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Chapter 23: Q8E (page 1053)

Cobe Company has already manufactured 28,000 units of Product A at a cost of \(28 per unit. The 28,000 units can be sold at this stage for \)700,000. Alternatively, the units can be further processed at a \(420,000 total additional cost and be converted into 5,600 units of Product B and 11,200 units of Product C. Per unit selling price for Product B is \)105 and for Product C is $70. Prepare an analysis that shows whether the 28,000 units of Product A should be processed further or not.

Short Answer

Expert verified

The company should process further product A.

Step by step solution

01

Definition of incremental income 

The incremental cost is the cost that is increased by choosing the various course of action.

02

 Calculation of incremental income

Sell as is

Process Further

Sales

$700,000

$1,372,000

Relevant Cost

Costs to Process Further

$420,000

Total relevant score

$420,000

Income

$700,000

$952,000

The incremental income of the process further is $952,000.

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Most popular questions from this chapter

Gelb Company currently manufactures 40,000 units per year of a key component for its manufacturing process. Variable costs are \(1.95 per unit, fixed costs related to making this component are \)65,000 per year, and allocated fixed costs are \(58,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for \)3.50 per unit. Should it continue to manufacture the component, or should it buy this component from the outside supplier? Support your decision with analysis of the data provided

Alto Company currently produces component TH1 for its sole product. The current cost per unit to manufacture

its required 400,000 units of TH1 follows.

Direct materials and direct labor are 100% variable. Overhead is 75% fixed. An outside supplier has offered

to supply the 400,000 units of TH1 for \(4 per unit.

Direct materials . \)1.20

Direct labor . 1.50

Overhead . 6.00

Total cost per unit . . . . . . . . . . . . $8.70

Required

1. Determine whether management should make or buy the TH1.

2. What factors besides cost must management consider when deciding whether to make or buy TH1?

Kando Company incurs a \(9 per unit cost for Product A, which it currently manufactures and sells for \)13.50 per unit. Instead of manufacturing and selling this product, the company can purchase it for \(5 per unit and sell it for \)12 per unit. If it does so, unit sales would remain unchanged and \(5 of the \)9 per unit costs of Product A would be eliminated. Should the company continue to manufacture Product A or purchase it for resale?

A guitar manufacturer is considering eliminating its electric guitar division because its \(76,000 expenses are higher than its \)72,000 sales. The company reports the following expenses for this division. Should the division be eliminated?idable Expenses Unavoidable Expenses

Cost of goods sold \(56,000

Direct expenses 9,250 \)1,250

Indirect expenses . 470 1,600

Service department costs . 6,000 1,430

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The

following information is available.

Product G Product B

Selling price per unit . \(120 \)160

Variable costs per unit . 40 90

Contribution margin per unit . \( 80 \) 70

Machine hours to produce 1 unit 0.4 hours 1.0 hours

Maximum unit sales per month . 600 units 200 units

The company presently operates the machine for a single eight-hour shift for 22 working days each month.

Management is thinking about operating the machine for two shifts, which will increase its productivity

by another eight hours per day for 22 days per month. This change would require \(15,000 additional fixed

costs per month.

Required

1. Determine the contribution margin per machine hour that each product generates.

2. How many units of Product G and Product B should the company produce if it continues to operate

with only one shift? How much total contribution margin does this mix produce each month?

3. If the company adds another shift, how many units of Product G and Product B should it produce?

How much total contribution margin would this mix produce each month? Should the company add

the new shift? Explain.

4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per

month by spending \)12,000 per month in marketing efforts. Should the company pursue this strategy

and the double shift? Explain.
See all solutions

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