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All fixed expenses of the company are fully allocated to products in the
company's accounting system. Further investigation has revealed that
$55,000 of the fixed manufacturing expenses and $71,000 of the fixed
selling and administrative expenses are avoidable if product S85U is
discontinued.
Required:
i. According to the company's accounting system, what is the net
operating income earned by product S85U? Show your work!
ii. What would be the effect on the company's overall net operating
income of dropping product S85U? Should the product be dropped?
Show your work!
Question 4. Question : (TCO D) Rosiek Corporation uses part A55 in
one of its products. The company's accounting department reports the
following costs of producing the 4,000 units of the part that are needed
every year.
Per Unit
Direct Materials $2.80
Direct Labor $6.30
Variable Overhead $8.50
Supervisor's Salary $2.60
Depreciation of Special Equipment $6.80
Allocated General Overhead $6.10
An outside supplier has offered to make the part and sell it to the
company for $32.30 each. If this offer is accepted, the supervisor's salary
and all of the variable costs, including direct labor, can be avoided. The
special equipment used to make the part was purchased many years ago
and has no salvage value or other use. The allocated general overhead
represents fixed costs of the entire company. If the outside supplier's
offer were accepted, only $4,000 of these allocated general overhead
costs would be avoided. In addition, the space used to produce part A55
could be used to make more of one of the company's other products,
generating an additional segment margin of $26,000 per year for that
product.
Required: