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Module 3Cost CategoriesAvoidableUnavoidableDirect CostsIndirect CostsSunk costsExample of Sunk CostsAssume that XYZ Clothing makes baseball gloves. It pays $5,000 a month for its factory lease, and the machinery has been purchased outright for $25,000. The company produces a basic model of glove that costs $50 and sells for $70. The manufacturer can sell the basic model and earn $20?profit?per unit. Alternatively, it can continue the production process by adding $15 in costs and sell a premium model glove for $90.To make this decision, the firm compares the $15 additional cost with the $20 added?revenue?and decides to make the premium glove in order to earn $5 more in profit. The cost of the factory lease and machinery are both sunk costs and are not part of the decision-making process.Isabella Company makes three products. The following are the revenue and cost data for a typical month. (in thousands of dollars) Diapers WipesBalmTotalSales $300 $500 $800 $1,600Variable Costs 100 200 400 700Contribution Margin 200 300 400 900Fixed Costs 620Profit 280Of the fixed costs, $80,000 are attributable to advertising and the product managers’ salary for Diapers, $100,000 for the product managers’ salary and advertising for Wipes, and the cost of advertising and the product managers’ salary for Balm is $120,000.Fixed costs AllocationAvoidable Common Diapers WipesBalmTotalSales $300 $500 $800 $1,600Variable Costs 100 200 400 700Contribution Margin 200 300 400 900Fixed Costs Avoidable 80 100 120 300Short Term Profit 120 200 280 600Unavoidable Fixed Costs 320Profit 280Answer each of the following independently.What will total profit be if Isabella simply drops Diapers? Isabella is considering selling a new product, Binkies in place of Diapers, Binkies will sell for $7 per unit, have variable costs of $5 per unit, and have avoidable fixed costs of $130,000. How many units of Binkies would Isabella have to sell to maintain its current income of $280,000?Contribution margin of Binkies is ($7-5) = $2Lose on Diapers $120,000New Avoidable Fixed130,000Need to cover $250,000 divide by cont margin per unit ($2)125,000 Binkies need to sell Isabella charges $10 per unit for Balm. Walmart is offering to buy 40,000 units of Balm for $8 per unit. The additional sales would not affect total fixed costs or variable costs per unit. Isabella has the capacity to make 110,000 units of Balm per month. If Isabella accepts the offer, it would have to supply the full 40,000 units. What will be its total monthly income? Currently selling 80,000 Balm If we accept the Walmart offer, we can only sell 70,000 Balm at the regular price.Walmart Contribution Margin = 40,000 X (8-5) got variable cost per unit ($5) by dividing total variable costs for Balm by 80,000, the units sold)Walmart will add $120,000 to contribution margin. BUT I lose 10,000 units of capacity at regular price. So I must subtract 10,000 X normal contribution Margin for Balm,($5), or $50,000. So deal will increase profit by $70,000.Unit sales of Diapers and Wipes are 100,000 and 200,000 respectively. Both products are make on a single machine that has a limited capacity. The machine can make 5 Diapers or 8 Wipes per hour.If Isabella can sell all that it can make of either product, should it continue to make both products?I figured the contribution margin amount per hour for each. For Diapers, 5 X $2 per hour equals $10For Wipes, 8 X $1.5 (I divided the contribution margin for Wipes by 200,000=$12 per hourAssume the machine is being operated at its capacity of 45 hours per month. What will happen to monthly profits if Isabella makes only the more profitable product as determined in (a)?Finishing the MFE Group Adjusting EntriesReversing Journal EntriesIsabella Company makes three products. The following are the revenue and cost data for a typical month. (in thousands of dollars) Diapers WipesBalmTotalSales $300 $500 $800 $1,600Variable Costs 100 200 400 700Contribution Margin 200 300 400 900Fixed Cost Avoidable 80 100 120 300 Common, allocated on the basis of sales dollars 60 100 160 320Total Fixed Costs 140 200 280 620Profit 60 100 120 280So for Diapers, (300/1600) X 320 = 60Module 3 HomeworkImportant Background Jackman’s Grocery Store is a medium sized grocery in a large city. Mary Storm, the owner, is contemplating the addition of a department to sell either hardware or beer. She has talked to owners’ of several similar stores and has reached the following conclusions.A hardware department would generate sales of $320,000 per year with a gross profit of 60%. No other variable costs would be added. Fixed costs added would be $84,000. Sales of groceries would increase 5% because of increased traffic through the store.A beer and wine department would generate sales of $480,000 per year with a gross profit of 80%. No other variable costs would be added, and additional fixed costs would be $144,000. Sales of groceries would increase by 8%. The income statement for a typical year for grocery sales alone is as follows:Sales$4,800,000Cost of Sales 1,920,000Gross Profit 2,880,000Other Variable costs 960,000Fixed Costs 1,120,000Income $ 800,000Compute the effects on income of adding each department. Which department should be added and why?The part 4B of IsabellaDepreciation journal entry for the MFE Equipment ................
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