisions, which items are relevant?

A. direct material costs and sunk costs
B. incremental costs and opportunity costs
C. differential costs and allocated fixed costs
D. incremental costs and incremental revenues.
There are never any incremental revenues with make or buy decisions. Sunk costs are never
relevant. Allocated fixed costs do not go away when a make or buy decision occurs.
13.Fixed costs
A. are always incremental.
B. can be incremental or sunk.
C. are always sunk.
D. are always unavoidable.
Some fixed costs are unavoidable so they are sunk. Avoidable fixed costs are relevant (incremental).
14.Which one of the following is qualitative information that management might evaluate in making a
decision?
a.Opportunity costs of a decision
b.Contribution margin
c. The effect on profit of a decision
d.The effect on employee morale of a decision
Qualitative information involves no dollar amounts. There are dollar amounts associated with
opportunity costs (cost savings), contribution margin (sales less variable costs), and the effect on
profit. Employee morale cannot be quantified however, its effect may be an influence on managment
decisions.
15.What is insourcing?
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A. The allocation of common fixed costs to different product lines
B. What occurs when a company’s avoidable costs exceed its unavoidable costs
C. Another name for opportunity costs
D. Decisions of whether to accept a special order
E. Internally manufacturing products
Insourcing is the 'make' part of the make or buy decision.
16.Which one of the following is a qualitative advantage of making rather than buying a component?
A. factory supervisor’s salaries
B. opportunity costs
C. delivery schedules
D. costs of shipping goods into the company’s own factory
Answers A, B, and C are all quantitative amounts which appear in budgets. Delivery schedules are a
consideration of buying instead of making since the timing of when components arrive can affect
production.
17.For make-or-buy decisions, which items are relevant?
A. incremental costs and incremental revenues.
B. direct material costs and sunk costs
C. differential costs and incremental revenues
D. differential costs and allocated fixed costs
E. incremental costs and opportunity costs
There are no incremental revenues with make or buy decisions, so answers A and C cannot be
correct. Answer B is wrong because sunk costs are never relevant since they cannot be changed.
Answer D is wrong because allocated fixed costs are always relevant. Opportunity costs are always
relevant. Incremental costs is another name for relevant and differential costs.
18. Which one of the following is not a disadvantage of outsourcing?
A. Quality control specifications and delivery schedules may not be met.
B. The outside supplier may raise prices significantly in the future.
C. Profitable product lines may be dropped.
D. Employee morale may suffer.
This has nothing to do with outsourcing (make or buy decisions)
19. Which one of the following is a disadvantage of buying rather than making a component of a
company’s product?
A. Quality control specifications may not be met.
B. The outside supplier can often produce items at a lower cost than the company.
C. Unprofitable product lines cannot be eliminated.
D. The supplier may use fewer cost pools.
The cost incurred and the number of cost pools used by the outside supplier do not affect the price
the buyer will pay the outsider supplier.
20. A company was evaluating the differences between two packaging machines. Which one of the
following would be a qualitative aspect of making the decision?
A. The number of products packaged per hour is different.
B. One machine is smaller allowing the company to lease out a portion of its facility.
C. The machine will not pollute the environment.
D. The machines will package products at different rates.
There is no cost associated with environmental pollution (assuming no fine is assessed.) Producing a
different number of products creates an effect on income. Answer B is an opportunity cost.
21. Which of the following is one disadvantage of using an outside supplier?

A. The supplier may be able to produce a component at a lower cost.
B. There is increased control over the production process.
C. There may be delays in acquiring materials on time.
D. The supplier assumes some of the risk of a downturn in business activity.
Answer D is an advantage for the company since manufacturing is a risk a company takes when it
produces products that might not be sold. Answer A is an advantage since this is a primary reason
that a company would outsource. Answer B is wrong because outsourcing creates decreased, not
increased control.
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Answers can be found in chapters 21. It is much more beneficial if you look up the answers
in the chapter as you will get more insight by reading the concept in context of the chapter
compared to if I would provide you a one sentence answer. Hence, I will not post answers
to the following questions. If you want confirmation of your interpretation of the answer,
feel free to ask.
Chapter 21
1. What is meant by insourcing and outsourcing

2. what are qualitative versus quantitative advantages/disadvantages
3. Which of the following are relevant with outsourcing decisions? opportunity cost, sunk cost,
avoidable, unavoidable?
4. What conditions would make a company outsource instead of insource?
5. What is the impact of soft benefits/qualitative issue and how does it impact outsourcing decisions?
6. Why are incremental revenues never relevant with outsourcing?
7. What cost savings often impact outsourcing decisions? What is the nature of variable versus fixed
overhead costs?
This page was last edited on Tuesday September 04, 2012 03:26 PM
Study Probes - Chapters 22 and 23 Solutions
Problem 1 Brislin Company makes and sells two products, Olives and Popeyes. The
income statement for the prior year, 2001, was as follows:
Olives Popeyes
Sales $16,000 $24,000
Variable cost of goods sold 6,000 10,000
Fixed production 5,000 7,000
Variable selling and administration 2,000 5,000
Fixed selling and administration 1,000 3,000
Net income $2,000 ($1,000)
Brislin's fixed costs are unavoidable and are allocated to products on the basis of sales revenue. If Popeyes
are dropped, sales of Olives are expected to increase by 40 percent next year.
Use the incremental approach to determine if Popeyes should be dropped.
Incremental revenue ($16,000* 40%) of Olives $ 6,400
Incremental revenue of Popeyes (24,000)
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Incremental cost savings of Popeyes CGS 10,000
Incremental cost savings of Popeyes S&A cost 5,000
Incremental variable cost of Olives ($6,000*40%) (2,400)
Incremental s&a cost of Olives ($2,000*40%) (800)
Incremental decrease in income if Popeyes are discontinued ($5,800)
Problem 2 - Gordon Company sells two items, corn and broccoli. The company is considering dropping corn.
It is expected that sales of broccoli will increase by 40% as a result. Dropping corn will allow the company to
cancel its monthly rental of its corn shucker costing $100 a month. The other equipment will be used for
additional production of broccoli. One employee earning $200 can be terminated if corn production is dropped.
Gordon’s other allocated costs are unavoidable. The company rents all of its equipment. A condensed,
budgeted monthly income statement with both products is below:
Total Corn Broccoli

Sales $20,000 $8,000 $12,000
Food materials 4,500 2,000 2,500
Direct labor 3,200 1,200 2,000
Equipment rental 2,900 2,600 300
3,100 2,100 1,000
Other allocated overhead
Operating income $6,300 $ 100 $6,200
In good form, prepare an incremental analysis to determine the financial effect of dropping corn production.
Incremental change in revenue:

Increase in broccoli sales: $12,000 x 40% = +$4,800
Decrease in corn sales (8,000)
Incremental decrease in revenue ($3,200)
Incremental change in variable costs:
Food materials: Increase in broccoli costs: $2,500 x 40% (1,000)
Decrease in corn costs +2,000
Direct labor: Increase in broccoli labor: $2,000 x 40% (800)
Decrease in corn labor +1,200
Incremental decrease in variable costs +1,400
Terminated employee +200
Equipment rental reduction - corn shucker +100

Incremental decrease in profits if corn production is dropped ($1,500)
Problem 3 - Parrino has three product lines in its retail stores: books, videos, and music. Results of the
4th quarter are presented below:
Books Music Videos Total

Units sold
1,000 2,000 2,000 5,000
Revenue
$22,000 $40,000 $23,000 $85,000
Variable departmental costs
15,000 22,000 12,000 49,000
Direct fixed costs
1,000 3,000 2,000 6,000
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Allocated fixed costs
7,000 7,000 7,000 21,000
Net income
($1,000) $ 8,000 $ 2,000 $ 9,000
The allocated fixed costs are unavoidable. Demand of individual products are not affected by
changes in other product lines. If Parrino discontinues the Books product line, what is the effect on
profit? Use the incremental approach.
Incremental revenue ($22,000)
Incremental costs:
Variable costs savings +15,000
Direct fixed costs savings +1,000
Incremental drop in profits if discontinued ($6,000)
Problem 4 - At the start of the year, West Coast Grocery Supply budgeted sales and variable costs
for three product lines as shown below in the table. With this level of allocation, the Canned Goods
line does not appear profitable.
Canned
Meat Dairy Total
Goods
Sales $15,000 $1,500 $20,000 $36,500
Variable Costs 10,000 1,000 18,000 29,000
Contribution Margin 5,000 500 2,000 7,500
Fixed Costs 1,644 164 2,192 4,000
Profit (Loss) $ 3,356 $ 336 ($ 192) $ 3,500
West Coast Grocery Supply is operating at capacity in terms of the existing warehouse and the
current fleet of delivery trucks. If the Canned Goods line is dropped, $500 of fixed costs specifically
associated with the Canned Goods line can be avoided. Additionally, sales of Meat and Dairy can be
increased by 20% each.
A. How much is the fixed cost savings related to canned goods?

