I need E7-5B 2 chapter 7 Incremental Analysis Using incremental analysis, determ

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I need E7-5B

2 chapter 7 Incremental Analysis Using incremental analysis, determine whether Weaver should accept the Army's offer. Make incremental analysis for make-oncy dectsion E7-4B Maningly Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 1 charged to production at the rate of 50% of direct labor cost. The direct materials and di- rect labor cost per unit to make the lamp s duction is 50,000 table lamps per year 00% of capacity. Variable manufacturing overhead is hades are $4 and s6, respectively. Normal pro- A supplier offers to make the lamp shades at a price of $13.50 per unit. If Maningly Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $50,000 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products. re the incremental analysis for the decision to make or buy the lamp shades. (a) Prepa (b)Should Maningly Inc. buy the lamp shades? Would your ans ifferent in (b) if the productive capacity released by not making the lamp shades could be used to produce income of $40,000? Use incrementat analysis for Home Safety Co. has recently started th E7-5B robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 TriRobo's is as follows. e manufacture of TriRobo, a three-wheeled (SO 4) Cost Direct materials ($35 per robot) Direct labor ($30 per robot) Variable overhead ($10 per robot) Allocated fixed overhead ($25 per robot) $ 700,000 600,000 200,000 500,000 Total $2,000,000 Home Safety Co. is approached by Ahn Inc. which offers to make TriRobo for $80 per unit or $1,600,000 Instructions (a) Using incremental analysis, determine whether Home Safety Co. should accept this offer under each of the following independent assumptions. (1) Assume that $400,000 of the fixed overhead cost can be reduced (avoided). (2) Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Ahn Inc., Home Safety Co. can use the released productive resources to generate additional income of $200,000. (b) Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier ulate contribution gin and prepare rential analysis for e-or-buy decision. E7-6B Marke Company purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Marke purchases sails at $260 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $100 for materials, $80 for direct labor and $100 for overhead. The $100 overhead is based on $60,000 of annual fixed overhead that is allocated using normal capacity The president of Harmon has come to you for advice. "It would cost me $280 to make the sails," she says, "but only $260 to buy them. Should I continue buying them, or have I missed something?" Instructions (a) Prepare a per unit analysis of the differential costs. Briefly explain whether Harmon (b) If Harmon suddenly finds an opportunity to rent out the unused capacity of its (c) Identify three qualitative factors that should be considered by Harmon in this make- should make or buy the sales. factory for $70,000 per year, would your answer to part (a) change? Briefly explain. or-buy decision. (CGA adapted)

Explanation / Answer

(1) $400,000 fixed costs can be avoided:

Particulars

Amount ($)

Manufacturing costs:

Direct materials

700000

Direct labour

600000

Variable overhead

200000

Allocated fixed costs

500000

Total cost of production

2000000

Buying costs:

Per unit cost of buying

80

20000 units costs (20000 x 80)

1600000

Add: Fixed costs (500000 - 400000)

100000

Total cost of buying

1700000

Saving in expenses if the company buys instead of production (2000000-1700000)

300000

Thus, the company should buy instead of manufacturing TriRobo as it will result in saving of $300000 in costs.

(2) No fixed costs avoided but the idle capacity can be used for $200000 income:

Particulars

Amount ($)

Manufacturing costs:

Direct materials

700000

Direct labour

600000

Variable overhead

200000

Allocated fixed costs

500000

Total cost of production

2000000

Buying costs:

Per unit cost of buying

80

20000 units costs (20000 x 80)

1600000

Add: Fixed costs

500000

Cost of buying

2100000

Less: Additional income to be generated

200000

Net cost of buying

1900000

Saving in expenses if the company buys instead of production (2000000-1900000)

100000

Again under this scenario also the company should buy TriRobo instead of manufacturing since the cost will be reduced by $100000.

Part (b):

The following qualitative factors might affect the decision of purchasing:

Particulars

Amount ($)

Manufacturing costs:

Direct materials

700000

Direct labour

600000

Variable overhead

200000

Allocated fixed costs

500000

Total cost of production

2000000

Buying costs:

Per unit cost of buying

80

20000 units costs (20000 x 80)

1600000

Add: Fixed costs (500000 - 400000)

100000

Total cost of buying

1700000

Saving in expenses if the company buys instead of production (2000000-1700000)

300000

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