WEI-HAN,HUANG

A2
using the contribution-margin technique, prepare an analysis similar to that in
Exhibit 5-6 on page 187. Use four columns: without the special order, the effect of
the special order (one column total and one column per unit), and totals with the
special order.

Without With
Special Effect of Special Order Special
Order Order
3,000, 140,000 3,140,000
000
Units Total Per Unit
Sales 15,900,00 16,510,40
0 610,400 4.36 0
Less variable expenses:
-
Manufacturing 5,850,000 322,000 2.30 6,172,000
Selling & administrative 1,050,000 1,050,000
Total variable expenses 6,900,000 322,000 2.30 7,222,000
Contribution margin
9,000,000 288,400 2.06 9,288,400
Less fixed expenses:
-
Manufacturing 3,600,000 3,600,000
Selling & administrative 3,300,000 3,300,000
Total fixed expenses 6,900,000 6,900,000
Operating income 2,100,000 288,400 2.06 2,388,400

By what percentage would operating income increase or decrease if the order had
been accepted? Do you agree with the president’s decision? Why?
- Operating income will increase by 14%
- I disagree with the president’s decision
- Because as I have idle capacity acceptance of the order will contribute by $
288,400 to cover the fixed cost and the company will be better off accepting
the special order
 B1

a)

Zealand Manufacturing Company

Contribution Income Statement

For the Year Ended December 31,2012

Sales $14,000,000

Less:Variable Costs

Direct materials used $3,500,000

Direct labor $1,700,000

Variable indirect manufacturing cost (Schedule 1) $1,102,000 $6,302,000

Total variable manufacturing cost of goods sold

Variable selling expenses:

Sales commissions $470,000

Shipping expenses $320,000 $790,000

Variable clerical salaries $370,000

Total variable expenses -$7,462,000

Contribution margin $6,538,000

Less fixed expenses:

Manufacturing (Schedule 2) $692,000

Advertising $430,000

Administrative-executive salaries $100,000

Total fixed expenses -$1,222,000

b)

Zealand Manufacturing Company

Absorption Income Statement

For the Year Ended December 31,2012

Sales $14,000,000

Less manufacturing cost of goods sold:

Direct material -$3,500,000

Direct labor -$1,700,000

Indirect manufacturing costs (Schedules 1 and 2) -$1,794,000

Gross profit $7,006,000

Selling expenses:

Sales commissions -$470,000

Advertising -$430,000

Shipping expenses -$320,000

Administrative expenses:

Executive salaries -$100,000

Clerical salaries -$370,000

Operating income $5,316,000

Zealand Manufacturing Company

Schedules 1 and 2

Indirect Manufacturing Costs

Schedule 1: Variable Costs

Cutting bits $53,000

Abrasives for machining $99,000

Indirect labor $950,000

Total Variable indirect manufacturing costs $1,102,000

Schedule 2: Fixed Costs

Factory supervisors' salaries $105,000

Factory methods research $42,000

Long-term rent, factory $85,000

Fire insurance on equipment $4,000

Property taxes on equipment $26,000

Depreciation on equipment $430,000

Factory superintendent's salary $31,000

Total Fixed manufacturing costs $692,000

Total indirect manufacturing costs $1,794,000

5-59 Target Costing

Under Cost-plus Pricing, the selling price is being arrived at by adding the desired profit
margin to the Cost. In the instant case, the Product cost is $27 and desired margin is
20% above the cost. Thus in the instant case, under cost-plus pricing, Memphis Electrical
will like to have profit of $5.4 ( 27 x 20%) and will like to charge selling price of $32.40. If I
were the manager, I would not produce the motor, as company desired selling price is
more than market selling price ( $26).

Answer -2
Under target costing, an entity accept the market price and adjust its cost, to achieve the
desired profits. In the instant case, market selling price is $ 26. The Company will charge
$ 26 for a garage-dooropener motor.

The desired margin is 20% on cost, which means, it is 1/6th of Sale price ( If cost price is
100, margin 20% of Cost, selling price 120, then margin on sale price is 20/120). Thus
desired margin is $ 4.33 (26/6). The highest acceptable manufacturing cost for which
Memphis would be willing to produce the motor is $ 21.67 ( 26-4.33)
Answer-3

The steps managers take to try to make production of this product feasible could be :-

a) Effectively using the direct material to minimize wastage, so that direct material cost
can be reduced

b) Increasing the labour efficiency, so that direct labour cost can be reduced

c) Try to reduce the factory overheads to the minimum possible extent