Question

On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $17,000.

Featherweight Shoes Inc.

Product-Line Income Statement

For the Year Ended April 30, 20Y8

1		Children’s Shoes	Men’s Shoes	Women’s Shoes	Total
2	Sales	$235,000.00	$300,000.00	$500,000.00	$1,035,000.00
3	Costs of goods sold:
4	Variable costs	$130,000.00	$150,000.00	$220,000.00	$500,000.00
5	Fixed costs	41,000.00	60,000.00	120,000.00	221,000.00
6	Total cost of goods sold	$171,000.00	$210,000.00	$340,000.00	$721,000.00
7	Gross profit	$64,000.00	$90,000.00	$160,000.00	$314,000.00
8	Selling and administrative expenses:
9	Variable selling and admin. expenses	$46,000.00	$45,000.00	$95,000.00	$186,000.00
10	Fixed selling and admin. expenses	35,000.00	20,000.00	25,000.00	80,000.00
11	Total selling and admin. expenses	$81,000.00	$65,000.00	$120,000.00	$266,000.00
12	Income (loss) from operations	$(17,000.00)	$25,000.00	$40,000.00	$48,000.00

Prepare a differential analysis to determine the flaw in the general manager’s decision. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Question not attempted.

Score: 0/89

Differential Analysis

Continue (Alternative 1) or Discontinue (Alternative 2) Children’s Shoes

1		Continue Children’s Shoes	Discontinue Children’s Shoes	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8

Points:

1 / 1

If the Children’s Shoes are discontinued, the company'sincome would decrease by:

Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $81 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 60% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$51
Direct labor	20
Factory overhead (60% of direct labor)	12
Total cost per unit	$83

If Fremont Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 10% of the direct labor costs.

Required:

a.

Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

b.

On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.

Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $81 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 60% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$51
Direct labor	20
Factory overhead (60% of direct labor)	12
Total cost per unit	$83

If Fremont Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 10% of the direct labor costs.

	Required:
a.	Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
b.	On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.

X

Labels and Amount Descriptions

Labels
Cash flows from investing activities
Unit costs
Amount Descriptions
Direct labor
Direct materials
Fixed factory overhead
Gain on sale of investments
Income (loss)
Loss on sale of investments
Purchase price
Sales price
Variable factory overhead

X

Differential Analysis

Shaded cells have feedback.

a. Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Question not attempted.

Score: 0/125

Differential Analysis

Make (Alternative 1) or Buy (Alternative 2) Carrying Case

September 30

1		Make Carrying Case	Buy Carrying Case	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)

Answer 1

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Question-1
		Continue Childred Shoes	Discontinue Childred Shoes	Differential effect on income
Sale		235000	0	-235000
Cost of Goods Sold:
Variable Cost		-130000	0	130000
Fixed Cost (Fixed cost will incure fully even if discontinued)		-41000	-41000	0
Total Cost of goods sold		-171000	-41000	130000
Gross Profit		64000	-41000	-105000
Selling and administrative expense:
Variable Selling and administrative expense		-46000	0	46000
Fixed Selling and administrative expense		-35000	-35000	0
Total Selling and administrative expense		-81000	-35000	46000
Income/(loss) from operations		-17000	-76000	-59000
If discontinued, income will decrease by 59000.
Flaw with management decision:
Management uses Fixed cost to make decision
Question-2a
		Make Carrying Case	Buy Carrying Case	Differential Effect
Purchase Price			-81	-81
Direct Material		-51		51
Direct Labor		-20		20
Variable Overhead (20*10%)		-2		2
Fixed Overhead 20*(60-10)%		-10	-10	0
Income/(Loss)		-83	-91	-8
Question-2b
Should make the cases as cost is lower by $8