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QS 25 7 Analysis of incremental costs L.O. A1

Mo Kan Company incurs a $6 per unit cost for Product A, which it currently manufactures and sells for $9 per unit. Instead of manufacturing and selling this product, the company can purchase Product B for $5 per unit and sell it for $8 per unit. If it does so, unit sales would remain unchanged and $5 of the $6 per unit costs assigned to Product A would be eliminated.

1.

Prepare Incremental cost analysis. (Input all amounts as positive values. Round your answers to 2 decimal places. Omit the “$” sign in your response.)

Incremental cost analysis

Costs of purchasing:

Cost to purchase Product B $

Revenue loss from reduced price

Total cost of purchasing Product B

Costs eliminated if Product B purchased

Net incremental cost of purchasing Product B $

2. Should the company continue to manufacture Product A or purchase Product B for resale?

QS 25 8 Selection of sales mix L.O A1

Memory Lane Company can sell all units of computer memory X and Y that it can produce, but it has limited production capacity. It can produce four units of X per hour or three units of Y per hour, and it has 8,000 production hours available. Contribution margin is $10 for product X and $8 for product Y.

1.	Calculate contribution margin per production hour. (Do not round intermediate calculations and round your final answers to 2 decimal places. Omit the “$” sign in your response.)

	X	Y
Contribution margin per unit	$	$
Production hours per unit
Contribution margin per production hour	$	$

2.	What is the most profitable sales mix for this Company?
	Allocate 40% its production capacity to Product X Allocate 24% its production capacity to Product Y Allocate all of its production capacity to Product X Allocate all of its production capacity to Product Y QS 25 9 Decision to accept additional business L.O. A1 Kirk Company sells bikes for $600 each. The company currently sells 7,500 bikes per year and could make as many as 10,000 bikes per year. The bikes cost $450 each to make; $300 in variable costs per bike and $150 of fixed costs per bike. Kirk received an offer from a potential customer who wants to buy 1,500 bikes for $500 each. Incremental fixed costs to make this order are $100,000. No other costs will change if this order is accepted. Compute Kirk’s additional income (ignore taxes) if it accepts this order. (Omit the “$” sign in your response.) Incremental income from new business $ QS 25 4 Computation of accounting rate of return L.O. P2 Cardinal Company is considering an investment expected to generate an average net income after taxes of $1,300 for three years. The investment costs $30,000 and has an estimated $4,000 salvage value. Compute the accounting rate of return for this investment; assume the company uses straight line depreciation. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)