CONNECT PLUS-FINANCIAL & MANAGERIAL AC
CONNECT PLUS-FINANCIAL & MANAGERIAL AC
7th Edition
ISBN: 2810020507384
Author: Wild
Publisher: MCG
Question
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Chapter 23, Problem 1PSB
To determine

Relevant costs:

Relevant costs are those costs in any managerial decision-making process that will influence the flow of capital in the future. Hence, such costs decide whether the decision is taken forward or rejected.

To prepare: A three-column comparative income statement to show the annual operating income without special order, annual operating income received from the new business only, and the combined annual operating income from normal business and the new business.

Expert Solution & Answer
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Explanation of Solution

Prepare the three-column comparative income statement as shown below.

Particulars Normal volume New business Combined
Sales 1,200,000 172,000 1,372,000
Costs and expenses:
Direct materials 384,000 64,000 448,000
Direct labor 96,000 24,000 120,000
Overhead 288,000 36,000 324,000
Selling expenses 120,000 - 120,000
Administrative expenses 80,000 4,000 84,000
Total costs and expenses 968,000 128,000 1,096,000
Net income 232,000 44,000 276,000

Table − 1

Working notes:

1. Calculation of new business direct material cost as shown below.

Particulars Amount ($)
Normal direct materials cost 384,000
Units of output 300,000
Cost per unit ( 384,000 300,000 ) 1.28
New business volume ( 1.28×50,000 ) 50,000
New business direct materials cost 64,000

Table − 2

Therefore, the new business direct material cost is $64,000.

2. Calculation of new business direct labor cost.

Particulars Amount ($)
Normal direct labor cost 96,000
Units of output 300,000
Cost per unit ( 96,000 300,000 ) 0.32
Overtime per unit (50%) 0.16
New business direct labor cost per unit ( 0.32+0.16 ) 0.48
New business volume ( 0.48×50,000 ) 50,000
New business direct labor cost 24,000

Table 3

Therefore, the new business direct material labor cost is $24,000.

3. Calculation of new business variable overhead cost.

Particulars Amount ($)
Total overhead 288,000
Fixed overhead (25%) 72,000
Variable overhead ( 288,00072,000 ) 216,000
Units of output 300,000
Cost per unit ( 216,000 300,000 ) 0.72
New business volume 50,000
New business variable overhead cost ( 0.72×50,000 ) 36,000

Table 4

Conclusion

Hence, the three-column comparative income statement is prepared as above.

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Chapter 23 Solutions

CONNECT PLUS-FINANCIAL & MANAGERIAL AC

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