Marginal costing applications
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Marginal costing applications
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Marginal costing applications
- 1. Chapter 26 Special Business Decisions and Capital Budgeting
- 10. Dropping Products, Departments, Territories Product Line Oil Filters Air Cleaners Total Units 250,000 20,000 270,000 Sales $805,000 $ 41,000 $846,000 Variable expenses 375,000 30,000 405,000 Contribution margin $430,000 $ 11,000 $441,000 Fixed expenses 310,185 24,815 335,000 Operating income/(loss) $119,815 ($13,815) $106,000
- 15. Product Mix A. B. Fast can produce 5 oil filters in one hour or 8 windshield wipers. Product Oil Windshield Per Unit Filters Wipers Sales price $3.22 $13.50 Variable expenses 1.50 12.00 Contribution margin $1.72 $ 1.50 Contribution margin ratio 53% 11%
- 16. Product Mix Which product should A. B. Fast emphasize? Oil filters: $1.72 contribution margin per unit × 5 units per hour = $8.60 per machine hour Windshield wipers: $1.50 contribution margin per unit × 8 units per hour = $12.00 per machine hour
- 18. Outsourcing (Make or Buy) A. B. Fast has the following costs for 250,000 units of Part no. 4: Part no. 4 costs: Total Direct materials $ 40,000 Direct labor 20,000 Variable overhead 15,000 Fixed overhead 50,000 Total $125,000 $125,000 ÷ 250,000 units = $0.50/unit
- 20. Outsourcing (Make or Buy) Purchase cost (250,000 × $0.37) $ 92,500 Fixed costs that will continue 35,000 Total $127,500 The unit cost is then $0.51 ($127,500 ÷ 250,000). $127,500 – $125,000 = $2,500, which is the difference in favor of manufacturing the part.
- 22. Best Use of Facilities Expected cost of obtaining 250,000 parts: Make part $125,000 Buy part and leave facilities idle $127,500 Buy part and use facilities for gas filters $110,500* *Cost of buying part: $127,500 less $17,000 contribution from gasoline filters.
- 26. Sell As-Is Or Process Further Cost to produce 250,000 parts: $500,000 Sell these parts for $3.22 each: $805,000 Cost to process original parts further: $ 25,000 Sell these parts for $3.52 each: $880,000 Sales increase ($880,000 – $805,000) $ 75,000 Less processing cost 25,000 Net gain by processing further $ 50,000
- 47. Net Present Value Example Periods Amount PV Factor Present Value 0 ($450,000) 1.000 ($450,000) 1 225,000 0.862 193,950 2 230,000 0.743 170,890 3 210,000 0.641 134,610 Total PV of net cash inflows $499,450 Net present value of project $ 49,450
- 55. End of Chapter 26