Question

Per unit data concerning a product manufactured by XYZ Co. are given below:

Selling price	$100
Direct materials, direct labor, and variable manufacturing overhead	40
Fixed manufacturing overhead	25
Variable selling expense	10
Fixed selling and administrative expense	7

The above per unit data are based on annual production of 10,000 units. The company has received a special, one-time-only order for 500 units of the product with a selling price of $60. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and total fixed selling and administrative expenses of the company would not be affected by the order. If XYZ accepts the order, it will have no effect on other customers. Assuming that XYZ has excess capacity and can fill the order without cutting back on the production of any product, what is the financial advantage (disadvantage) of company accepting the special order?

	A.	$11,000 financial disadvantage
	B.	$20,000 financial disadvantage
	C.	$10,000 financial advantage
	D.	$5,000 financial advantage

1. XYZ manufactures and sells a number of products, including Product G. Results for last year for the manufacture and sale of Product G are as follows:

   Sales		$50,000
   Less expenses:
   Variable costs	$40,000
   Fixed costs	36,000	76,000
   Net operating loss		$(26,000)

   XYZ is trying to decide whether or not to discontinue Product G. Two thirds of fixed costs are avoidable if the product is dropped. Assume that dropping Product G will have no effect on other products. What is the financial advantage (disadvantage) of dropping Product G?
   

   	A.	$14,000 financial advantage
   	B.	$26,000 financial advantage
   	C.	$2,000 financial advantage
   	D.	$40,000 financial advantage

2. Which of the following equation is NOT valid regarding spending variances shown in the flexible budget performance report?

   	A.	Total spending variance for fixed overhead = fixed overhead budget variance + fixed overhead volume variance.
   	B.	Total spending variance for direct labor = labor rate variance + labor efficiency variance.
   	C.	Total spending variance for variable overhead = variable overhead rate variance + variable overhead efficiency variance.
   	D.	Total spending variance for direct materials = material price variance + material quantity variance, if actual quantity purchased = actual quantity used.

3. Suppose a company applies variable manufacturing overhead to products on the basis of direct labor-hours. If the company’s labor efficiency variance is favorable, which of the following statement is TRUE?

   	A.	The company’s fixed overhead volume variance must be favorable as well.
   	B.	The company’s variable overhead rate variance must be favorable as well.
   	C.	The company’s labor rate variance must be favorable as well.
   	D.	The company’s variable overhead efficiency variance must be favorable as well.

Answer 1

Solution

1. Calculation of Financial Advantage/(Disadvantage) on Accepting the special order of 500 units:

As given in Question:

• There would be no variable selling expense on this special order
• The total fixed manufacturing overhead and Total fixed selling and administrative expenses of the company would not be affected by the order.

Therefore, There will be a Financial Advantage of $10,000 on accepting the special order.

Option C) $10,000 financial advantage is the correct answer.

2. Calculation of Financial Advantage/(Disadvantage) on Dropping the Product G:

Working Note:

Fixed Cost on Discontinue Product G

As given in question, two thirds of fixed costs are avoidable if the product is dropped. It means, one third of Fixed costs will still incur.

= $36,000 * 1/3rd = $12,000

As we can see in above statement, There will be a Net operating Loss of $12,000 if company discontinues Product G, whereas Net operating Loss of $26,000 if company Continue Product G.

So financial advantage on dropping Product G = $26,000 - $12,000 = $14,000

Option A) $14,000 financial advantage is the correct answer.

3. The Equation which is not valid for Spending Variance :

A) Total Fixed overhead spending variance = Actual Fixed overhead - Standard Fixed overhead

whereas,

Total Fixed Overhead Volume variance = Budgeted Fixed overhead - Fixed Overheads applied

Therefore, Option A) is the correct answer as given in equation in option a is not valid.

4. For any company that applies variable manufacturing overhead to products on the basis of direct labor hours, the variable overhead efficiency variance is:

= Variable overhead Budgeted rate * (Actual Labour Hours - Budgeted Labour Hours)

If above formula gives the negative result, it means that Variable overhead efficiency variance is favourable.

As given in question, If the company’s labor efficiency variance is favorable, it means Actual labour hours are lesser than the budgeted labour hours.

Therefore, in purview of above explained formula, If the company’s labor efficiency variance is favorable then the company’s variable overhead efficiency variance must be favorable as well.

Therfore, Option D) is the correct answer