The company’s overall net operating income

Lusk Corporation produces and sells 15,700 units of Product X each month. The selling price of Product X is $27 per unit, and variable expenses are $21 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $72,000 of the $107,000 in fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the company’s overall net operating income would:

decrease by $59,200 per month

increase by $12,800 per month

increase by $47,800 per month

decrease by $47,800 per month

2. Barrus Corporation makes 38,000 motors to be used in the productions of its power lawn mowers. The average cost per motor at this level of activity is as follows:

Direct materials


Direct labor


Variable manufacturing overhead


Fixed manufacturing overhead


This motor has recently become available from an outside supplier for $24.55 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company’s net operating income be than if the motors are purchased from the outside supplier? Assume that direct labor is a variable cost in this company.









3. Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 12,500 cases of sauce each year but is currently only manufacturing and selling 11,000. The following costs relate to annual operations at 11,000 cases:



Variable manufacturing cost


Fixed manufacturing cost


Variable selling and administrative cost


Fixed selling and administrative cost


Gwinnett normally sells its sauce for $30 per case. A local school district is interested in purchasing Gwinnett’s excess capacity of 1,500 cases of sauce but only if they can get the sauce for $15 per case. This special order would not affect regular sales or total fixed costs or variable costs per unit. If this special order is accepted, Gwinnett’s profits for the year will:

increase by $60

decrease by $3,000

decrease by $22,000

decrease by $19,000

4. Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:

Alternative A

Alternative B

Materials costs



Processing costs



Equipment rental



Occupancy costs



What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?





5. Tawstir Corporation has 400 obsolete personal computers that are carried in inventory at a total cost of $576,000. If these computers are upgraded at a total cost of $130,000, they can be sold for a total of $190,000. As an alternative, the computers can be sold in their present condition for $40,000.

What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition?









6. The management of Kabanuck Corporation is considering dropping product V41B. Data from the company’s accounting system appear below:



Variable expenses


Fixed manufacturing expenses


Fixed selling and administrative expenses


All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $221,000 of the fixed manufacturing expenses and $132,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued.

According to the company’s accounting system, what is the net operating income earned by

product V41B? Include all costs in this calculation whether relevant or not.





7. Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 43,000 units per month is as follows:

Direct materials


Direct labor


Variable manufacturing overhead


Fixed manufacturing overhead


Variable selling & administrative expense


Fixed selling & administrative expense


The normal selling price of the product is $92.10 per unit. An order has been received from an overseas customer for 2,300 units to be delivered this month at a special discounted price. This order would have no effect on the company’s normal sales and would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be $1.50 less per unit on this order than on normal sales. Direct labor is a variable cost in this company.

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $79.40 per unit. By how much would this special order increase (decrease) the company’s net operating income for the month?





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