2. Clemente Inc. incurs the following costs to produce 10,000 units of a subcomp
ID: 2491095 • Letter: 2
Question
2.
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials
$8,400
Direct labor
11,250
Variable overhead
12,600
Fixed overhead
16,200
An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.
If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3,600. The increase (decrease) in net income from accepting the offer would be
A)
$150.
B)
$7,350.
C)
$(150).
D)
$(3,600).
3.
Janssen Company has old inventory on hand that cost $24,000. Its scrap value is $32,000. The inventory could be sold for $80,000 if manufactured further at an additional cost of $24,000. What should Janssen do?
A)
Sell the inventory for $32,000 scrap value
B)
Dispose of the inventory to avoid any further decline in value
C)
Hold the inventory at its $24,000 cost
D)
Manufacture further and sell it for $80,000.
4.
Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period:
Sales Value
Additional
Sales Value after
Product
at Split-off
Variable Costs
Further Processing
Green lumber
$159,600
$24,000
$178,000
Rough lumber
124,000
28,200
173,600
Sawdust
102,000
19,600
130,000
Which products should be processed further?
A)
Green lumber and rough lumber
B)
Green lumber and sawdust
C)
Rough lumber and sawdust
D)
All three products
5.
Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected:
Old Equipment
New Equipment
Purchase price
$225,000
$375,000
Accumulated depreciation
90,000
- 0 -
Annual operating costs
300,000
240,000
If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment's remaining useful life and the new equipment's useful life is 5 years.
The net advantage (disadvantage) of replacing the old equipment with the new equipment is
A)
$60,000
B)
$(15,000)
C)
$(75,000)
D)
$90,000
6.
Custom Shoes Co. has gathered the following information concerning one model of shoe:
Variable manufacturing costs
$40,000
Variable selling and administrative costs
$20,000
Fixed manufacturing costs
$160,000
Fixed selling and administrative costs
$120,000
Investment
$1,700,000
ROI
30%
Planned production and sales
5,000 pairs
What is the target selling price per pair of shoes?
A)
$142
B)
$170
C)
$114
D)
$158
2.
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials
$8,400
Direct labor
11,250
Variable overhead
12,600
Fixed overhead
16,200
An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.
If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3,600. The increase (decrease) in net income from accepting the offer would be
A)
$150.
B)
$7,350.
C)
$(150).
D)
$(3,600).
Explanation / Answer
2 B) $7350
Relevant cost per unit if product is manufactured = ($8400 + $11250 + $12600) / 10000 = $3.225
Relevant cost per unit if product is purchased = $2.85 - $3600/10000 = $2.49
The cost to manufacture us more than cost to buy. Hence it would be profitable to buy the product.
Savings per unit in case product is purchased = $3.225 - $2.49 = $0.735
Net increase in profit = $0.735 * 10000 units = $7350
3 D Manufacture further and sell it for $80,000.
By incurring an additional cost of $24000, the total cost would increase to ($24000 + $24000) = $48000
Selling price after processing would be $80000
Net profit would be $80000 - $48000 = $32000
Profit before processing = $32000 - $24000 = $8000
By further processing the profit can be increased by $24000 ($32000 - $8000)
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