Question

1.

Gelb Company currently manufactures 58,500 units per year of a key component for its manufacturing process. Variable costs are $6.25 per unit, fixed costs related to making this component are $75,000 per year, and allocated fixed costs are $83,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.70 per unit.

Calculate the total incremental cost of making 58,500 units and buying 58,500 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?

2.

Cobe Company has already manufactured 20,000 units of Product A at a cost of $25 per unit. The 20,000 units can be sold at this stage for $450,000. Alternatively, the units can be further processed at a $270,000 total additional cost and be converted into 5,100 units of Product B and 11,800 units of Product C. Per unit selling price for Product B is $109 and for Product C is $52.

1. Prepare an analysis that shows whether the 20,000 units of Product A should be processed further or not?

3.

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $5.50 per unit to manufacture. The units can be a) sold as is for $2.70 each, or b) reworked for $4.60 each and then sold for the full price of $8.20 each.

What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Enter costs and losses as negative values.)

4.

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $35,000 and a remaining useful life of four years, at which time its salvage value will be zero. It has a current market value of $45,000. Variable manufacturing costs are $33,500 per year for this machine. Information on two alternative replacement machines follows.

	Alternative A				Alternative B
Cost	$	119,000			$	115,000
Variable manufacturing costs per year		22,900				10,500

Calculate the total change in net income if Alternative A, B is adopted. Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase?

Answer 1