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# Incremental Revenue Problem: Kaplan Company

Kaplan Company manufactures ties. When 28,000 ties are produced, the costs per unit are:
Direct materials \$0.60
Direct manufacturing labor 3.00
Variable selling 0.80
Fixed selling 1.13

The ties normally sell for \$22 each. The company has received a special order for 2,000 ties at \$10.00 per tie. The company has excess capacity.

Required:
Compute the amount by which the operating income would change if the order were accepted.

b.The following information pertains to the East Division of Saturn Company:
Net sales \$21,000
Variable costs:
Cost of merchandise sold 10,300
Operating expenses 2,700
Fixed costs:
Controllable by segment manager 2,400
Controllable by others 1,000
Unallocated costs 600
Compute the contribution margin. Please show all computations for partial credit consideration.

c. Double Corporation has a joint process that produces two products: XX and YY. Each product may be sold at the split-off point or processed further and then sold. Joint-processing costs for a year are \$45000. Product XX can be sold at the split-off point for \$32,000. Alternatively, Product XX can be processed further and sold for \$40,000. Additional processing costs are \$5,000. What is the amount of additional contribution margin can be generated after split-off, by XX?

d. Hubley Company Inc. uses a normal costing system and estimated its overhead costs for the current year to be as follows: fixed, \$625,000; variable, \$3 per unit. Hubley Company is expected to produce 100,000 units during the year. During the year, the company incurred overhead costs of \$925,000 and produced 100,000 units. Calculate the rate to be used to apply manufacturing overhead costs to products.

#### Solution Preview

Please see the attached Word 97-2003 document for full solutions.

a. Because the company has excess capacity, its fixed costs will not increase by accepting the order. (It need not buy another factory, for example.) Also, because the fixed costs will not change by the order, net income will change only by the amount by which the sales revenues from the special order exceed the variable costs to fill that order. Its variable costs are direct materials, direct labor, variable manufacturing overhead and variable selling expenses. We will ...

#### Solution Summary

This solution illustrates how to compute incremental net income, contribution margin, and overhead application rate.

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