Lean Foods produces a variety of snack products including fried pork rinds. The cost of one batch of pork rinds is below: \[\begin{array} { l r } \text { Direct materials } & \$ 12.00 \\ \text { Direct labor } & 10.00 \\ \text { Variable overhead } & 7.00 \\ \text { Fixed overhead } & 9.00 \end{array}\] An outside supplier has offered to produce the pork rinds for $25 per batch. How much will Lean save if it accepts the offer?

A) $3.00 per batch B) $4.00 per batch C) $18.00 per batch D) $13.00 per batch A) $3.00 per batch B) $4.00 per batch C) $18.00 per batch D) $13.00 per batch

Bay States Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2016 the company incurred $344000 of costs to produce 40000 gallons of the chemical. The selling price of the chemical is $11.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: $\begin{array}{lr} \text { Direct materials } & \$ 6.00 \\ \text { Direct labor } & 1.20 \\ \text { Variable manufacturing overhead } & .80 \\ \text { Fixed manufacturing overhead } & .60 \\ \text { Total manufacturing costs }&\$8.60 \end{array}$ The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself the following additional costs per gallon will be incurred: Direct materials $1.80 Direct labor $.60 Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.00 per gallon. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.

@#IMG-DLM& (A) $6.00 + $1.80 (B) $1.20 +

Exam 26: Incremental Analysis and Capital Budgeting

Jim-Mate Company supplies schools with floor mattresses to use in physical education classes. Jim-Mate has received a special order from a large school district to buy 700 mats at $55 each. Acceptance of the special order will not affect fixed costs but will result in $1500 of shipping costs. For the first 7 months of 2016 the company reported the following operating results while operating at 75% capacity: Sales (100,000 units) \ 9,000,000 Cost of goods sold 5,300,000 Gross profit 3,700,000 Operating expenses 2,500,000 Net income \ 1,200,0000 Cost of goods sold was 70% variable and 30% fixed; operating expenses were 75% variable and 25% fixed. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Jim-Mate Company accept the special order? Justify your answer.

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Question 1

Correct Answer:

Verified

(a)
$\begin{array}{lccc}&&&\text { Net Income }\\&\text { Reject Order } &\text { Accept Order } &\text { Increase (Decrease) }\\\begin{array}{l}\text { Revenues } \\\text { Cost of Goods Sold } \\\text { Operating Expense } \\\text { Net Income }\end{array} & \begin{array}{r}\$-0- \\-0- \\-0- \\\$-0- \\\end{array} & \begin{array}{r}\$ 38,500 \\25,970 \\14,625 \\(2,095) \\\end{array} & \begin{array}{r}\$ 38,500 \\(25,970) \\(14,625) \\(2,095) \\\end{array} \\\end{array}$ Variable cost of goods sold = $5300000 × 70% = $3710000.
Variable cost of goods sold per unit = $3710000 ÷ 100000 = $37.10.
Variable cost of goods sold for the special order = 700 × $37.10 = $25970.
Variable operating expenses = $2500000 × 75% = $1875000
Variable operating expenses per unit = $1875000 ÷ 100000 = $18.75
Variable operating expenses for the special order = 700 × $18.75 = $13125 + $1500
= $14625
(b) The incremental analysis shows Jim-Mate Company should not accept the special order because incremental costs exceed incremental revenues.

It is better not to replace old equipment if it is not fully depreciated.

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(True/False)

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Question 2

Correct Answer:

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False

Western Company has a machine that affixes labels to bottles. The machine has a book value of $60000 and a remaining useful life of 3 years and no salvage value. A new more efficient machine is available at a cost of $210000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $490000 to $390000. Instructions Prepare an analysis showing whether the old machine should be retained or replaced.

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Question 3

Correct Answer:

Verified

*For 3 years of remaining life
**390000 * 3 = 1170000
***490000 x 3 - 1470000 and 390000 x 3 = 1170000

In a sell or process further decision management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

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Question 4

Flores Company has identified that the cost of new manufacturing equipment will be $60000 but with the use of the new equipment net income will increase by $5000 a year. If depreciation expense is $5000 a year the cash payback period is:

(Multiple Choice)

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Question 5

Which decision will involve no incremental revenues?

(Multiple Choice)

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Question 6

Accounting's contribution to the decision-making process occurs in all of the following steps except to

(Multiple Choice)

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Question 7

Lean Foods produces a variety of snack products including fried pork rinds. The cost of one batch of pork rinds is below: Direct materials \ 12.00 Direct labor 10.00 Variable overhead 7.00 Fixed overhead 9.00 An outside supplier has offered to produce the pork rinds for $25 per batch. How much will Lean save if it accepts the offer?

(Multiple Choice)

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Question 8

A company is considering purchasing factory equipment that costs $320000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased annual revenues are expected to be $90000 and annual operating expenses exclusive of depreciation expense are expected to be $40000. The straight-line method of depreciation would be used. The cash payback period on the equipment is

(Multiple Choice)

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Question 9

Match the items below

A cost that cannot be changed by any present or future decision.