The amount of fixed costs that can be avoided = $500
B. Using the cost allocation death spiral concept, indicate whether West Coast should drop its
canned goods line. No, the company will lose more money if it drops canned goods. Since not all
fixed costs can be eliminated, they must be allocated to the other divisions causing those divisions to
have reduced profits or create losses.
Problem 5 - Auchter Company has old inventory on hand that cost $12,000. Its scrap value is only $5,000.
The inventory could be sold for $20,000 if manufactured further at an additional cost of $13,000. What should
Auchter do? Support your work with an incremental analysis.
Incremental revenue ($20,000 - $5,000) $15,000
Incremental costs (13,000)
Incremental profit if processed further 2,000
Best option is to process further
Problem 6 - Diversified Machines has four product lines, one of which reflects the following results:
Sales $ 220,000
Variable expenses 120,000
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Contribution margin 100,000
Fixed expenses 120,000
Net loss $ (20,000)
If this product line is eliminated, 40% of the fixed expenses can be eliminated and the other 60% will be
allocated to other product lines.
A. Create an incremental analysis to determine if this product line should be eliminated.

Effect on Profit
Incremental variable cost savings $120,000

Incremental fixed cost savings ($120,000 x 40%) +48,000
Incremental decrease in profits if eliminated ($52,000)
B. Identify any non-relevant costs.
Since the other 60% of fixed costs will be incurred regardless of decision, they are not relevant.
Problem 7 - Crisp has 4 product lines: milk, ice cream, yogurt, and butter. The allocated fixed costs are
based on units sold and are unavoidable. Demand of individual products is not affected by changes in other
product lines. 40% of the fixed costs are direct, and the other 60% are allocated. Results of June follow:
Milk Ice Cream Yogurt Butter Total
Units sold 2,000 500 400 200 3,000
Revenue $10,000
$20,000 $10,000 $20,000 $60,000
ariable departmental costs 6,000
13,000 4,200 4,800 28,000
ixed costs 5,000 2,000 3,000 7,000 17,000
Net income (loss) ($1,000) $5,000 $2,800 $8,200 $15,000
A. In good form, prepare an incremental analysis of the effect of dropping the milk product line.
Incremental variable cost savings +6,000
Incremental fixed cost savings (5,000 x .40) +2,000
Incremental decrease in profits ($2,000)
B. Briefly state how the cost allocation death spiral concept applies to this problem.
The cost allocation death spiral occurs when a company drops a product line/division that has a loss.
Management may believe this will eliminate the loss, however, since the common fixed costs must be
allocated and absorbed by other products, the total profit of the company declines. i.e., allocated fixed
costs cannot be avoided.
Problem 8 SMP Company's market for the Model 64 has changed significantly, and SMP has had to drop
the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of
$150 per unit associated with them. SMP could sell these units in their current state for $100 each. It will cost
SMP $10 per unit to complete these units so that they can be sold for $125 each. Which of the following is the
amount of sunk costs in this problem?
$150 per unit
Two costs are not relevant since the profits remain the same regardless if SMP is dropped or not. The original
selling price of $265 does not make the company more or less profitable. The $150 cost exists regardless of
the decision made. However, a sunk cost is an amount incurred for which it is too late to change. The previous
selling price is not a 'cost'.
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Problem 9 Huxley Sports Company sells logo sports merchandise and does custom screen printing. They
are trying to decide whether or not to continue screen printing. The following information is available for the
segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total
common fixed costs would remain unchanged if the screen printing were dropped.
Screen Printing Apparel Sales
Sales $120,000 $420,000
Variable costs 72,000 220,000
Contribution margin 48,000 200,000
Direct fixed costs 32,000 70,000
Allocated common fixed costs 20,000 70,000
Net income ($4,000) $60,000
Assume that more space will be allocated to apparel sales if screen printing is dropped. This will allow apparel
sales to increase by 25%. What is the impact on profits of the proposed change?
Incremental revenue - screen ($120,000)
Incremental revenue - apparel (25%*$420,000) 105,000
Incremental savings/(costs):
VC - screen printing + 72,000
VC - apparel (25%*$220,00) (55,000)
Direct FC +32,000
Incremental increase in profits $34,000
Problem 10. Tison Company produces two products, clips and binders. The cost of producing 5,000 of each is
$22,000. Clips are currently sold for $1.25 each while binders are sold for $2.00 each. The company has
determined it could sell binders for a total of $16,250 if it stamps NCAA logos on the binder covers. Each logo
stamp requires a royalty payment of $1.10 each. In good form in the answer box below, create an incremental
analysis for Tison to determine if it should stamp NCAA logs on the binders. (Do not include extraneous
information/ calculations inside the answer box.) Label line items respectively.
Incremental analysis Calculations here:
Incremental revenue $6,250 $16,250 – ($2.00*5,000) =

$6,250
Incremental costs:
Logo stamps (5,500)

$1.10*5,000 = $5,500
Incremental increase in profit if processed further $750
Problem 11 Carraba Company gathered the following data about the two products that it
produces:
Product Current Sales Value Estimated Added Processing Costs Sales Value if Processed Further
A $10,000 $ 3,000 $14,000
B 11,000 2,000 12,000
Which of the products should be processed further? Explain why.
Product A because profits increase by $1,000 whereas product B creates a decrease in profit.
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Product A: Incremental revenue = $14,000 - $10,000 = $4,000
Product B: Incremental revenue = $12,000 - $11,000 = $1,000
Incremental loss = $1,000 - $2,000 = ($1,000)
Problem 12 MRC, Inc. manufactures wheels for its golf carts. Because a new assembly mechanism is now
available, the company has 5,400 partially completed wheels with direct material costs totaling $6,750, direct
labor totaling $2,300, and manufacturing overhead totaling $1.40 per unit of which 60% is variable. They can
be sold for $4.00 per unit ‘as is.’ MRC is considering adding a ceramic pot and silk flowers to each wheel and
selling the wheels as decorative pots for $5.75 each. The total cost of the added materials and labor would be
$7,300 plus an additional $0.20 of variable overhead for each unit. In good form in the answer box below,
create an incremental analysis for the decision. Label line items respectively.
tal analysis: Calculations:
al revenue + $9,450 ($.00-$5.75)*5,400
al costs:
al materials and labor (7,300)
al VOH (1,080) $0.20*5,400
al increase in profit if processed further $1,070
Problem 13. Nelson Company has inventory on hand with a production cost of $18,000. Due to
technological changes, the inventory’s scrap value is only $7,000. The inventory could be sold for $16,000 if
modified at an additional cost of $10,000. IN GOOD FORM in the box below, create an incremental
analysis to decide if Nelson should modify the inventory as proposed. Clearly label line items and totals as
we did in class.
Incremental analysis: Calculations:
Incremental revenue $9,000 $16,000 - $7,000
Incremental cost (10,000)
Incremental decrease in profit if processed further ($1,000)
Problem 14 Jace Company manufactures a number of products from the same raw material. Costs to
process the The A units is a total $10,000 per month. Product A could be sold as-is for $18,000 per
month or it can be further processed at a cost of $9,000 per month and then sold for $25,000. What
should Jace Company do? Support with computations.
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Do not process product A further because its profit declines by $2,000
Problem 15 Hankers Company manufactures a number of products from the same raw material. Costs to
process Product 33 total $10,000 per month. Product 33 could be sold as-is for $18,000 per month or it
can be further processed at a cost of $9,000 per month and then sold for $26,000. Prepare an
incremental anallysis in good form.
Sell product 33 as-is because its incremental costs will exceed incremental revenues by $1,000.
Problem16 WoodYou Flooring produced 3,000 yards of its economy-grade carpet. In the coloring process, there was a
pigment defect and the resulting color appeared to be faded. The carpet normally sells for $18 per yard, with $8 of
variable cost per yard and $4 of fixed cost per yard assigned to the carpet. The company realizes that it cannot sell the
carpet for $18 per yard through its normal channels, unless the coloring process is repeated. The incremental cost of the
process is $4 per yard. Harry's Salvage is willing to buy the carpet in its current faded condition for $12 per yard. Should
WoodYou repeat the coloring process or sell the carpet to Harry's Salvage and what is the benefit?
Incremental revenue $18,000 ($18- $12)*3,000

Incremental cost (12,000) $4*3,000
Incremental increase in profit if processed further $6,000
Repeat coloring (proicess further) and sell to Harry's Salvage for a $6,000 incremental profit
1.A company wants to know if it should sell now or process further. Under what conditions should the company
process further rather than sell now?
A. If incremental revenues are greater than the cost incurred to date of the original units
B.If variable processing costs exceed fixed processing costs
C. If there are only incremental variable costs, and no incremental revenue.
D.If there are no opportunity costs
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E.None of the above.
The cost incurred to date is a sunk cost and is not relevant since it is the same no matter if the product is sold
as is or processed further. Answer C would result in a greater loss if processed further since an increase in
costs without an increase in revenue creates a bigger loss.
2. In deciding whether or not to process a product further or sell it as is, which of the following is a relevant
cost?
A. Sunk cost
B. Incremental cost
C. Joint cost
D. Irrelevant cost
All incremental costs are relevant.
3.Tucson Furniture Company makes chairs, tables, and beds from small pine logs which have been "peeled" of
bark. Once a chair is constructed, it receives a wax finish. No finish is applied to the tables and beds. The cost
of the wax finish is a(n)
A. Sunk cost.
B. Incremental cost
C. Marketing cost.
D. Period cost.
4.What is the cause of the cost allocation death spiral?
A. Not realizing that when a department that appears to be unprofitable is dropped, the common fixed costs
are not incremental.
B. A company decides to buy a product instead of making it, and the supplier is unable to meet the demand on
a timely basis.
C. Allocations of joint costs are made only to profitable products.
D. Variable costs rise when sales decline, causing a decline in profits.
5. Irby, Inc.’s market for the nibulators has changed significantly, and Irby has had to drop the price
per unit from $100 to $80. There are some units in the work in process inventory that have costs of
$65 per unit associated with them. Irby could sell these units in their current state for $60 each. It will
cost Irby $10 per unit to complete these units so that they can be sold for $80 each. Which of the
following is a sunk cost in this problem?
A. $100 = former price
B. $80 = current price
C. $65 = price for partially completed units
D. $10 = cost to complete units
6.If an unprofitable product is eliminated,
A. net income will always increase.
B. variable expenses of the eliminated product will have to be absorbed by other segments.
C. fixed expenses allocated to the eliminated segment will not likely be avoidable.
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D. the company will lose it opportunity costs.
The other divisions/products will have to absorb these costs.
7. Which of the following is not relevant when considering whether or not to drop a product?
A. The contribution margin
B. Qualitative factors
C. The potential impact on demand for other products
D. Allocated common costs
8. What is the cause of the cost allocation death spiral?

