PROBLEM 4 INCREMENTAL ANALYSIS

A. Hickman Manufacturing produces Product A in batches of 4,000 gallons at $.90 per gallon. Product A can be sold without further processing for $1.20 per gallon. Product A can be processed further to yield Product B, which can be sold for $1.85 per gallon. Product B requires additional processing costs at $1,650 per batch.

Instructions

Compute the incremental income or loss from further production of one batch of Product B.

B. Brooks Manufacturers produces can openers. For the first six months of 2018, the company reported the following operating results while operating at 80% of plant capacity.

Sales = $4,000,000 Variable Cost per unit = $4.90 Fixed Cost per unit = $5.25

In September 2018, Brooks Manufacturers receives a special order for 20,000 can openers at $7.50 from a foreign company. Acceptance of the special order would result in $7,000 of shipping costs.

Instructions Prepare an incremental analysis for the special order.

C. A recent accounting graduate from UNM evaluated the operating performance of Hickman Company's three divisions. The following presentation was made to Hickman's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division, stating that total net income would increase by $20,000 as shown in the analysis below.

Other Two Divisions Southern Division Total Sales $1,000,000 $300,000 $1,300,000 Variable Costs 557,500 234,000 791,500 Contribution Margin 442,500 66,000 508,500 Fixed Costs 192,500 86,000 278,500 Net Income $ 250,000 $ (20,000) $ 230,000

If the division is eliminated, 40% of the fixed costs will be eliminated.

Instructions Do you concur with the new accountant's recommendation? Show your work to support your answer.

D. Brooks Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:

Direct materials $ 70,000

Direct labor 30,000 Variable manufacturing overhead 20,000 Fixed manufacturing overhead 40,000 $160,000

Another company has offered to sell the same component part to the company for $24 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Brooks Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $30,000.

Instructions Prepare an incremental analysis report for Brooks Company which can serve as informational input into this make-or-buy decision.

E. Hickman Corp. produces three products, and is currently facing a labor shortage - only 3,000 hours are available this month. The selling price, costs, labor requirements, and demand of the three products are as follows:

	Product A	Product B	Product C
Selling price	$30.00	$40.00	$50.00
Variable cost per unit	$10.00	$30.00	$35.00
Direct labor hours per unit	3	2	1.5
Demand	2,000	500	1,000

a. In what order should Hickman prioritize production of the products?

b. How many of each product should be sold during the labor shortage to maximize profit?

c. What is the total contribution margin if Hanson prioritizes production according to its limited resources?