Three_ Management Accounting Questions

| June 5, 2016

Question

Exercise 21.6 Incremental Analysis for a Make or Buy Decision
The cost to Swank Company of manufacturing 15,000 units of a particular part is $135,000, of which $60,000 is fixed and $75,000 is variable. The company can buy the part from an outside supplier for $6 per unit. Fixed costs will remain the same regardless of Swank’s decision. Should the company buy the part or continue to manufacture it? Prepare a comparative schedule in the format illustrated in Exhibit 21–6.

Manufacturing Costs:

Direct Materials ……………………………………………………………………………………………………………..

Direct Labor…………………………………………………………………………………………………………………….

Variable Overhead………………………………………………………………………………………………………….75,000

Fixed Overhead per month…………………………………………………………………………………………….60,000

Total Cost of Manufacturing 15,000 units per month………………………………………. $135,000

Average Manufacturing cost per unit ($ / units)………………………………………………………

Exercise 22.9 Transfer Pricing

Delmar Foods has two divisions:

(1) a Processed Meat Division and (2) a Frozen Pizza Division.

Delmar’s frozen pizzas use processed meat as a topping. The company’s Processed Meat Division supplies the Frozen Pizza Division with all of its meat toppings. Delmar managers are paid bonuses based on their division’s profitability. The manager of the Processed Meat Division argues for a transfer price based on a market value approach. The manager of the Frozen Pizza Division favors a transfer price based on a cost approach.

Explain how Delmar’s bonus system may influence each manager’s opinion regarding which approach to use in establishing a transfer price.

Exercise 22.1A Preparing and Using Responsibility Income Statements

Chocolatiers Company produces two products: Solid chocolate and powdered chocolate. Cost and revenue data for each product line for the current month are as follows:

Product Lines

Solid Powdered

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $850,000 $870,000

Contribution margin as a percentage of sales . . . . . . . . . . . . . . . . . . 45% 55%

Fixed costs traceable to product lines . . . . . . . . . . . . . . . . . . . . . . . . $175,000 $250,000

In addition, fixed costs that are common to both product lines amount to $125,000.

Instructions:

a. Prepare Chocolatiers’s responsibility income statement for the current month. Report the responsibility margin for each product line and income from operations for the company as a whole. Also include columns showing all dollar amounts as percentages of sales.

b. According to the analysis performed in part a, which product line is more profitable? Should the common fixed costs be considered when determining the profitability of individual product lines? Why or why not?

c. Chocolatiers has $15,000 to be used in advertising for one of the two product lines and expects that this expenditure will result in additional sales of $50,000. How should the company decide which product line to advertise?

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