A.It is caused by not realizing that when a department that appears to be unprofitable is dropped, the
common fixed costs that had been allocated to that department are not avoidable.
B.It is caused by a company that manufacturing its products, rather than buying them.
C.It is caused by not considering avoidable costs in a product dropping decision.
D.It is caused by accepting special orders for a sales price that is less than the contribution margin
per unit.
While answers B, C, and D are possible happenings for a company, they are not the cause of the
cost allocation death spiral
9.Which of the following is relevant information in a decision whether old equipment presently being
used should be replaced by new equipment?
a.The cost of the old equipment
b.The salvage value of the old equipment
c. The book value of the old equipment
d.The accumulated depreciation of the old equipment
Salvage value is relevant since this is the amount the equipment will bring into the company if sold.
The other three amounts remain the same regardless if the machine is replaced or not.
10. When a department or product line is dropped, the fixed costs which had been allocated to that
department
A.are eliminated.
B.become avoidable costs.
C.are allocated to the remaining departments or product lines.
D.become opportunity costs.
Allocated costs are spread out to the products/divisions that use the costs. If a product is eliminated, those
costs continue and must be reallocated over the remaining products/lines. Unless specifically implied, allocated
fixed costs are never eliminated, so they are not incremental. Avoidable means they are eliminated, which is
not the case (they could be called unavoidable.)
11. Which of the following costs are always incremental and relevant in decision analysis?
A. opportunity costs and fixed costs
B. avoidable costs and opportunity costs
C. differential costs and unavoidable costs
D. sunk costs and avoidable costs
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Sunk costs are already spent and cannot be changed no matter what alternative is chosen. Unavoidable costs
continue no matter what decision is made. Some fixed costs are avoidable and some are unavoidable.
Differential = relevant = incremental.

Answers can be found in chapters 22 and 23. It is much more beneficial if you look up
the answers in the chapter as you will get more insight by reading the concept in context
of the chapter compared to if I would provide you a one sentence answer. Hence, I will not
post answers to the following questions. If you want confirmation of your interpretation of
the answer, feel free to ask.
Chapter 22
1. What conditions would cause a company to process a product further or sell as-is?
2. What qualitative issues may impact sell or process further decisions?
3. How are incremental revenue determined for process further decisions? incremental costs?
4. How are costs incurred up to the decision point handled? Why?
Chapter 23
1. What conditions would cause a company to drop a product line or keep it?
2. What qualitative issues may impact keep or drop decisions?
3. How are incremental revenue determined for keep or drop decisions? incremental costs?
4. What are common costs? Allocated costs?
4. Why are allocated costs considered irrelevant for keep or drop decisions?
5. What are direct fixed costs and how do they affect keep or drop decisions?
6. What is the cost allocation death spiral and how does it apply to keep or drop decisions?
This page was last edited on Tuesday September 04, 2012 03:26 PM
ACG2071 Managerial Accounting

Chapters 20-23 Incremental Analysis Decisions - Sample Problems
Answers appear in red.
Problem 1 - Coleman Company owns a machine that produces a component for the products the company
makes and sells. The company uses 1,800 units of this component in production each year. The costs of
making one unit of this component are
Direct material $7
Direct labor 4
The fixed overhead costs are unavoidable, and the unit cost is based on the present annual usage of 1,800
units of the component. An outside supplier has offered to sell Coleman this component for $18 per unit and
can supply all the units it needs.
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A. If Coleman buys the component from the outside supplier instead of making it, how much will net income
change? Should Coleman make or buy the component? Use the incremental approach to justify your answer.
Since net income decreases, Coleman should continue making the component.
Variable cost = $7 + $6 + $4 = $17
Incremental cost savings from not making component (1,800 x $17) $30,600
Incremental cost of buying component (1,800 x $18) (32,400)
Incremental decrease in net income due to buying component $(1,800)
B. Suppose Coleman could rent the machine to another company for $5,000 per year. How would your
response change to part A? Use the incremental approach to justify your answer.
Since net income increases, the company should choose to buy the components.
Incremental cost savings from not making component (1,800 x $17) $30,600
Incremental Annual rent from machine 5,000
Incremental Cost of buying component (1,800 x $18) (32,400)
Incremental Increase in net income due to buying component $3,200
Problem 2 - Tenchavez Company makes and sells 12,000 pairs of running shoes each year. The cost of
making one pair of these shoes is
Direct material $ 11
Direct labor 4
The fixed overhead costs are unavoidable. Tenchavez allocates fixed overhead costs based on its annual
capacity of 15,000 pairs it is able to make. An overseas company recently offered to buy 3,000 pairs of shoes
at $21 per pair. Regular customers buy shoes from Tenchavez at $30 per pair.
How much is incremental income if Tenchavez accepts the special order? Should Tenchavez accept? Use the
incremental approach to justify your answer.
Variable cost = $11 + $5 + $4 = $20 per unit
Tenchavez should accept.
Incremental revenue from special order (3,000 x $21) $63,000
Incremental cost to fill special order (3,000 x $20) (60,000)
Incremental income from accepting special order $ 3,000
Problem 3 - Brislin Company makes and sells two products, Olives and Popeyes. The income statement for
the prior year, 2001, was as follows:
Olives Popeyes
Sales $16,000 $24,000
Variable cost of goods sold 6,000 10,000
Manufacturing contribution margin $10,000 $14,000
Fixed production 5,000 7,000
Variable selling and administration 2,000 5,000
Fixed selling and administration 1,000 3,000
Net income $2,000 ($1,000)
Brislin's fixed costs are unavoidable and are allocated to products on the basis of sales revenue. If Popeyes
are dropped, sales of Olives are expected to increase by 40 percent next year.
A. Use the incremental approach to determine if Popeyes should be dropped.
Incremental revenue ($16,000* 40%) of Olives $ 6,400

Incremental revenue of Popeyes (24,000)
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Incremental cost savings of Popeyes CGS +10,000
Incremental cost savings of Popeyes S&A cost +5,000
Incremental variable cost of Olives ($6,000*40%) (2,400)

Incremental s&a cost of Olives ($2,000*40%) (800)
Incremental decrease in income if Popeyes discountinued ($5,800)
Problem 4 - Monk Company manufactures widulators. Watson Company has approached Monk with a
proposal to sell the company a component use in its widulators at a price of $12,000 for 4,000 units. Monk is
currently making these components in its own factory. The following costs are associated annually with this
part of the process when 4,000 units are produced:
Direct labor 2,000
Manufacturing overhead (fixed & variable) 6,800
Total $12,800
All but $3,000 of the manufacturing overhead costs will continue if Monk discontinues making the components.
Monk will be able to eliminate machine rental of $1,800 per year if the components are no
longer manufactured.
A. How much are the incremental cost or savings if Monk outsources? Use the incremental approach to justify
your answer.
Of the $6,800, $3,000 is avoidable, and $3,800 will continue.
Incremental cost to buy 4,000 components ($

