Termus Industries is operating at 85% of its manufacturing capacity of 52,500 pr
ID: 2456363 • Letter: T
Question
Termus Industries is operating at 85% of its manufacturing capacity of 52,500 product units per year. A customer has offered to buy an additional 4,200 units at $37.5 each and sell them outside the country so as not to compete with Termus. The following data are available:
In producing 4,200 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $5.75 per unit would be incurred. What is the effect on income if Termus accepts this order?
Income will decrease by $9.00 per unit.
Income will increase by $4.75 per unit.
Income will increase by $32.75 per unit.
Income will decrease by $10.50 per unit.
Income will increase by $9.00 per unit.
Altertech Inc. manufactures a product that contains a circuit board. The company has always purchased this circuit board from a supplier for $287.5 each. Altertech recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the circuit board instead of buying it. The company prepared the following per unit cost projections of making the circuit board, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 110% of direct labor cost.
2.
The required volume of output to produce the circuit boards will not require any incremental fixed overhead. Incremental variable overhead cost is $31.5 per circuit board. What is the effect on income if Altertech decides to make the circuit boards?
Income will decrease by $25.0 per unit.
Income will decrease by $174.5 per unit.
Income will increase by $25.0 per unit.
Income will increase by $174.5 per unit.
Income will increase by $56.5 per unit.
3.
Teague Plumbing has received a special one-time order for 2,400 toilets (units) at $66 per unit. Teague currently produces and sells 14,250 units at $91 each. This level represents 75% of its capacity. Production costs for these units are $66 per unit, which includes $61 variable cost and $5 fixed cost. To produce the special order, shipping costs of $10,000 will be incurred. Management expects no other changes in costs as a result of the additional production.
480 units.
850 units.
2,340 units.
4,680 units.
1,170 units.
Termus Industries is operating at 85% of its manufacturing capacity of 52,500 product units per year. A customer has offered to buy an additional 4,200 units at $37.5 each and sell them outside the country so as not to compete with Termus. The following data are available:
Explanation / Answer
1) Relevant cost = Direct material + Direct Labour + Incremental variable overhead costs
Relevant cost = $15 + $12 + $5.75 = $32.75 per unit
Net income = selling price - relevant cost = $37.5 - $32.75 = $4.75
Income will increase by $4.75 per unit.
2) Relevant cost = Direct material + Direct Labour + Incremental variable overhead costs
Relevant cost = $21 + $210+ $31.5 = $262.5 per unit
Net income = Purchased price - relevant cost = $287.5 - $262.5 = $25
Income will increase by $25 per unit.
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