1)Lattimer Company had the following results of operations for the past year: A
ID: 2474034 • Letter: 1
Question
1)Lattimer Company had the following results of operations for the past year:
A foreign company whose sales will not affect Lattimer's market offers to buy 4,700 units at $7.20 per unit. In addition to existing costs, selling these units would add a $0.22 selling cost for export fees. If Lattimer accepts this additional business, the special order will yield a:
$3,995 profit.
$1,880 loss.
$7,614 loss.
$2,961 profit.
$2,914 loss.
2) Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,700. The division sales for the year were $1,057,000 and the variable costs were $867,000. The fixed costs of the division were $200,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be: $190,000 decrease $60,000 decrease $56,300 decrease $130,000 decrease $190,000 increase
Sales (15,000 units at $11.85) $177,750 Variable manufacturing costs $95,250 Fixed manufacturing costs 18,750 Selling and administrative expenses (all fixed) 33,750 (147,750) Operating income $30,000Explanation / Answer
(1) Incremental Revenue from special order = 4,700 * 7.2 = $33,840
Existing variable cost per unit = 95250/15000 = 6.35
New incremental cost = 6.35 + 0.22 = $6.57
Total Incremental cost for special order = 4,700 * 6.57 = $30,879
Profit from special order = 33840 - 30879 = $2,961 (Option-D)
(2) Elimination in Fixed cost = $200,000*30% = $60,000
Fixed cost which will continue = 200,000 - 60,000 = $140,000
Saving on existing operating loss = $10,000
Effect in net income - Decrease by $130,000 (Option-D)
Please note:- The figure of operating loss in second question seems wrong...It should be $10,000 (1057000 - 867000 - 200000)
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