Question

1a. Lusk Corporation produces and sells 15,100 units of Product X each month. The selling price of Product X is $21 per unit, and variable expenses are $15 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $72,000 of the $101,000 in fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the company’s overall net operating income would:

1b. Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:

	Alternative A	Alternative B
Materials costs	$44,000	$59,000
Processing costs	$50,000	$50,000
Equipment rental	$11,800	$28,900
Occupancy costs	$19,900	$30,800

What is the differential cost of Alternative B over Alternative A, including all of the relevant costs? 1c. The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below:   Sales $919,000   Variable expenses $398,000   Fixed manufacturing expenses $333,000   Fixed selling and administrative expenses $240,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $200,000 of the fixed manufacturing expenses and $111,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. 1e. Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 56,000 units per month is as follows: Direct materials $50.60   Direct labor $9.70   Variable manufacturing overhead $2.70   Fixed manufacturing overhead $20.50   Variable selling & administrative expense $5.00   Fixed selling & administrative expense $24 The normal selling price of the product is $118.10 per unit. An order has been received from an overseas customer for 3,600 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $2.80 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $92.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

Answer 1

1-A

	Not drop	drop	difference
Sales	317100 (15100*21)		317100
Less: variable expenses	226500 (15100*15)		226500
Contribution margin	90600		90600
Less: fixed expenses	101000	72000	29000
Net operating income	-10400		61600

If Product X is discontinued, the company’s overall net operating income would: increase by 61600

1-B

	Alternative A	Alternative B	Differential cost
Materials cost	44000	59000	15000
Processing Cost	50000	50000	-
Equipment rental	11800	28900	17100
Occupancy cost	19900	30800	10900
Total expenses	125700	168700	43000

the differential cost of Alternative B over Alternative A, including all of the relevant costs is $43000

1-C

Overall net operating income would decrease by $210,000.

919000

Less:

398,000

333,000

240000

= (52,000) loss if the item is not dropped

333000 -200,000 = 133,000 fixed mfg. expenses remaining

240000 - 111000 = 129000 fixed selling expenses remaining

136,000 + 55,000 = ($262000) Loss in expenses remaining if item is dropped

262,000 - 52,000 = $210,000 decrease

1-E

this special order would increase (decrease) the company's net operating income for the month:

(92.40-50.60-9.70-2.70-(5-2.80))= 27.20*3600 = 97920