Question 1: (2 points) Q Company currently produces a part which has the followi
ID: 2514437 • Letter: Q
Question
Question 1: (2 points) Q Company currently produces a part which has the following per unit cost: Direct materials $ 8 Direct labor Variable overhead Fixed overhead $17 Q Company can buy the part from an outside supplier for $19 per unit. 60% of Q Company's fixed overhead would continue if the part is purchased. If the part is not manufactured by Q, then the plant facilities can be rented for $60,000 per year. Q Company is currently manufacturing 10,000 units (parts) per year. Required: If Q Company decides to buy the part from an outside supplier, what would be the net benefit (incremental income)? Omit $ signs. Question 2: (2 points) Merrill Company has 2 departments, Men's Clothing and Women's Clothing. Merrill is considering dropping the Women's Clothing department, and has gathered the following data: Sales Variable expenses Direct fixed expenses Allocated fixed expenses Operating income Men's Clothing Women's Clothing $150,000 $80,000 80,000 46,000 20,000 38,000 15,000 15,000 $35,000 $(19,000) Total $230,000 126,000 58,000 30,000 $ 16,000 Required: Calculate Merrill's operating income if the Women's Clothing department is dropped. Omit $ signs.Explanation / Answer
Answer
Make
Buy
Net Income Increase (Decrease)
Direct Materials
80000
0
80000
Direct Labor
30000
0
30000
variable Overhead
10000
0
10000
Fixed Overhead
50000
30000
20000
Purchase price
190000
-190000
Additional Income
-60000
60000
Total Annual Cost
170000
160000
10000
Incremental Income = $10,000
Men's Clothing
Total
Sales
150000
(-) Variable expenses
80000
Contribution margin
70000
(-) Direct fixed expenses
20000
Division margin
50000
(-) Allocated fixed expenses [total]
30000
Operating Income
$20,000
Make
Buy
Net Income Increase (Decrease)
Direct Materials
80000
0
80000
Direct Labor
30000
0
30000
variable Overhead
10000
0
10000
Fixed Overhead
50000
30000
20000
Purchase price
190000
-190000
Additional Income
-60000
60000
Total Annual Cost
170000
160000
10000
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