Question 1. The Work for Less Company manufactures a variety of hardware tools. The following information identifies their financials on two particular products.
Fixed manufacturing costs included in cost of goods sold amount to $40,000 for Hammers and $76,000 for Drills the remaining cost of goods sold is variable manufacturing costs. Variable selling expenses are $ 9 per unit for Hammers and $15 per unit for Drills; the remaining selling expenses are fixed cost.
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Hammers
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Drills
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Total
|
|
Units
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10,000
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3,700
|
13,700
|
|
Sales
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$240,000
|
$740,000
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$980,000
|
|
Costs of goods sold (less)
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$180,000
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$481,000
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$661,000
|
|
Gross margin
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$60,000
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$259,000
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$319,000
|
|
Selling expense (less)
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$60,000
|
$134,000
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$194,000
|
|
Total operating income
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$0
|
$125,000
|
$125,000
|
If the Work for Less Company eliminates "Hammers" and uses the available capacity to produce and sell an additional 1,500 units of "Drills," what would the new income statement be? Since the company is moving capacity over to Drills the fixed costs incurred for the Hammer product will shift to the Drill product
Drills
Units
Sales
Costs of Goods Sold
Gross Margin
Selling Expense
Total Operating Expense
Question 2.
The Work for Less Company manufactures drills and hammers from a joint process costs equal to $80,000. Ten-thousand hammers can be sold at a split-off for $15.00 or processed further at an additional cost of $20,000 and later sold for $20.00. If the company decides to process hammers beyond the spilt-off point, would the operating income increase or decrease and by how much?