Question

A company manufactures 10,000 microwave ovens every period. Each of the ovens requires a timer. The company currently manufactures the 10,000 timers with the following cost: direct materials $40,000, direct labor $50,000, variable overhead $20,000, fixed overhead $60,000 (the fixed overhead is only 50% avoidable if the company stops making timers). An external supplier offers the company to supply the timers for $15 each. What will be the effect on the company's profit if it decides to buy the timers instead of making them?

$10,000 decrease

$20,000 increase

$30,000 decrease

$30,000 increase

A company manufactures two joint products, A and B, from a common input. At the split-off point, A unit of product A can be sold for $10 and a unit of product B can be sold for $12. However, if $7 of further processing per unit is spent on product A, it can be sold for $15 per unit; and if $9 of further processing per unit is spent on product B, it can be sold for $25 per unit. Which of the products should be processed further?. Single choice.

Only A

Only B

Both A and B

None of the products

Answer 1

We will prepare incremental analysis

fixed costs unavoidable will be incurred even when company buy the timers.So it is irrelevant in decision making

	Make	Buy	Net increase (decraese )in income
direct material	$40,000	-	$40,000
Labor	$50,000	-	$50,000
variable OH	$20,000	-	$20,000
Avoidable fixed cost	$30,000	-	$30,000
Cost of buying	-	$150,000[$15*10,000]	($150,000)
Net			($10,000)

company's profit will decrease by $10,000 if it decides to buy the timers instead of making them

Answer A)

2]product should be further processed if incremental revenue by further processing> Incremental cost of further processing

	A	B
Incremental Revenue	[$15-$10] $5	[$25-12] $13
Incremental costs	$7	$9
Net benefit (loss) from further processing	($2)[5-7]	$4[$13-$9]

Product A will result into loss per unit of $2 if further processed

Product B will result into profit per unit of $4 if further processed

Answer Only B

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