Incremental analysis

A capital budgeting technique that considers both the estimated total cash inflows from the investment and the time value of money.

Opportunity cost

A method used in capital budgeting in which cash inflows are discounted to their present value and then compared to the capital outlay required by the capital investment.

Discounted cash flow technique

Correct Answer:

Verified

A cost that cannot be changed by any present or future decision.

A capital budgeting technique that considers both the estimated total cash inflows from the investment and the time value of money.

A method used in capital budgeting in which cash inflows are discounted to their present value and then compared to the capital outlay required by the capital investment.

The process of identifying the financial data that change under alternative courses of action.

A method used in capital budgeting that results in finding the interest yield of the potential investment.

The minimum rate of return management requires on an investment.

The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment.

The potential benefit that may be lost from following an alternative course of action.

The process of making capital expenditure decisions in business.

A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the annual cash inflow produced by the investment.

(Matching)

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Question 10

Sardine Kitchen Company produces three versions of crock pots: small medium and large. A condensed segmented income statement for a recent period follows: $\begin{array}{lcccc}&\text { Large }&\text { Medium } & \text { Small }&\text { Total }\\ \text { Sales } & \$ 200,000 & \$ 200,000 & \$ 105,000 & \$ 505,000 \\ \text { Variable expenses } & 125,000 & 110,000 & 65,000 & 300,000 \\ \text { Contrbution margin } & 75,000 & 90,000 & 40,000 & 205,000 \\\text { Fixed expenses } & 55,000 & 55,000 & 47,000 & 157,000 \\ \text { Net income (loss) } & \$ 20,000 & \$ 35,000 & \$(7,000) & \$ 48,000 \\\end{array}$ Assume all of the fixed expenses for the small size crock pot are avoidable. What will be total net income if the line is dropped?

(Multiple Choice)

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Question 11

Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability.

(True/False)

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Question 12

The interest rate yielded by a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

(True/False)

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Question 13

Use the following table $\text { Present Value of an Annuity of } 1$ Period 8\% 9\% 10\% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $420000 and is expected to generate cash inflows of $168000 at the end of each year for three years. The net present value of this project is

(Multiple Choice)

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Question 14

In making decisions management ordinarily considers both financial and nonfinancial information.

(True/False)

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Question 15

A recent accounting graduate from East Southwest State University evaluated the operating performance of Patel Company's four divisions. The following presentation was made to Patel 's Board of Directors. During the presentation the accountant made the recommendation to eliminate the Northern Division stating that total net income would increase by $60000. (See analysis below.) For the other divisions cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the Northern Division is 35% fixed and its operating expenses are 75% fixed. If the division is eliminated only $5000 of the fixed operating costs will be eliminated. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer.

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Question 16

Internal reports that review the actual impact of decisions are prepared by

(Multiple Choice)

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Question 17

October Inc. is considering purchasing equipment costing $46300 with a 6-year useful life. The equipment will provide cost savings of $10950 and will be depreciated straight-line over its useful life with no salvage value. October Inc. requires a 10% rate of return. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Present Value of an Annuity of } 1$ Period 8\% 9\% 10\% 11\% 12\% 15\% 6 4.623 4.486 4.355 4.231 4.111 3.784 What is the approximate internal rate of return for this investment?

(Multiple Choice)

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Question 18

Bay States Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2016 the company incurred $344000 of costs to produce 40000 gallons of the chemical. The selling price of the chemical is $11.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials \ 6.00 Direct labor 1.20 Variable manufacturing overhead .80 Fixed manufacturing overhead .60 Total manufacturing costs \8 .60 The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself the following additional costs per gallon will be incurred: Direct materials $1.80 Direct labor $.60 Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.00 per gallon. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.

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Question 19

The process used to identify the financial data that change under alternative courses of action is called __________________ analysis.

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Question 20

It is better not to replace old equipment if it is not fully depreciated.

In a sell or process further decision management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

Flores Company has identified that the cost of new manufacturing equipment will be $60000 but with the use of the new equipment net income will increase by $5000 a year. If depreciation expense is $5000 a year the cash payback period is:

Which decision will involve no incremental revenues?

Accounting's contribution to the decision-making process occurs in all of the following steps except to

Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability.

The interest rate yielded by a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

In making decisions management ordinarily considers both financial and nonfinancial information.

Internal reports that review the actual impact of decisions are prepared by

The process used to identify the financial data that change under alternative courses of action is called __________________ analysis.

Accounting in Action

The Recording Process

Adjusting the Accounts

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories

Accounting Information Systems

Fraud, Internal Control, and Cash

Accounting for Receivables

Plant Assets, Natural Resources, and Intangible Assets

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Corporations: Organization and Capital Stock Transactions

Corporations: Dividends, Retained Earnings, and Income Reporting

Long-Term Liabilities

Investments

Statement of Cash Flows

Financial Statement Analysis

Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

Time Value of Money

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