Practice Calculations Chapter 4, Problem Essay

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33%

400000

53.33%

480000

53.33%

FM

125,000

125,000

125,000

FSA

25,000

25,000

25,000

Net Income

170,000

28.33%

250,000

33.33%

330,000

36.67%

2. The manager's tabulation is incorrect because the manager has set $2 as the fixed cost per unit. This is only true at the 200,000 unit level. At the other levels, the fixed cost per unit will be lower, as fixed costs do not increase with production volume.

6-47. 1. In order to make this assessment, Dana needs to calculate which method is cheaper. The accounting for producing the parts itself has been noted as $1,100,000, which equates to $22 per unit. The cost of the units from the other company is $20, but fixed costs will still be incurred. The fixed costs are $300,000 less the $150,000 that will be saved, so $150,000. For 50,000 units, this is $3 per unit. Thus, the total cost per unit will be $20 + $3 = $23. This is higher than it would cost Dana to produce the units itself -- in other words the savings from purchasing are not good enough to justify making the switch.

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Dana should produce the units itself.

2. a) if there is an additional input of $75,000, this equates to $1.50 per unit. The new calculation would be $20 + $3 -$1.50 = $21.50. Dana should now accept the offer to buy the units at $20.

b) the $100,000 contribution would be $2 per unit, so the new calculations are $20 + $3 - $2 = $21.00. Again, Dana should now accept the offer to buy the units at $20.

6-59. 1. Ignoring taxes means ignoring the impact of depreciation, which otherwise is not a cash flow. The comparison therefore is as follows:

Cost Comparison

Old

New

Purchase

0

-12,000

Salvage

Annual Operating

-33000

-18000

-33000

-27000

Thus, the new machine will cost less to operate over the course of the next three years than the old machine will, even after.....

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