12,000)
Incremental manufacturing savings if bought:
Machine rental $ 1,800
Direct materials 4,000
Direct labor 2,000
Overhead – avoidable portion 3,000
Total Incremental savings 10,800
Incremental cost of buying ($1,200)
components
B. What is the amount of avoidable costs if Monk buys rather than makes the components?
$10,800 – from part A above….the costs that can be avoided if the alternative course of action—buying—is
taken.
C. Which costs/amounts from above are opportunity costs, if any?
$1,800......the rent savings are given up if the alternative action--buying--is undertaken. Note that the cost of
the products--whether bought or made is still a 'cost' for the company.
D. Should Monk make or buy the components? Briefly justify your answer.
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Monk should make the components. There is an additional cost of $1,200 if Monks buys the components.
Increases in costs are bad choices in decision making because the cost must be passed on to the customer or
absorbed as lower profits by the seller.
Problem 5 - Anheiser, Inc. has three divisions: Bud, Wise, and Er. Results of May, 2003 are
presented below:
Bud Wise Er Total
Units sold 3,000 5,000 2,000 10,000
Revenue $70,000 $50,000 $40,000 $160,000
Less variable costs 32,000 26,000 16,000 74,000
Less direct fixed costs 14,000 19,000 12,000 45,000
Less allocated fixed costs 6,000 10,000 4,000 20,000
Net income $18,000 ($5,000) $ 8,000 $21,000
The variable costs are directly attributable to the products produced for the specific departments. All
of the allocated costs will continue even if a division is discontinued. Anheiser allocates indirect fixed
costs based on the number of units to be sold. Since the Wise division has a net loss, Anheiser feels
that it should be discontinued. Anheiser feels if the division is closed, that sales at the Bud division
will increase by 20%, and that sales at the Er division will stay the same.
A. Prepare an incremental analysis showing the effect of discontinuing the Wise division on the
remaining divisions.
Bud
Incremental revenue
20%*$70,000 - $50,000
($36,000)
Incremental variable costs savings
20%*32,000 - $26,000 19,600
Incremental direct fixed costs saved 19,000
Increase increase in profit if discontinued $2,600
B. Should Anheiser close the Wise division? Briefly indicate why or why not.
Yes. The profit increases by $2,600 when the division is eliminated. Direct fixed costs and variable
costs for the Wise division were relatively high compared to those for the Bud and Er divisions. The increase in
sales by 20% of the Bud division was enough to offset the loss of the Wise division.
Problem 6 - Gordon Company sells two items, corn and broccoli. The company is considering dropping corn.
It is expected that sales of broccoli will increase by 40% as a result. Dropping corn will allow the company to
cancel its monthly rental of its corn shucker costing $100 a month. The other equipment will be used for
additional production of broccoli. One employee earning $200 can be terminated if corn production is dropped.
Gordon’s other allocated costs are unavoidable. The company rents all of its equipment. A condensed,
budgeted monthly income statement with both products is below:
Total Corn Broccoli

Sales $20,000 $8,000 $12,000
Food materials 4,500 2,000 2,500
Direct labor 3,200 1,200 2,000
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Equipment rental 2,900 2,600 300
3,100 2,100 1,000
Other allocated overhead
Operating income $6,300 $ 100 $6,200
In good form, prepare an incremental analysis to determine the financial effect of dropping corn production.
Incremental change in revenue:
Increase in broccoli sales: $12,000 x 40% = +$4,800
Decrease in corn sales (8,000)
Incremental change in variable costs:
Food materials: Increase in broccoli costs: $2,500 x 40% (1,000)
Decrease in corn costs +2,000
Direct labor: Increase in broccoli labor: $2,000 x 40% (800)
Decrease in corn labor +1,200
Incremental decrease in variable costs +1,400
Equipment rental reduction - corn shucker +100
Incremental decrease in profits if corn production is dropped ($1,700)
Problem 7 - Parrino has three product lines in its retail stores: books, videos, and music. Results of the
4th quarter are presented below:

Units sold 1,000 2,000 2,000 5,000
Revenue $22,000 $40,000 $23,000 $85,000
Variable departmental costs 15,000 22,000 12,000 49,000
Direct fixed costs 1,000 3,000 2,000 6,000
Allocated fixed costs 7,000 7,000 7,000 21,000
Net income ($1,000) $ 8,000 $ 2,000 $ 9,000
The allocated fixed costs are unavoidable. Demand of individual products are not affected by
changes in other product lines. If Parrino discontinues the Books product line, what is the effect on
profit? Use the incremental approach.
Incremental costs:
Variable costs savings +15,000
Direct fixed costs savings +1,000
Incremental drop in profits if discontinued ($6,000)
Problem 8 -Temple, Inc. produces grandfather clocks and sells 100 per year.
:
Unit
Cost
Direct labor 240
Fixed overhead (40% avoidable) 300
A. An outside supplier has offered to produce the clocks for Temple for $700. Use the incremental approach.
Relevant costs are the incremental costs of making one clock:
Incremental Cost to buy ($70,000)
Incremental DM cost savings +20,000
Incremental DL cost savings +24,000
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Incremental VOH cost savings +16,000
Incremental FOH cost savings (40%*$300*100clocks) +12,000
Incremental Net savings to buy per unit +$2,000
Problem 9 - Young Siding Co. produces computers, which sell for $400 each. A foreign distribution
wants to order 1,000 units at $300 a unit. 70% of the fixed overhead is unavoidable. Production costs
per unit are:
Direct labor 120
Fixed overhead 60
A. How much is the relevant cost of producing one more computer?
Relevant costs are incremental costs of making one unit.
$90 + $120 + $50 = $260
Note that fixed costs do not increase when one additional unit is produced.
B. What the effect on net income of accepting the special order? Use the incremental approach.
Incremental revenue = $1,000 x $300 = $300,000
Incremental costs = $1,000 x 260 = ($260,000)
Increase of $40,000
Problem 10 - Scott, Inc. has a capacity of producing 300,000 units a year and sells them at $28 a unit. At
present Scott is selling 250,000 units. A foreign distributor has offered to purchase 40,000 units at $20
a unit. Variable selling costs will be reduced by 40%. The sales manager determined that incremental
costs of accepting the order are $744,000. Should Scott accept the order? Use the incremental
approach.
Yes, incremental profit is $56,000.
Incremental Revenue = 40,000 x $20 = $800,000

Incremental costs = $744,000
Problem 11 - It costs Roy Company $14 of variable costs and $6 of allocated fixed costs to produce a
toy truck that sells for $30. A buyer offers to purchase 3,000 units at $18 each. Roy has unused
capacity. What will occur to profits is the offer is accepted and produced? Use the incremental
approach.
Incremental increase in revenue (3,000*$18) $54,000
Incremental increase in costs (3,000*$14) (42,000)
Incremental increase in profits to accept $12,000
Problem 12 - At the start of the year, West Coast Grocery Supply budgeted sales and variable
costs for three product lines as shown below in the table. With this level of allocation, the
Canned Goods line does not appear profitable.
Canned
Meat Dairy Total
Goods
Sales $15,000 $1,500 $20,000 $36,500
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Variable Costs 10,000 1,000 18,000 29,000
Contribution Margin 5,000 500 2,000 7,500
Fixed Costs 1,644 164 2,192 4,000
Profit (Loss) $ 3,356 $ 336 ($ 192) $ 3,500
West Coast Grocery Supply is operating at capacity in terms of the existing warehouse and
the current fleet of delivery trucks. If the Canned Goods line is dropped, $500 of fixed costs
specifically associated with the Canned Goods line can be avoided. Additionally, sales of Meat
and Dairy can be increased by 20% each.
A. How much is the fixed cost savings related to canned goods?

The amount of fixed costs that can be avoided = $500
B. Using the cost allocation death spiral concept, indicate whether West Coast should drop
its canned goods line. No, the company will lose more money if it drops canned goods. Since
not all fixed costs can be eliminated, they must be allocated to the other divisions causing
those divisions to have reduced profits or create losses.
Problem 13 - Hand Devices makes and sells hand-held computers. Each computer regularly sells for
$200. The following cost data per computer are based on a normal production of 8,000 computers
produced each period. The company has the capacity to produce 12,000 computers.

Direct labor 55
Factory Overhead (75% variable, 25% unavoidable 40
fixed)
Hand Devices has received a special order for a sale of 500 computers to an overseas customer. The
customer is willing to pay $150 per computer. The only selling costs that would be incurred on this
order would be $10 per computer for shipping. Hand is now selling 8,000 computers through regular
distributors each period. Should Hand Devices accept the special order? use the incremental
approach.
No. The incremental costs are $170 per computer, which exceeds the price the customer is willing to
pay.
Incremental revenue per computer = $150
Incremental cost per computer.$75 + $55 + [75% x $40] + $10 = $170
Incremental loss per computer = $150 - $170 = $20
Problem 14 - Chapman Company manufactures widgets. Embree Company has approached Chapman
with a proposal to sell the company widgets at a price of $100,000 for 50,000 units. Chapman is
currently making these components in its own factory. The following costs are associated with this
part of the process when 50,000 units are produced:

Direct labor 20,000
Manufacturing 60,000
overhead
Total $124,000
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are
no longer produced by Chapman. The remaining manufacturing overhead will continue whether or not
Chapman makes the components. From Chapman’s point of view, what is the amount of avoidable
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costs if it buys rather than makes the components?
$44,000 + $20,000 + $32,000 = $96,000
Problem 15 - Wilson Company is considering replacing equipment which originally cost $56,000 and
which has $43,000 accumulated depreciation to date. A new machine will cost $67,000. How much
costs are sunk in this situation?
$56,000 This will not affect the outcome of decision making.
Problem 16 - Darnell Inc. budgeted 5,000 widgets for production during 2004. Fixed factory overhead is
allocated using ABC. The following estimated costs were provided:

($8/unit)
($53.80/unit)
Total $929,000
A. Darnell received an order for 400 units from a new customer in a country in which Darnell has never
done business. This customer would like to spend $160 per widget. Darnell has capacity to produce
5,500 units. Should Darnell accept the order? Support your work with an incremental analysis.
Yes, it can make $11,200
Incremental revenue per widget $160
Incremental cost per widget:
$80 + ($22 x 2) + $8 = 132
Incremental profit per unit $ 28

Total incremental profit = $28 x 400 = $11,200
B. Darnell received an offer from another company to manufacture the same quality widgets for them
at $140. Should Darnell let someone else manufacture all 5,000 widgets and focus on only
distribution? Support your work with an incremental analysis.
No, Darnell can expect profitability to decline $40,000 if it outsources production.
Incremental Cost to buy per widget ($140*5,000) ($700,000)

