E7.32 (LO 6) Clarington Company makes three models of phasers. Information on the three products is given below: Prepare incremental analysis for decision to eliminate a product line. Stunner Double-Set Mega-Power Sales $320,000 $480,000 $ 200,000 Variable expenses 160,000 200,000 130,000 Contribution margin 160,000 280,000 70,000 Fixed expenses 131,000 214,000 100,000 Net income $ 29,000 $ 66,000 $(30,000) Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $35,000 (Stunner); $70,000 (Double-Set), and $40,000 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is discontinued. John Liu, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income. Instructions a. Calculate current net income for Clarington Company. b. Calculate net income by product line and in total for Clarington Company if the company discontinues the Mega-Power product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.) c. Should Clarington eliminate the Mega-Power product line? Why or why not? E7.19 (LO 2) Hardy Fibre is the creator of Y-Go, a technology that weaves silver into fabrics to kill bacteria and odour on clothing while managing heat. Y-Go has become very popular in undergarments for sports activities. Operating at capacity, the company can produce one million Y-Go undergarments each year. The per-unit and total costs for the undergarment are as follows: Prepare incremental analysis for a special-order decision. Per Undergarment Total Direct materials $2.00 $2,000,000 Direct labour 0.50 500,000 Variable manufacturing overhead 1.00 1,000,000 Fixed manufacturing overhead 1.25 1,250,000 Variable selling expenses 250,000 Totals $5.00 $5,000,000 The Canadian Armed Forces (CAF) has approached Hardy Fibre and expressed an interest in purchasing 200,000 Y-Go undergarments for soldiers stationed in extremely warm climates. The CAF would pay the unit cost for direct materials, direct labour, and variable manufacturing overhead costs. In addition, the CAF has agreed to pay an additional $1 per undergarment to cover all other costs and provide a profit. Presently, Hardy Fibre is operating at 70% capacity and does not have any other potential buyers for Y-Go. If Hardy Fibre accepts the CAF's offer, it will not incur any variable selling expenses for this order. Instructions a. Using incremental analysis, determine whether Hardy Fibre should accept the CAF's offer. b. Assume Hardy Fibre can now sell one million undergarments in the open market at $8 per unit. Using incremental analysis, determine whether Hardy Fibre should accept the CAF's offer for the 200,000 garments. E7.21 (LO 3) SY Telc has recently started to manufacture RecRobo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 RecRobos is as follows: Prepare an incremental analysis for the make-or-buy decision. Cost Direct materials ($35 per robot) $ 700,000 Direct labour ($30 per robot) 600,000 Variable overhead ($10 per robot) 200,000 Allocated fixed overhead ($25 per robot) 500,000 Total $2,000,000 SY Telc is approached by Chen Inc., which offers to make RecRobo for $80 per unit or $1.6 million. Instructions a. Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions: 1. Assume that $400,000 of the fixed overhead cost is avoidable. 2. Assume that none of the fixed overhead is avoidable. However, if the robots are purchased from Chen Inc., SY Telc can use the released productive resources to generate additional income of $200,000. E7.24 (LO 4) Shynee Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Sarco, Barco, and Larco. Each of these products can be sold as is, or they can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and selling price information is available for one batch of each product: Determine whether to sell or process further-joint products. Excel Sarco Selling Price at Split-Off Point $200,000 Q 300,000 500,000 Allocated Joint Costs $40,000 60,000 80,000 Cost to Process Further $100,000 89,000 250,000 Selling Price of Processed Product $310,000 380,000 800,000 Barco Larco Instructions Determine whether each of the three joint products should be sold as is, or processed further. E7.26 (LO 5) Twyla Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra three hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing. Data for the two computers are as follows: Prepare an incremental analysis for the decision to retain or replace equipment. Current Computer New Computer Original purchase cost $15,000 $25,000 Accumulated depreciation $ 6,000 $ 0 Estimated operating costs $25,000 $20,000 Useful life 5 years 5 years If sold now, the current computer would have a salvage value of $6,000. If it is used for the remainder of its useful life, the current computer would have zero salvage value. The new computer is expected to have zero salvage value after five years. Instructions Determine whether the current computer should be replaced. (Ignore the time value of money.) E7.29 (LO 7) Dalton Company manufactures and sells two products. Relevant per-unit data concerning each product follow: Calculate the contribution margin and determine the products to be manufactured. Product Basic Selling price Variable costs Machine hours $40 $18 0.5 Deluxe $52 $24 0.7 Instructions a. Calculate the contribution margin per machine hour for each product. b. If 1,000 additional machine hours are available, which product should Dalton manufacture? c. Prepare an analysis showing the total contribution margin if the additional hours are (1) divided equally between the products, and (2) allocated entirely to the product identified in part (b)