The Big Bart product line should be continued because $25,000 of contribution margin will not be realized if the line is eliminated. This sum is greater than the $15,000 savings of fixed costs.
EXERCISE 9-4
(a) (1)
Make
Buy
Net Income
Increase
(Decrease)
Direct materials
$ 800,000
$ - 0 -
$ 800,000
Direct labor
600,000
- 0 -
600,000
Variable overhead
120,000
- 0 -
120,000
Fixed overhead
500,000
200,000
300,000
Purchase price 0 1,800,000
(1,800,000)
Total annual cost
$2,020,000
$2,000,000
$ 20,000
Yes. The offer should be accepted as net income will increase by $20,000.
EXERCISE 9-4 (Continued)
(2)
Make
Buy
Net Income
Increase
(Decrease)
Direct materials
$ 800,000
$ 0
$ 800,000
Direct labor
600,000
0
600,000
Variable overhead
120,000
0
120,000
Fixed overhead
500,000
500,000
0
Opportunity cost
300,000
0
300,000
Purchase price 0 1,800,000
(1,800,000)
Totals
$2,320,000
$2,300,000
$ 20,000
Yes. The offer should be accepted as net income would be $20,000 more.
(b) Qualitative factors include the possibility of laying off those employees that produced the robot and the resulting poor morale of the remaining employees, maintaining quality standards, and controlling the purchase price in the future.
EXERCISE 9-9
Retain
Machine
Replace
Machine
Net Income
Increase
(Decrease)
Operating costs
New machine cost
Salvage value (old) Total
The current machine should be replaced. The incremental analysis shows that net income for the five-year period will be $10,000 higher by replacing the current machine.
PROBLEM 9-5A
(a)
Division I
Division II
Sales
Variable costs Cost of goods sold Selling and administrative Total variable expenses
