Question

The condensed product-line income statement for Rhinebeck Company for the month of October is as follows:

Rhinebeck Company Product-Line Income Statement For the Month Ended October 31
	Hats			Gloves			Mufflers
Sales	$65,700			$90,400			$27,200
Cost of goods sold	(26,200)			(32,000)			(14,200)
Gross profit	$39,500			$58,400			$13,000
Selling and administrative expenses	(28,700)			(35,300)			(15,000)
Operating income (loss)	$10,800			$23,100			$(2,000)

Fixed costs are 15% of the cost of goods sold and 35% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued.

a. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mufflers
October 31
	Continue Mufflers (Alternative 1)	Discontinue Mufflers (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable selling and admin. expenses
Fixed costs
Profit (Loss)	$	$	$

b. Should the Mufflers line be retained?

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 37% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$28
Direct labor	22
Factory overhead (37% of direct labor)	8.14
Total cost per unit	$58.14

If Somerset 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 16% of the direct labor costs.

a. Prepare a differential analysis dated April 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0".

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
April 30
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effects (Alternative 2)
Unit costs:
Purchase price	$	$	$
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Total unit costs	$	$	$

b. Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases. Fixed factory overhead is to this decision.

A company is considering replacing an old piece of machinery, which cost $599,800 and has $347,000 of accumulated depreciation to date, with a new machine that has a purchase price of $486,400. The old machine could be sold for $64,200. The annual variable production costs associated with the old machine are estimated to be $155,600 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for eight years.

a.1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine	$	$	$
Costs:
Purchase price
Variable productions costs (8 years)
Profit (Loss)	$	$	$

a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

b. What is the sunk cost in this situation?

The sunk cost is $.

oyer Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $72,900, the accumulated depreciation is $29,200, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $151,600. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

	Present Operations		Proposed Operations
Sales	$231,100		$231,100
Direct materials	$78,700		$78,700
Direct labor	54,700		—
Power and maintenance	5,100		27,000
Taxes, insurance, etc.	1,800		6,100
Selling and administrative expenses	54,700		54,700
Total expenses	$195,000		$166,500

a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 4
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Sales (5 years)	$	$	$
Costs:
Purchase price
Direct materials (5 years)
Direct labor (5 years)
Power and maintenance (5 years)
Taxes, insurance, etc. (5 years)
Selling and admin. expenses (5 years)
Profit (Loss)	$	$	$

b. Based only on the data presented, should the proposal be accepted?

c. Differences in capacity between the two alternatives is to consider before a final decision is made.

Total Cost Method of Product Pricing

Smart Stream Inc. uses the total cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 3,500 units of cell phones are as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$ 88		Factory overhead	$155,400
Direct labor	40		Selling and administrative expenses	54,600
Factory overhead	26
Selling and administrative expenses	22
Total variable cost per unit	$176

Smart Stream desires a profit equal to a 14% return on invested assets of $472,000.

a. Determine the total costs and the total cost amount per unit for the production and sale of 3,500 cellular phones. Round the cost per unit to two decimal places.

Total cost	$
Total cost amount per unit	$

b. Determine the total cost markup percentage for cellular phones. Round your answer to two decimal places.
%

c. Determine the selling price of cellular phones. Round to the nearest cent.
$ per cellular phone

Answer 1