Question

12. Ahmad Company has no beginning and ending inventories, and reports the following data about its only product:

Direct materials used $300,000
Direct labor $75,000
Fixed indirect manufacturing $250,000
Fixed selling and administrative $140,000
Variable indirect manufacturing $125,000
Variable selling and administrative $150,000
Selling price(per unit) $200

Units produced and sold 10,000

Ahmad Company uses the contribution approach to prepare the income statement. What is the contribution margin?
A) $750,000
B) $1,000,000
C) $1,350,000   
D) $1,625,000

16. Shoestring Company manufactures a part for its production cycle. The costs per unit for 10,000 units of the part are as follows:

Per Unit
Direct materials $4.00
Direct labor 6.00
Variable factory overhead 5.00
Fixed factory overhead 4.00
Total costs $19.00

The fixed factory overhead costs are avoidable. Day Company has offered to sell 10,000 units of the same part to Shoestring Company for $18 per unit. Assuming no other use for the facilities, Shoestring Company should ________.
A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part from Day Company to save $10,000          ($18 X 10,000 - $19 X 10,000)
D) buy the part from Day Company to save $15,000

Answer 1

12
Sales revenue		2000000	=10000*200
Less: Variable expenses
Direct materials used	300000
Direct labor	75000
Variable indirect manufacturing	125000
Variable selling and administrative	150000
Total Variable expenses		650000
Contribution margin		1350000
Option C is correct
16
Total relevant costs to make	190000		=10000*19
Total relevant costs to buy	180000		=10000*18
Net difference in favor of buying	10000
Option C buy the part from Day Company to save $10,000 is correct