Question

 

 

1) The condensed income statement for a business for the past year is presented as follows:

		Product
	F	G	H	Total
Sales	$200,000	$180,000	$320,000	$700,000
Less variable costs	120,000	160,000	200,000	480,000
Contribution margin	$ 80,000	$ 20,000	$120,000	$220,00
Less fixed costs	25,000	30,000	40,000	95,000
Income (Loss) from Operations	55,000	10,000	80,000	125,000

Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products F and H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G?

a) $10,000 increase

b) $20,000 increase

c) $10,000 decrease

*d) $20,000 decrease (correct answer)

2) Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $3 of fixed costs. If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?

a) $60,000 decrease

b) $40,000 decrease

*c) $40,000 increase (correct answer)

d) $60,000 increase

Answer 1

(1) As per information provided us, The discontinuance of product G would have no effect on the total fixed cost and expenses on the sales of product F and H.

Hence, Total income of the business before disontinuance of product G is $125,000 and total income of the business after discontinuance of the product G is $105,000.

And for calculating total income of the business after discontinuing the product G consider the fixed cost of product G.In this way,

($55000+$80000-$30000) = $105000

Hence (d) is a correct answer

(2) The make or buy decision is the action of deciding between manufacturing an item internally or buying it from an external supplier.

To come to a make or buy decision it is essential to thoroughly analyze, all of the expenses associated with product development.In addition to expenses associated with buying the product

In this question fixed cost $3. per unit is given for the parts which is used in its manufacturing operation .The part which could be manufactured using unused capacity capacity is not the main part of manufacturing process of this company.Thereby the allocation of fixed overhead per unit is not in proper manner.

Hence, we can say that this answer is not best answer.