Incremental Cost to make per widget/savings if buy widgets:
$80 + ($22 x 2) + $8 = $132*5,000 +660,000
Incremental savings if manufactured $ 40,000
C. While evaluating the offer to outsource, Darnell realized it could rent its manufacturing space for $
50,000. Now, should Darnell outsource the manufacture of the widgets? Support your work with an
Yes, Darnell can expect profitability to increase $10,000 if they outsource production
Cost to buy all 5,000 widgets: $140 x 5,000 = ($700,000)
Opportunity cost of renting facility +50,000
Cost to make per widget: $132 x 5,000 = +660,000
Incremental savings if outsourced +$10,000
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Problem 17 - Auchter Company has old inventory on hand that cost $12,000. Its scrap value is only
$5,000. The inventory could be sold for $20,000 if manufactured further at an additional cost of $13,000.
What should Auchter do? Support your work with an incremental analysis.
Process further and sell:
Incremental revenue $20,000
Incremental costs (13,000)
Incremental profit 7,000
Incremental revenue to sell as is: $5,000
Best option is to process further and sell at $20,000.
Problem 18 - Zweig, Inc. produces batches of chocolate chip cookies:

Batch
Cost
Direct labor 3.00
Fixed common overhead 4.00
An outside supplier has offered to produce the cookies for $14 per batch. What is the minimum amount
that Zweig would sell additional batches of cookies if the company is under capacity?
$8 + $3 + $1 = $12; Relevant = incremental. Note that avoidable means it is a cost that will not be
incurred if the product is bought instead of made, i.e., it is a cost savings. The direct costs are
saved as well. Only the costs that are different if the cookies are made instead of bought are
relevant.
Problem 19 - Barry Corporation currently manufactures a subassembly for its main product. The costs
per unit are as follows:

Direct labor 10.00
Fixed overhead 8.00
Total $24.00
Funkhouser Company has contacted Barry with an offer to sell it 5,000 of the subassemblies for
$18.00 each. Total relevant costs if Barry makes the subassemblies are $85,000. Should Barry
make or buy the subassemblies? Support your answer with an incremental analysis.
Cost to make - costs to buy = incremental cost
$85,000 (given) - (5,000 x $18) = ($5,000) Cost savings if made.
Note that you do not know how much of the fixed overhead is avoidable per unit, so you can't use per
unit amounts. In addition, since the relevant cost to make is given, it is much easier to find the
answer than calculating.
Problem 20 -The cost to produce Part A was $10 per unit in 2003. During 2004, it has increased to $11
per unit. In 2004, Supplier Company has offered to supply Part A for $9 per unit. For the make-or-
buy decision, identify the following amounts that are relevant:
A. Incremental revenues
There are never any incremental revenues with make or buy decisions.
B. Differential costs are $2 per unit.
Cost to make - cost to buy = $11 - $9 = $2 per unit
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Problem 21 - A company uses 10,000 units of Part A in producing its products. A supplier offers to
make Part A for $70. Max Company has relevant costs of $80 a unit to manufacture Part A. There
is excess capacity. How much is the opportunity cost of buying Part A from the supplier?
Zero. Opportunity costs are the value of benefits forgone by selecting one alternative over another. There are no
opportunity costs in this problem.
Problem 22 - Temple, Inc. produces several models of grandfather clocks. An outside supplier has offered to
produce the economy clocks for Temple for $350 each. Temple needs 1,200 clocks annually. Temple has
provided the following unit costs for its economy model:
Unit
Cost
Direct labor 120
avoidable)
Using good form, prepare an incremental analysis which shows the effect of the make or buy decision.
Show calculations to support your answers in the space outside the answer box.
Incremental analysis: Incremental effect
Incremental Cost to buy (1,200 x $350) ($420,000)
Incremental Cost savings:
Savings of DM $100 x 1,200 = $120,000
Savings of DL $120 x 1,200 = 144,000
Savings of VOH $80 x 1,200 = 96,000
Savings of FOH 40% x $150 x 1,200 = 72,000

Incremental total cost savings +432,000
Incremental cost saving if clocks are bought instead of made $12,000
Problem 23 - A division has the following data:

Sales $600,000
What will be the incremental effect on net income if this division is eliminated, assuming the fixed expenses will
be allocated to profitable segments? Use the incremental analysis approach.
Effect on profit
Incremental variable costs +320,000
Incremental effect on profit ($280,000)
Only costs that change between alternatives are incremental. Fixed expenses that are allocated never change.
Problem 24 - Diversified Machines has four product lines, one of which reflects the following results:
Sales $220,000
Contribution margin 100,000
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Net loss $(20,000)
If this product line is eliminated, 40% of the fixed expenses can be eliminated and the other 60% will be
allocated to other product lines.
A. Create an incremental analysis to determine if this product line should be eliminated.
Effect on Profit
Incremental variable cost savings $120,000

Incremental fixed cost savings ($120,000 x 40%) +48,000
Incremental decrease in profits if eliminated ($52,000)
B. Identify any non-relevant costs.
Since the other 60% of fixed costs will be incurred regardless of decision, they are not relevant.
Problem 25 - Sally Industries can produce 100 units of a necessary component part with the following costs:

Direct Labor 13,000
If Sally Industries purchases the component externally, $3,000 of the fixed costs can be avoided. At what
external price for the 100 units is the company indifferent between making or buying?
The company is indifferent when the cost of making the part equals the cost of buying the part, which is
$78,000:
Incremental savings: Effect on Profit

($30,000 + $13,000 + $32,000 + $3,000) $78,000
Problem 26 - Hernandez, Inc. manufactures 3 models of picture frames. Hernandez Corporation manufactures
5,000 frames per year. The unit cost to produce a metal frame follows:
Direct Materials $6
Direct Labor 7
Variable Overhead 2
Fixed Overhead (70% 5
unavoidable)
Total $20
A local company has offered to supply Hernandez the 5,000 metal frames it needs for $16 each. In good form,
create an incremental analysis for the make or buy decision.
Incremental cost to buy ($80,000) 5,000 x $16 = $80,000

Direct materials savings +$30,000 5,000 x $6 = $30,000
Direct labor savings +35,000 5,000 x $7 = $35,000
Variable overhead savings +10,000 5,000 x $2 = $10,000
Fixed overhead savings - avoidable portion +7,500 5,000 x $5 x 30% = $7,500
Incremental savings if 'buy' decision is made $2,500
Problem 27 - Crisp has 4 product lines: milk, ice cream, yogurt, and butter. The allocated fixed costs are
based on units sold and are unavoidable. Demand of individual products is not affected by changes in other
product lines. 40% of the fixed costs are direct, and the other 60% are allocated. Results of June follow:
Milk Ice Cream Yogurt Butter
Units sold 2,000 500 400 200
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Revenue $10,000 $20,000 $10,000 $20,000
Fixed costs 5,000 2,000 3,000 7,000
Net income (loss) ($1,000) $5,000 $2,800 $8,200
A. In good form, prepare an incremental analysis of the effect of dropping the milk product line.

Incremental fixed cost savings (5,000 x .40) +2,000
B. Briefly state how the cost allocation death spiral concept applies to this problem.
The cost allocation death spiral occurs when a company drops a product line/division that has a loss.
Management may believe this will eliminate the loss, however, since the common fixed costs must be
allocated and absorbed by other products, the total profit of the company declines. i.e., allocated fixed
costs cannot be avoided.
Problem 28 - Evans Corporation currently manufactures 3,000 subassemblies annually for its main product.
The costs per unit are as follows:
Direct labor 8.00
Fixed overhead 7.00
Total $22.00
Howard Company has contacted Evans with an offer to sell it 3,000 subassemblies for $18.00 each.
$5 of the fixed overhead per unit is unavoidable. In good form in the answer box below, create an
incremental analysis for the make or buy decision. (Do not include extraneous
information/calculations inside the answer box.)
Incremental analysis: Calculations (not part of analysis):
Incremental cost to buy ($54,000) 3,000 x $18
Incremental savings on direct materials +9,000 3,000 x $3
Incremental savings on direct labor +24,000 3,000 x $8
Incremental savings on variable MOH +12,000 3,000 x $4
Incremental savings on fixed MOH +6,000 3,000 x $2*
Incremental net cost to buy ($3,000)
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*The unavoidable portion of this cost ($5) exists whether or not the company makes or buys the
subassemblies. If the subassemblies are bought, the company saves the avoidable portion of the cost, $2 per
unit.
Problem 29 Parrino has three product lines in its retail stores: books, videos, and music. The allocated fixed
costs are based on units sold and are unavoidable. Results of the fourth quarter are presented below:

Units sold
1,000 2,000 2,000 5,000
Revenue $24,000 $48,000 $34,000 106,000
Net income (loss) $ 1,600 $11,200 ($2,800) $10,000
Demand of individual products is not affected by changes in other product lines. In good form, prepare
an incremental analysis of the effect of dropping the Video product line.
Incremental analysis:

