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Manufacturing costs:
Direct materials
Direct manufacturing labour
Variable manuf. indirect costs
Fixed manuf. indirect costs
Marketing costs:
Variable
Fixed
1.
$1.30
1.48
0.92
0.75
$1.72
1.10
Per Unit
Fixed
Variable
$4.45
$0.75
$3.70
2.82
$7.27
1.10
$1.85
1.72
$5.42
(d) $4.45
Manufacturing Costs
Variable
$3.70
Fixed
0.75
Total
$4.45
2.
Sales
Variable costs
Manufacturing
Marketing and other
Variable product costs
Contribution margin
Fixed costs:
Manufacturing
Marketing and other
Fixed product costs
Operating income
*Incremental revenue:
$7.22 (45,000)
Deduct price reduction
$0.28 (300,000)
Differential
New
300,000 u $7.50
$2,250,000
+ $240,900*
345,000 u $7.22
$2,490,900
300,000 u $3.70
300,000 u $1.72
1,110,000
516,000
1,626,000
624,000
+ 166,500
+ 77,400
+ 243,900
3,000
345,000 u $3.70
345,000 u $1.72
1,276,500
593,400
1,869,900
621,000
225,000
330,000
555,000
$ 69,000
$ 3,000
$0.75 u 25,000
u 12 mos. =
$1.10u 300,000
$324,900
84,000
$240,900
508
225,000
330,000
555,000
$ 66,000
Chapter 11
11-29 (contd)
3.
(c) $3,750
If this order were not landed, fixed overhead would be underallocated by $3,750.
Therefore, taking the order increases operating income by $1,500 plus $3,750, or
$5,250.
Another way to present the same idea follows:
Sales will increase by [5,000 ($4.45) = $22,250] + $1,500
Costs will increase by 5,000 ($3.70)
Fixed overhead will not change
Change in operating income
$23,750
18,500
$ 5,250
Note that this answer to (3) assumes that variable marketing costs are not
influenced by this contract. These 5,000 units do not displace any regular sales.
4.
Government Contract
As above
$5,250
5.
Regular Customers
Sales, 5,000 (7.50)
Increase in costs:
Variable costs only:
Manufacturing,
5,000 (3.70)
$18,500
Marketing,
5,000 (1.72)
8,600
Fixed costs are not affected
Change in operating income
$37,500
27,100
$ 10,400
$3.70
0.86
$4.56 (10,000)
0.52 (10,000)
$5.08 (10,000)
$45,600
5,200
$50,800
6.
(e) $1.72, the variable marketing costs. The other costs are past costs, and are
therefore irrelevant.
7.
(e) None of these. The correct answer is $4.419. This part always gives students
trouble. The short-cut solution below is followed by a longer solution that is
helpful to students.
509
11-29 (contd)
Shortcut solution:
The highest price to be paid would be measured by those costs that could be avoided
by halting production and subcontracting:
Variable manufacturing costs
Fixed manufacturing costs saved
$112,500 300,000
Marketing costs (0.20 u $1.72)
$3.700
0.375
0.344
$4.419
Sales [300,000*$7.5]
Variable costs:
Manufacturing, 300,000 u 3.70
Marketing and other, 300,000 u $1.72
Variable product costs
Contribution margin
Fixed costs:
Manufacturing
Marketing and other
Total fixed costs
Operating income
+215,700
103,200
225,000
330,000
555,000
$ 69,000
112,500
1,325,700*
412,800
1,738,500
511,500
112,500
330,000
442,500
$ 69,000
*This solution is obtained by filling in the above schedule with all the known figures and working from the bottom
up and from the top down to the unknown purchase figure. Maximum variable costs that can be incurred:
$1,738,500 $412,800 = maximum purchase costs, or $1,325,700. Divide $1,325,700 by 300,000 units, which yields a
maximum purchase price of $4.419.
510