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In: Accounting

C. A recent accounting graduate from UNM evaluated the operating performance of Hickman Company's three divisions....

C. A recent accounting graduate from UNM evaluated the operating performance of Hickman Company's three divisions. The following presentation was made to Hickman's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division, stating that total net income would increase by $20,000 as shown in the analysis below.

Other Two Divisions Southern Division Total

Sales $1,000,000 $300,000 $1,300,000

Variable Costs - 557,500 -234,000 - 791,500

Contribution 442,500 66,000 508,500

Margin Fixed Costs 192,500 86,000 278,500

Net Income $250,000 $(20,000) $230,000

If the division is eliminated, 40% of the fixed costs will be eliminated.

Instructions: Do you concur with the new accountant's recommendation? Show your work to support your answer.

D. Brooks Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:

Direct materials$ 70,000

Direct labor $30,000

Variable manufacturing overhead $20,000

Fixed manufacturing overhead 40,000

$160,000

Another company has offered to sell the same component part to the company for $24 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Brooks Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $30,000.

Instructions Prepare an incremental analysis report for Brooks Company which can serve as informational input into this make-or-buy decision.

Solutions

Expert Solution

InCremental Analysis report

IF WE MAKE PRODUCT COMPONENET

VARIABLE COST 120000

OPPURTUNITY COST IF WE MAKE 30000

TOTAL COST 150000

IF WE BUY PRODUCT

COST ( 6000 * 24) 144000

Cost Saving (150000-144000) 6000 so recommnd to buy

ekkarill92 answered 1 year ago
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