Incremental savings on variable costs +23,000
Incremental savings on direct fixed costs +5,000
Incremental decrease in profit to drop video line ($6,000)
Note: Incremental analyses show only the differences in revenues and costs. Comparative columns or
comparative income statements, or a revised income statement showing the net amounts to be reported after
the drop are NOT incremental analyses. We emphasized incremental analysis using this approach in class.
Problem 30 - Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The
company uses 800 baskets in production each month. The costs of making one basket is $4 for direct
materials, $3 for variable manufacturing overhead, $2 for direct labor and $5 for fixed manufacturing overhead.
The unit cost is based on the monthly usage of 800 baskets. The company determined that 30% of the fixed
manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $12 each,
and can supply all the units it needs. In good form, prepare an incremental analysis to determine if Calc
should buy the component from the supplier?
Incremental cost to buy (800 x $12) ($9,600)
Incremental cost savings:
DM ($4 x 800) +3,200
VOH ($3 x 800) +2,400
DL ($2 x 800) +1,600
FOH ($5 x 30% x 800) +1,200
Incremental cost to buy ($1,200)
Since 30% of the fixed cost is avoidable, this cost will be a savings.
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Problem 31 - Boys Toys sells three products in its retail stores: planes, trains, and cars. Results of the
4th quarter are below:
Planes Trains Cars Total
Units sold 1,000 2,000 2,000 5,000
Revenue $31,000 $43,000 $26,000 $100,000
Net income ($2,000) $ 8,000 $ 3,000 $ 9,000
Demand of individual products are not affected by changes in other product lines. In good form, prepare
an incremental analysis to determine if planes should be discontinued.
Incremental VC savings +22,000
Incremental direct fixed costs +5,000
Incremental decline in profit if discontinued ($4,000)
Problem 32 - The following estimated costs were provided by Young Company:

($15/unit)
Fixed factory overhead costs ($10/unit) 10,000
Total $91,000
Young received an order for 600 units from a new customer in a country in which Young has never done
business. This customer would like to spend $86 per widget. Young has capacity to produce 900 more units.
Should Young accept the order? Support with an incremental analysis.
Yes, it can make $3,000 more profit
Incremental revenue (600 x $86) = +$51,600
Incremental DM cost (600 x $30) = (18,000)
Incremental DL cost (600 x $36) = (21,600)
Incremental VMOH cost (600 x $15) = (9,000)
Incremental profit = + $3,000
Fixed OH is not incremental since it does not change.
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Problem 33 - Kirk Company plans to produce 50,000 buckets next year at a total cost of $850,000. Fixed
costs are $3 per unit at this level of operations. Selling price is $8 per unit. Kirk is considering lowering the
price to $7 per unit, and feels that this action will cause sales to climb to 60,000 buckets. Use incremental
analysis to calculate incremental profit or loss if the change is made to the sales price.
Incremental revenue: Effect on Profit
Before change: $8 x 50,000 = $400,000
After change: $7 x 60,000 = 420,000
Problem 34 - Zeriff’s Donuts currently sells donuts for $4.00 per dozen. These donuts cost $2.70 per dozen
to produce. Business was very slow yesterday, and several dozen donuts have been marked down to $1.50
per dozen on the day-old table today. What is the sunk cost associated with these donuts?
The original cost of the donuts is $2.70 no matter what and it can't be changed. This is a sunk cost.
Problem 35 - Morley, Inc. has three product lines in its retail stores: putters, drivers, and sinkers. The
allocated fixed costs are based on units sold and are unavoidable. Results of May follow:
Putters Drivers Sinkers Total
Units sold 500 1,000 1,000 2,500
Revenue $24,000 $48,000 $34,000 106,000
Net income (loss) $ 2,000 $12,000 ($2,000) $12,000
Demand of individual products is not affected by changes in other product lines. In good form, prepare
an incremental analysis of the effect of dropping the sinkers product line.

Incremental savings of variable costs +23,000
Incremental savings of direct fixed costs +5,000
Incremental decline in profit if Sinkers dropped ($6,000)
Problem 36 - Walker, Inc. currently manufactures 4,000 motors for its electric scooters annually. Direct
material costs are $48,000 and direct labor total $12,000 annually. Overhead totals $10 per unit of which $4 is
variable. Thirty percent of the fixed overhead is unavoidable. Anthony, Inc. has contacted Walker with an offer
to sell the motors for $21 each. In good form, create an incremental analysis for the make or buy decision.
Incremental cost to buy ($21 x 4,000) ($84,000)

Incremental direct material cost savings +48,000
Incremental direct labor cost savings +12,000
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Incremental variable overhead cost savings ($4 x 4,000) +16,000
Incremental fixed overhead cost savings
[$10- $4] x 4,000 x 70% +16,800
Incremental net cost savings if buy instead of make $8,800
Problem 37 - Bing Corporation currently manufactures a lid for its main product. The relevant costs to
produce one unit for direct costs are $1.70, and the allocated common costs are $0.80 per unit. A supplier
has offered to provide the monthly supply of 12,000 lids for $21,600. Should Bing outsource the lids? Use
No, the cost increases by $1,200
Incremental savings of cost to make: $1.70 x 12,000 = $20,400

Incremental cost to buy: ($21,600)
Incremental cost to buy instead of make: $20,400 - $21,600 = ($1,200)
Problem 38 - Block Corporation currently makes the rolls that it uses for its sandwiches. It uses 50,000 rolls
annually. The costs to make the rolls are given below:
Materials $0.04
Labor $0.03
VOH $0.02
FOH $0.07
A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are purchased, 20% of the
fixed overhead could be avoided. Determine the effect if Block accepts the offer. Use incremental analysis.
Profits will decrease (costs will increase) by $300 if accepted.
Incremental cost to buy ($0.11)
DM savings + $0.04
DL savings + $0.03
VOH savings + $0.02
FOH savings ($.07 x 20%) + $0.014
Incremental decrease in profit per unit = $.006
Total incremental decrease in profit (50,000 x $0.006) = $300
Problem 39 - Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The
following information is available for the segments. Assume that all direct fixed costs could be avoided if a
segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were
dropped.
Bowling Shoes Athletic Shoes Boots
Sales $120,000 $420,000 $360,000
VC 64,000 220,000 140,000
CM 56,000 200,000 220,000
Direct FC 40,000 70,000 90,000
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Allocated FC 20,000 70,000 60,000
NI ($4,000) $60,000 $70,000
If bowling shoes are dropped, what would happen to the overall net income? Support with incremental
analysis.
It would decrease by $16,000.
Incremental Revenue ($120,000)
Incremental VC savings + $64,000
Incremental Direct FC savings + $40,000
Problem 40 - Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes.
The following information is available for the segments. Assume that all direct fixed costs could be avoided if a
dropped.
Sales $120,000 $420,000 $360,000
VC 64,000 220,000 140,000
CM 56,000 200,000 220,000
Direct FC 40,000 70,000 90,000
Allocated FC 20,000 70,000 60,000
NI ($4,000) $60,000 $70,000
Assume that boots normally sell for $90 per pair. An exporter has approached Menlo about buying 1,000 pairs
of boots for a one-time export deal for $80 per pair. $3.00 per unit of the normal variable cost could be avoided
on this sale, but Menlo would have to pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to
produce this order, and no regular sales will be affected. Should Menlo accept this order? Support with an
Yes, profits will increase by $44,000.
# of boots sold = $360,000/$90 = 4,000
Incremental cost per unit = $140,000/4,000 = $35
Incremental revenue ($80 x 1,000) $80,000

Incremental VC ($35 - $3) x 1,000 (32,000)
Increase in fixed costs 4,000
Problem 41 BarBQue Heaven has three product lines in its stores: ribs, chicken, and beef. Results of May are
presented below:
Ribs Chicken Beef Total
Units sold 2,000 4,000 4,000 10,000

Revenue $22,000 $40,000 $23,000 $85,000
Net income ($1,000) $ 8,000 $ 2,000 $ 9,000
Allocated fixed costs are unavoidable. Individual product demand is not affected by changes in other product
lines.
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A. In good form, use the incremental approach to determine if BarBQue Heaven should discontinue Ribs.
Label appropriately. Show calculations in the space provided if needed. .
Incremental variable costs savings + 15,000
Incremental direct fixed cost savings + 1,000
Incremental decrease in profit if ribs are dropped ($6,000)
B, Briefly state how the cost allocation death spiral applies to this problem.
When a division is eliminated, the fixed costs that had been allocated to it, have to be allocated to the
remaining divisions. Hence, the allocated fixed costs do not disappear. Without the additional contribution
margin from the dropped product, total profit declines. If more products are dropped the company spins into a
deeper cut in profits or increased loss.
Problem 42 - Halo Inc. budgeted 8,000 bearings for production during 2006. Fixed factory overhead is
allocated using ABC. Halo received an offer from a suppler to manufacture the same quality bearings at $81
each. The space currently occupied by the manufacturing facility could be leased out for $20,000 per year if
the supplier provides the bearings. The following estimated costs were provided:

Direct labor ($16/hr. * 1.5 hrs./unit) 192,000
($6/unit)
($18/unit)
Total $784,000

Use the incremental approach to determine if Halo should buy its bearings from the supplier. Label
appropriately. Show calculations in the space provided if needed. .
Incremental cost to buy ($648,000) ($81*8,000)
Incremental cost savings - DM +400,000
Incremental cost savings - DL +192,000
Incremental cost savings - VOH +48,000
Incremental lease revenue +20,000
Incremental cost savings to buy from supplier $12,000
Problem 43 Clinton Company makes and sells 16,000 ties each year. Fixed overhead costs are allocated to
ties based on its annual production of 16,000 ties. The unit cost of making one tie at this activity level follows:
Direct material $9
Variable manufacturing 3
overhead
Direct labor 5
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Fixed manufacturing 4
overhead
Capacity is 20,000 ties. Forty percent of the fixed overhead costs is avoidable. An overseas company recently
offered to buy 2,500 ties at $20 per tie even though Clinton’s regular customers pay $25 each.
A. Use the incremental approach to determine the effect on income if Clinton accepts the order for 2,500 ties.
Label appropriately. Show calculations in the space provided if needed.
Incremental revenue $50,000 2,500*$20
Incremental costs = DM (22,500)
2,500*$9
Incremental costs = DL (7,500) 2,500*$3
Incremental costs = VOH (12,500) 2,500*$5

Incremental costs avoided = FOH (4,000)
2,500*$4*40%
Incremental increase in profit if special order accepted $3,500
B. Should Clinton accept? Briefly justify your answer.

