Question

# 1.Division 1 has the following information: Sales is \$200,000; Variable costs are \$130,000; Fixed costs are...

1.Division 1 has the following information: Sales is \$200,000; Variable costs are \$130,000; Fixed costs are \$100,000; leaving a loss of \$30,000. If we drop division 1, 60% of the fixed costs could be saved. Should we drop division 1?

 a. Yes, overall company net income would go up by \$30,000
 b. No, overall company net income would go down by \$30,000
 c. Yes, overall company net income would go up by \$10,000
 d. No, overall company net income would go down by \$10,000

2.Should we accept a special order for 1,000 at a selling price of \$40 if our variable costs are \$15 per unit and there would be an additional fixed costs of \$12,000?

 a. Yes, net income would go up by \$25,000
 b. No, net income would go down by \$25,000
 c. No, net income would go down by \$13,000
 d. Yes, net income would go up by \$13,000

3.Given the following information, determine the product cost of one unit: Direct Materials = \$60; Direct labor = \$10; Apply Overhead based on \$2 per Direct Labor hour; Direct labor hours is 4 hours per unit.

 a. \$70 per unit
 b. \$80 per unit
 c. \$78 per unit
 d. \$85 per unit

1.

Cost Analysis

 Contribution margin lost (\$200,000-\$130,000) (\$70,000) Add : Savings from avoidable fixed costs (\$100,000*60%) \$60,000 Net loss from dropping Division 1 (\$10,000)

2.

Relevant costs = Variable costs + Fixed costs

= (1,000 * \$15) + \$12,000

= \$27,000

Relevant revenues = 1,000 * \$40

= \$40,000

Increase in Net income = Relevant revenues - Relevant costs

= \$40,000 - \$27,000

= \$13,000

3.

Product cost = Direct materials + Direct labor + Overhead

= \$60 + \$10 + (4 * \$2)

= \$78