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A product x additional revenue 17700 15500 22...


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ECONOMIC 201

Test Prep

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53

a. Product X:
Additional revenue ($17,700 - $15,500) = $2,200
Additional cost
= ($2,200)
Net profit
-0Product Y:
Additional revenue $23,000 - $18,000 =
Additional cost
=
Net loss

$5,000
$8,000
$(3,000)

Product Z:
Additional revenue $37,500 - $24,000 = $13,500
Additional cost
= ($11,500)
Net profit
$ 2,000
b. $15,500 + $18,000 + ($37,500 - $11,500) - $30,000 = $29,500

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LEARNING OBJECTIVE 3

LEARNING OBJECTIVE 3
155.

Freedom Corporation has three departments. Data for the most recent year is presented
below:
X
Y
Z

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Sales
Variable expenses
Fixed expenses:
Unavoidable
Avoidable

$400
128

$200
52

$80
34

96
116

52
104

12
54

Required:
a. Compute the operating income of the company.
b. Compute the contribution margin and operating income of each department.
c. Should any department(s) be eliminated? If so, which one(s) and why?
Answer:
a. ($400 + $200 + $80) ($128 + $96 + $116 + $52 + $52 + $104 + $34 + $12 + $54) =
$32
b. X: $400 - $128 = $272 contribution margin
$272 - $212 = $60 operating income
Y: $200 - $52 = $148 contribution margin
$148 - $156 = $(8) operating loss
Z: $80 - $34 = $46 contribution margin
$46 - $66 = $(20) operating loss
Department Z should be eliminated. Sales revenue of $80 does not cover the
variable costs and the avoidable fixed costs, which total $88. By eliminating
this department, the operating income of the company will increase by $8.

215

156.

Linehan Company has three departments. Data for the most recent year is presented
below:

Sales
Variable expenses
Fixed expenses:
Unavoidable
Avoidable
Operating income (loss)

$4,000
3,280

$1,920
1,420

$2,240
520

480
555

180
265

440
360

(315)

55

920

Linehan Company is considering eliminating department C because it has a loss.


Required:

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a. Compute the change in operating income if Linehan Company eliminates Department


C and does not replace it.
b. Compute the change in operating income if Linehan Company replaces Department

C with a second Department T. This will double the sales of Department T without
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increasing fixed cost.

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Answer:

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a. Operating income will decrease by: $4,000 - ($3,280 + $555) = $165.


b. Operating income will increase by: $2,240 - $520 - $480 = $1,240.

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LEARNING OBJECTIVE 4

LEARNING OBJECTIVE 4
157.

Ring Company manufactures two tables, Small and Large. The following data is
available:
Small
Large

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Selling price per unit


Variable cost per unit
Machine hours required
Total fixed costs

$100
$68
3.2

$210
$138
10
$9,600

Ring Company can sell a maximum of 1,000 units of each size of table. Machine hour
capacity is 8,000 hours per year.
Required:
a. Which table has the higher contribution margin per unit?
b. Which table has the higher contribution margin per hour?
c. How many tables of each size should be produced to maximize income, and what is
the maximum income?
Answer:
a. The large table has the higher contribution margin per unit of $72 ($210 - $138).
b. The small table has the higher contribution margin per hour of $10 [($100 - $68)
/ 3.2 hours].
c. To maximize income, Ring Company should produce 1,000 small tables that
would use up 3,200 hours, and 480 large tables that would use the remaining
4,800 hours. This would produce an income of $56,960 calculated as follows:
1,000 units x $32
480 units x $72

=
=

$32,000
34,560

Less: fixed costs

$66,560
$9,600

Net income

$56,960

217

158.

Top Inc. manufactures two products, Hats and Caps. The following information is
available:

Selling price per unit


Variable cost per unit
Labor hours required
Total fixed costs
Labor hour capacity for the year is 15,000 hours.

Hats

Caps

$21
$12
3

$13
$9
1
$52,000

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TERM

PROFESSOR

TAGS

Fall '13

caca

Opportunity Cost

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