Most likely, yes. Profits increase by $3,500. Qualitative benefits and costs should be considered as well.
Problem 44 SMP Company's market for the Model 64 has changed significantly, and SMP has had to drop
the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of
$150 per unit associated with them. SMP could sell these units in their current state for $100 each. It will cost
SMP $10 per unit to complete these units so that they can be sold for $125 each. Which of the following is the
amount of sunk costs in this problem?
$150 per unit
Two costs are not relevant since the profits remain the same regardless if SMP is dropped or not. The original
selling price of $265 does not make the company more or less profitable. The $150 cost exists regardless of
the decision made. However, a sunk cost is an amount incurred for which it is too late to change. The previous
selling price is not a 'cost'.
Problem 45 Block Corporation currently makes the rolls that it uses for its sandwiches. It uses 50,000 rolls
annually. The costs to make the rolls are given below:
Materials $0.04
Labor $0.03
VOH $0.02
FOH $0.07
A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are purchased, 20% of the
fixed overhead could be avoided. If Block accepts the offer, it will be:
Incremental cost to buy ($0.11)
DM savings + $0.04
DL savings + $0.03
VOH savings + $0.02
FOH savings + $0.014
($.07 x 20%)
Incremental decrease in profit per unit = $.006
Total incremental decrease in profit = $300
(50,000 x $0.006)
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Problem 46 Alan Company makes sets of wrenches. They are trying to decide whether to continue to make
the case the wrenches are sold in, or to outsource it to another company. The direct material and direct labor
cost to produce the cases total $2.00 per case. The overhead cost is $1.00 per case which consists of $0.40 in
variable overhead which would all be eliminated if the case were bought from the outside supplier. The $0.60
of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the
case production manager of $40,000 per year and $80,000 in depreciation on equipment that would have no
resale value. The manager would be laid off if the cases were bought externally. Additionally, if the case
production were stopped, the space that it is using could be rented out for $20,000 per year. The outside
supplier has offered to supply the cases for $2.80 per case. How much will Alan save or lose if the cases are
bought externally?
Incremental cost to buy per case ($2.80)
Incremental cost savings to buy:
DM and DL savings + $2.00
VOH savings + $0.40
FOH savings:
Salary $40,000/200,000 = = $0.20
Incremental opportunity cost is bought +$0.10
($20,000/200,000)
Incremental cost increase if bought = ($0.10) per case
Problem 47- Smith Company manufactures widgets. Newman Company has approached Smith with a
proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000
units. Smith is currently making these components in its own factory. The following costs are associated with
this part of the process when 50,000 units are produced:
Direct labor 20,000
MOH 60,000
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no
longer produced by Smith. The remaining manufacturing overhead will continue whether or not Smith makes
the components. Answer the following questions from Smith's point of view.
Should Smith make or buy the components for the widgets?
Continue to make them because the incremental cost of buying from Newman is $4,000.
Incremental cost savings to make:
DM + $44,000
DL + $20,000
MOH + $32,000
Problem 48 Huxley Sports Company sells logo sports merchandise and does custom screen printing. They
are trying to decide whether or not to continue screen printing. The following information is available for the
segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total
common fixed costs would remain unchanged if the screen printing were dropped.
Screen Printing Apparel Sales
Sales $120,000 $420,000
Variable costs 72,000 220,000
Contribution margin 48,000 200,000
Direct fixed costs 32,000 70,000
Allocated common fixed costs 20,000 70,000
Net income ($4,000) $60,000
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Assume that more space will be allocated to apparel sales if screen printing is dropped. This will allow apparel
sales to increase by 25%. What is the impact on profits of the proposed change?
Incremental revenue - screen ($120,000)
Incremental revenue - apparel (25%*$420,000) 105,000
Incremental savings/(costs):
VC - screen printing + 72,000
VC - apparel (25%*$220,00) (55,000)
Direct FC +32,000
Problem 49 Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The
dropped.
Sales $120,000 $420,000 $360,000
VC 64,000 220,000 140,000
CM 56,000 200,000 220,000
Direct FC 40,000 70,000 90,000
Allocated FC 20,000 70,000 60,000
NI ($4,000) $60,000 $70,000
If bowling shoes are dropped, what would happen to overall net income?
Incremental VC savings + $64,000
Incremental direct FC savings + $40,000
Problem 50 Menlo Shoe Company is trying to decide whether or not to continue making bowling shoes. The
dropped.
Sales $120,000 $420,000 $360,000
VC 64,000 220,000 140,000
CM 56,000 200,000 220,000
Direct FC 40,000 70,000 90,000
Allocated FC 20,000 70,000 60,000
NI ($4,000) $60,000 $70,000
Assume that boots normally sell for $90 per pair. An exporter has approached Menlo about buying 1,000 pairs
of boots for a one-time export deal for $80 per pair. $3.00 per unit of the normal variable cost could be avoided
on this sale, but Menlo would have to pay a fixed cost $4,000 to have the boots shipped. Menlo has capacity to
produce this order, and no regular sales will be affected. If Menlo accepts this order:
# of boots sold = $360,000/$90 = 4,000
Incremental cost per unit = $140,000/4,000 = $35
Incremental revenue ($80 x 1,000) $80,000

Incremental VC ($35 - $3) x 1,000 (32,000)
Increase in fixed costs 4,000
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Problem 51Contesa Company plans to produce 8,000 units during May at a total cost of $29,000. Fixed costs
total $13,000. Selling price per unit is $5.00. Management is considering lowering the price to $4.60 per unit,
and feels that this action will cause sales to climb to 8,800 units. How much are the incremental costs incurred
if 8,800 units are produced and sold?
Total costs = FC + VC
$29,000 = $13,000 + X; so VC = $16,000;
VC per unit: $16,000/8,000 = $2 per unit
Incremental costs to produce 800 more units (8,800 - 8,000):
800 units x $2 = $1,600
Problem 52 Don’s Donuts budgets the following costs for the production of 36,000 boxes of donuts next
year: Rent, $20,000; other fixed costs, $6,000; direct materials, $54,000, and direct labor, $36,000. The
normal selling price is $4.00 per box. A new convenience store has offered to pay Don’s $3.00 per box to
supply them with 10,000 boxes of donuts during the year. Assuming that Don’s has the capacity to fill this
order along with their other production and that accepting this order will not cause problems with any of their
other customers, should Don’s Donuts accept this order? Justify your answer with computations.
Yes, because incremental profits will increase by $5,000.
Incremental revenue: $3.00 x 10,000 = $30,000

Incremental costs: VC/unit= [$54,000+$36,000]/36,000 = $2.50; so incremental costs are $2.50 x
10,000 boxes = $25,000; Incremental profit is revenue less cost: $30,000 - $25,000 = $5,000
Problem 53 - AT, Inc. plans to produce and sell 80,000 calculators next year. Fixed costs are $100,000. The
current selling price is $7 each and the variable cost per unit is $4. Management is considering raising the
selling price to $8 per unit, but this is likely to cause the sales volume to drop to 76,000 units. How much is the
incremental profit associated with the changes?
Incremental revenue
(80,000 x $7) - (76,000 x $8) $48,000
Incremental costs:
Variable cost: ((80,000 - 76,000) x $4) (16,000)
Incremental profit $32,000
Problem 54 Tague Company sells calculators. During the past year, 6,000 calculators were produced and sold
at $10 each. Variable cost per unit was $3 and total fixed costs were $200,000. Tague would like to raise the
selling price per unit to $11 each, but feels that this will reduce sales to 5,500 bottles per year. How much is
the incremental revenue of raising the selling price?
Old revenue: $10 x 6,000 = $60,000
New revenue: $11 x 5,500 = $60,500
Incremental revenue: $60,500 - $60,000 = $500
Problem 55 At Fruit Company, the total cost to produce 50,000 units is $750,000. Total fixed costs are
$250,000. What is the expected cost to produce 48,000 units?
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VC = ($750,000 - $250,000) = $500,000
VC per unit = $500,000/50,000 = $10
Cost at 48,000 units = $10(48,000) + $250,000 = $730,000
Problem 56 At Richetti Company, the total variable cost to produce 15,000 units is $45,000. Total fixed costs
are $21,000. What is the expected cost to produce 13,000 units?
VC per unit = $45,000/15,000 = $3 per unit
Total cost = variable cost + fixed costs = [$3*13,000] + $21,000 = $60,000
Note that product costs include both fixed and variable amounts. If the question asked for the incremental
cost, then $39,000, the variable cost would be the answer, only if the difference in units was 13,000.
Problem 57 Key Company plans to produce and sell 500 skateboards next year. Fixed costs are estimated at
$50,000. Key sells each skateboard for $60. Total variable costs at 500 units are $12,000. Management is
considering decreasing the selling price to $55 each, which is likely to cause the sales volume to increase to
600 units. How much is the incremental revenue associated with the changes?
Option 1 (price at $60) = $60 x 500 = $30,000
Option 1 (price at $55) = $55 x 600 = $33,000
Incremental revenue = $33,000 - $30,000 = $3,000
Problem 58 Eng Company plans to produce and sell 400 skateboards next year. Fixed costs are estimated at
$10,000. Eng sells each skateboard for $50. Variable costs are $20 per unit. Management is considering
decreasing the selling price to $45 each, which is likely to cause the sales volume to increase to 500
units. How much is the incremental profit associated with the changes?
Incremental revenue = (400 x $50) - (500 x $45) = +$2,500

