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Various Accounting Issues

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Problem 1

The Widrick manufactures 10,000 rolls of cable each period. The cable is used as an input for producing several other products that Widrick manufactures. The full manufacturing costs for a batch of 100 rolls of cable are:
Direct materials 270
Direct labor 200
Variable manufacturing overhead 200
Average fixed manufacturing overhead 250
Total 920

The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the cable. These assets have no other use than for the manufacturing of the cable. An outside supplier has offered to sell Widrick the 10,000 rolls of cable necessary to meet production needs this period for a lump-sum of $75,000. If Widrick accepts this outside supplier's offer. How much better or worse off will the company be?

(Show your computation & the final amount by which the company would be better or worse off)

Total cost of manufacturing 10,000 rolls by Widrick
= 920 x (10,000/100) = 92,000

Total cost that Widrick need to pay if hire outside supplier

Total amount required to pay to outside supplier 75,000
Total average fixed manu. overhead (10,000/100 x 250) 25,000
Total cost to Widrick 100,000

Hire outside supplier is worse off by (100,000 - 92,000 = $8,000).

Problem 2

Amherst produces a single product. The company's March 2005 income statement is as follows:
Sales $60,000
Cost of goods sold - 54,000
Gross profit $ 6,000
Selling and administrative - 5,000
Net income $ 1,000

There were no beginning or ending inventories of work-in-process or finished goods. Amherst's full manufacturing costs were as follows:

Direct materials (1,200 units x $10) $12,000
Direct labor (1,200 units x $16) 19,200
Variable manufacturing overhead (1,200 units x $9) 10,800
Fixed manufacturing overhead 12,000
Total $54,000
Average cost per unit $45

Selling and administrative expenses are all fixed. Amherst just received a special order from a firm in Mexico to purchase 800 units at $40 each. The order will not affect the selling price to regular customers.

a. Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or reject the special order, assuming ...

Solution Summary

This solution is comprised of a detailed explanation to answer how much better or worse off will the company be.