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# Calculating: amount of differential cost increase or decreas

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51. Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for \$5 a unit. The unit cost for Frank Co. to make the part is \$6, which includes \$.40 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?
\$12,000 cost decrease
\$20,000 cost increase
\$20,000 cost decrease
\$2,400 cost increase

52. Java, Inc has bought a new server and is having to decide what to do with the old one. The cost of the old server was originally \$60,000 and has been depreciated \$45,000. The company has received two offers that it must consider. One offer was made to purchase the equipment outright for \$18,500 less a 5% sales commission. The other offer was to lease the equipment for \$7,000 for the next five years but the company will be required to provide maintenance and insurance totaling \$3,000 per year. What offer should Java, Inc. accept?
\$2,425 in favor of leasing
Reject both offers
\$11,500 in favor of selling
\$16,500 in favor of leasing

53. Security Fire Alarm is currently buying 50,000 motherboards from MotherBoard's Inc at a price of \$65 per board. It was suggested at the last manager's meeting that the company should consider making its own boards. The costs to make the part are as follows: Direct Materials \$32 per unit, Direct labor \$10 per unit, Variable Factory Overhead \$16.00, Fixed Costs for the plant would increase by \$75,000. As the financial advisor, what would you recommend?
Buy - \$75,000 more in profits
Make - \$275,000 increase in profits
Buy - \$275,000 more in profits
Make - \$350,000 increase in profits

54. Elfrink Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Elfrink desires a profit equal to a 11.2% rate of return on invested assets of \$350,000.
Fixed selling and administrative costs 35,000
Variable direct materials cost per unit 4.34
Variable direct labor cost per unit 5.18
Variable factory overhead cost per unit .98
Variable selling and administrative cost per unit .70

The dollar amount of desired profit from the production and sale of the company's product is _______.
\$89,600
\$39,200
\$70,000
\$84,000

55. Soap Company manufactures Soap X and Soap Y and can sell all it can make of either. Based on the following data, which statement is true?
X Y
Sales Price \$32 \$40
Variable Cost 22 24

Hours needed to process 5 8

X is more profitable than Y.
Y is more profitable than X.
Neither X nor Y have a positive contribution margin.
X and Y are equally profitable.

#### Solution Preview

51. Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for \$5 a unit. The unit cost for Frank Co. to make the part is \$6, which includes \$.40 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?
\$12,000 cost decrease
\$20,000 cost increase
\$20,000 cost decrease
\$2,400 cost increase

Total cost to produce themselves = \$6 - \$0.40 = \$5.6 per unit
\$0.6 x 4,000 units = \$2,400

52. Java, Inc has bought a new server and is having to decide what to do with the old one. The cost of the old server was originally \$60,000 and ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer what would be the amount of differential cost increase or decrease for making the part rather than purchasing it.

\$2.19