Incremental costs = 100 x $20 = (2,000)
Incremental profit = $2,500 - $2,000 = $500
Problem 59 Bell Company sells sims. During the past year, 8,000 sims were produced and sold at $10 each.
Variable cost per unit was $4 and total fixed costs were $160,000. Bell would like to raise the selling price per
unit to $12 each, but feels that this will reduce sales to 7,400 sims per year.
A. Highlight the amounts of any items which are not relevant to this decision.
Highlighted in green = not relevant. Fixed costs are not relevant since the amount stays the same regardless of
whether the selling price stays at $10, or in raised to $12.
B. How much is the incremental revenue?

Current revenue: 8,000 x $10 = $80,000
Revenue if change is made: 7,400 x $12 = 88,800
Incremental revenue +$8,800
C. How much is the incremental profit?

Incremental revenue (from part B) +$8,880
Incremental cost: [8,000 - 7,400] x $4 = (2,400)
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Incremental profit $6,400
Problem 60 Kirk Company plans to produce 50,000 buckets next year at a total cost of $850,000. Fixed
costs are $3 per unit at this level of operations. Selling price is $8 per unit. Kirk is considering lowering the
price to $7 per unit, and feels that this action will cause sales to climb to 60,000 buckets. Use incremental
analysis to calculate incremental profit or loss if the change is made to the sales price.
Incremental revenue: Effect on Profit
Before change: $8 x 50,000 = $400,000
After change: $7 x 60,000 = 420,000
Increase in revenue $20,000
Problem 61 Don’s Donuts budgets the following costs for the production of 36,000 boxes of donuts next
year: Rent, $20,000; other fixed costs, $6,000; direct materials, $54,000, and direct labor, $36,000. The
normal selling price is $4.00 per box. A new convenience store has offered to pay Don’s $3.00 per box to
supply them with 10,000 boxes of donuts during the year. Assuming that Don’s has the capacity to fill this order
along with their other production and that accepting this order will not cause problems with any of their other
customers, should Don’s Donuts accept this order?
Yes, because incremental profits will increase by $5,000.
Incremental revenue: $3.00 x 10,000 = $30,000
Incremental costs:
VC/unit= [$54,000+$36,000]/36,000 = $2.50;
so incremental costs are $2.50 x 10,000 boxes = $25,000
Incremental profit = revenue less cost: $30,000 - $25,000 = $5,000
Problem 62 Sabab, Inc. produces 4 different qualities of cable for broadband internet hookups. Sabab
currently produces 800,000 yards of economy cable each month. The costs of making each yard is $0.12 for
direct materials, $0.05 for variable manufacturing overhead, $0.03 for variable administrative overhead, $0.06
for direct labor, and $0.12 for fixed manufacturing overhead. Overhead is allocated based on direct labor
hours. An outside supplier has offered to sell Sabab economy cable for $0.28 per yard, and can supply all it
needs. The company determined that 15% of the fixed overhead is avoidable if the company discontinues
production of the economy cable. In addition, the company could lease the machine used to make the
economy cable to another company for $8,000 annually. In good form, prepare anincremental analysis to
determine if Sabab should outsource the component.
Incremental Analysis Amounts Calculations (if any):

Buy: $0.28*800,000
Incremental variable cost savings DM: $0.12*800,000

DL: $0.06*800,000
Direct materials +96,000
VMOH: $0.05*800,000
Direct labor +48,000 VAOH: $0.03*800,000
$0.15*800,000*15%
Variable manufacturing overhead +40,000
Variable administrative overhead +24,000
Incremental fixed overhead savings +14,400
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Incremental lease revenue is bought +8,000
Incremental increase in profit if bought +$6,400
Should Sabab outsource? Yes. Profits increase by $6,400.
Problem 63 Hooters sells 3 child meals in its restaurants: Hot Wings, 3 Mile Wings, and Volcano Wings.
Changes in product lines do not affect demand of other products. Results of June are below:
Hot Wings 3 Mile Wings Volcano Total
Units sold
4,000 2,500 2,600 9,100
Revenue
$32,000 $30,000 $26,000 $88,000
Variable departmental costs
19,200 16,500 10,400 46,100
Direct fixed costs
5,000 7,000 4,000 16,000
Net income $1,300 ($2,000) $4,100 $3,400
Seventy percent of the allocated fixed costs are unavoidable. In good form, prepare an incremental analysis to
determine if 3 Mile Wings should be discontinued.
Incremental Analysis Amounts
Incremental revenue if dropped ($30,000)
Incremental direct fixed cost savings +7,000
Incremental fixed costs avoided* +2,550
Incremental decrease in profit if dropped ($3,950)
* $8,500*30% = $2,550
Should 3 Mile Wings be discontinued? Briefly justify your response as to why or why not.
3 Mile Wings should not be discontinued because profits would decline by $3,950, which results in a
net loss of $550 for the company instead of a $3,400 profit.
Problem 64 The following estimated costs were provided by Narb Company:

Direct labor ($12/hr. * .25 hrs./unit) 36,000
Allocated fixed overhead costs 30,000
($2.50/unit)
Total $324,000
Narb received an order for 2,500 units from a new customer with whom Narb is anxious to do business. This
customer would like to spend $26 per widget. Narb has the capacity to produce the additional units. In good
form, prepare an incremental analysis to determine if Narb should accept the order.
Incremental Analysis Amounts Calculations:

2,500 * $26 = $65,000
Incremental revenue if accepted +$65,000
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Incremental DL cost increase (7,500) $12*0.25hrs.*12,000 = $7,500
Incremental DM cost increase (50,000) 2,500 * $20 = $65,000
Incremental VOH cost increase (3,750) 2,500*12,000 = $3,750
Incremental increase in profit if accepted $3,750
# of units: $240,000/$20 = 12,000 units
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Study Probes - Chapters 20

Variable cost = $11 + $5 + $4 = $20 per unit

Direct materials $90

A. How much is the relevant cost of producing one more computer?

Yes, incremental profit is $56,000.

Incremental Revenue = 40,000 x $20 = $800,000

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Incremental increase in revenue (3,000*$18) $54,000

Direct materials $75

Incremental loss per computer = $150 - $170 = $20

Yes, it can make $11,200

Incremental revenue per widget $160

Problem 7- Zweig, Inc. produces batches of chocolate chip cookies:

Multiple Choice Questions

2.Which of the following describes one aspect of incremental analysis?

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4. Which of the following is most often a differential cost?

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16.An example of a qualitative performance measure is

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19. Which of the following is an example of a sunk cost?

Short Answer Questions

Study Probes - Chapters 21 Solutions

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Direct material $4,000

Incremental cost to buy 4,000 components ($

C. Which costs/amounts from above are opportunity costs, if any?

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Problem 9 - Hernandez, Inc. manufactures 3 models of picture frames. Hernandez Corporation

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Multiple Choice Questions

1. Which costs are usually avoidable in a make-or-buy decision?

4.Lakewood Industries is considering outsourcing a paint-spraying operation that is performed in

5. Which costs are usually avoidable in a make-or-buy decision?

7.An example of a qualitative performance measure is

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9. Which costs are usually avoidable in a make-or-buy decision?

11. Sunk costs

12.For make-or-buy decisions, which items are relevant?

21. Which of the following is one disadvantage of using an outside supplier?

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1. What is meant by insourcing and outsourcing

Study Probes - Chapters 22 and 23 Solutions

Sales $16,000 $24,000

Variable cost of goods sold 6,000 10,000

Fixed production 5,000 7,000

Variable selling and administration 2,000 5,000

Fixed selling and administration 1,000 3,000

Net income $2,000 ($1,000)

Use the incremental approach to determine if Popeyes should be dropped.

Incremental revenue ($16,000* 40%) of Olives $ 6,400

Incremental revenue of Popeyes (24,000)

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Incremental cost savings of Popeyes S&A cost 5,000

Incremental variable cost of Olives ($6,000*40%) (2,400)

Incremental s&a cost of Olives ($2,000*40%) (800)

Incremental decrease in income if Popeyes are discontinued ($5,800)

Total Corn Broccoli

Incremental change in revenue:

Equipment rental reduction - corn shucker +100

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