Question

ABC Company is currently operating at full capacity. It is considering buying a part from an outside supplier rather than making it in-house. If ABC purchases the part, it can use the released productive capacity to generate additional income of GH¢ 30,000 from producing a different product. When conducting incremental analysis in this make-or-buy decision, the company should:

Select one:

a. add GH¢ 30,000 to other costs in the “Make” column.

b. subtract GH¢ 30,000 from the other costs in the “Make” column.

c. add GH¢ 30,000 to other costs in the “Buy” column.

d. ignore the GH¢ 30,000.

ABC Company is considering a project with an annual cash flow of GH¢ 200,000. The project would have a seven year life, and the company uses a discount rate of 10 percent. (DF@ N=7, 10% = 4.868). What is the maximum amount the company could invest in the project and have the project still be acceptable?

Select one:

a. GH¢ 973,600.

b. GH¢ 200,000.

c. GH¢ 718,200.

d. GH¢ 1,400,000.

Last year, fixed manufacturing overhead costs were GH¢30,000, variable production costs were GH¢48,000, fixed selling and administration costs were GH¢20,000, and variable selling administrative expenses were GH¢9,600. There was no beginning inventory. During the year, 3,000 units were produced and 2,400 units were sold at a price of GH¢40 per unit. Under variable costing, what would be the operating income?

Select one:

a. A profit of GH¢ 4,000.

b. A loss of GH¢ 4,400.

c. A profit of GH¢ 6,000.

d. A loss of GH¢ 2,000.

During the last year, XYZ Company's total variable production costs were GH¢10,000, and its total fixed manufacturing overhead costs were GH¢6,800. The company produced 5,000 units during the year and sold 4,600 units. There were no units in the beginning inventory. Which of the following statements is true?

Select one:

a. The net income under absorption costing for the year will be GH¢544 higher than net income under variable costing.

b. The net income under absorption costing for the year will be GH¢800 lower than net income under variable costing.

c. The net income under absorption costing for the year will be GH¢544 lower than net income under variable costing.

d. The net income under absorption costing for the year will be GH¢800 higher than net income under variable costing.

Answer 1

1.

Add GH¢ 30,000 to other cost in the Make column.

Hence option a is correct.

2.

Maximum amount company could invest in project = GH¢ 200,000 * 4.868 = GH¢ 973,600

Hence option a is correct.

3.

Sales (2,400*GH¢ 40)	GH¢ 96,000
Variable costs (GH¢ 48,000/3,000*2,400)+GH¢ 9,600	48,000
Contribution margin	48,000
Fixed costs (GH¢30,000+20,000)	50,000
Net operating income / (loss)	GH¢(2,000)

A loss of GH¢ 2,000.

Hence option d is correct

4.

Portion of fixed manufacturing overhead in ending inventory under absorption costing = GH¢ 6,800/5,000*400

Portion of fixed manufacturing overhead in ending inventory under absorption costing = GH¢544

GH¢544 will not be included in Cost of goods sold under absorption costing.

Hence net operating income under absorption costing will increase by GH¢544.

Net income under absorption costing for the year will be GH¢544 higher than net income variable costing.

Hence option a is correct.