Question

PROBLEM 4 – INCREMENTAL ANALYSIS

A.       Hickman Manufacturing produces Product A in batches of 4,000 gallons at $.90 per gallon. Product A can be sold without further processing for $1.20 per gallon. Product A can be processed further to yield Product B, which can be sold for $1.85 per gallon. Product B requires additional processing costs at $1,650 per batch.

Instructions

Compute the incremental income or loss from further production of one batch of Product B.

B.       Brooks Manufacturers produces can openers. For the first six months of 2018, the company reported the following operating results while operating at 80% of plant capacity.

Sales = $4,000,000
Variable Cost per unit = $4.90
Fixed Cost per unit = $5.25

In September 2018, Brooks Manufacturers receives a special order for 20,000 can openers at $7.50 from a foreign company. Acceptance of the special order would result in $7,000 of shipping costs.

Instructions
Prepare an incremental analysis for the special order.

C.  A recent accounting graduate from UNM evaluated the operating performance of Hickman Company's three divisions. The following presentation was made to Hickman's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division, stating that total net income would increase by $20,000 as shown in the analysis below.

                                                           Other Two Divisions                        Southern Division                            Total           
Sales                                              $1,000,000                                           $300,000                                           $1,300,000
Variable Costs                              557,500                                                234,000                                                 791,500
Contribution Margin                442,500                                                  66,000                                                  508,500
Fixed Costs                                     192,500                                                  86,000                                                  278,500
Net Income                                $   250,000                                             $ (20,000)                                          $   230,000

If the division is eliminated, 40% of the fixed costs will be eliminated.

Instructions
Do you concur with the new accountant's recommendation?  Show your work to support your answer.

D.  Brooks Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:

                  Direct materials                                                                  $  70,000

                  Direct labor                                                                                  30,000
                  Variable manufacturing overhead                               20,000
                  Fixed manufacturing overhead                                      40,000
                                                                                                                          $160,000

Another company has offered to sell the same component part to the company for $24 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Brooks Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $30,000.

Instructions
Prepare an incremental analysis report for Brooks Company which can serve as informational input into this make-or-buy decision.

E.  Hickman Corp. produces three products, and is currently facing a labor shortage - only 3,000 hours are available this month. The selling price, costs, labor requirements, and demand of the three products are as follows:  

	Product A	Product B	Product C
Selling price	$30.00	$40.00	$50.00
Variable cost per unit	$10.00	$30.00	$35.00
Direct labor hours per unit	3	2	1.5
Demand	2,000	500	1,000

a. In what order should Hickman prioritize production of the products?

b. How many of each product should be sold during the labor shortage to maximize profit?

c. What is the total contribution margin if Hanson prioritizes production according to its limited resources?

Answer 1