Bernina McKennie - Page 2 - #1

i.

Margin = Net Operating Income/Sales

= 62,100/414,000
= 0.15
Turnover = Sales/Average Operating Assets
= 414,000/(220,000 + 240,000)/2
= 414,000/(460,000/2)
= 414,000/230,000
= 1.8
Return on Investment = Net Operating Income/Average Operating Assets
= 62,100/(220,000 + 240,000)/2
= 62,100/(460,000/2)
= 62,100/230,000
= 0.27

ii.

Residual Income = Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)
= 62,100 - {(220,000 + 240,000)/2} x 20%
= 62,100 - {(460,000/2) x 20%}
= 62,100 - (230,000 x 20%)
= 62,100 - 46,000
= 16,100

Bernina McKennie - Page 2 - #2

i.

Margin = Net Operating Income/Sales

= 1,170,000/30,000,000
= 0.04

ii.

Turnover = Sales/Average Operating Assets

= 30,000,000/8,000,000
= 3.75

iii.

Return on Investment = Net Operating Income/Average Operating Assets

= 1,170,000/8,000,000
= 0.15

iv.

Residual Income = Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)
= 1,170,000 - (8,000,000 x 18%)
= 1,170,000 - 1,440,000
= (270,000)

Bernina McKennie - Page 2 - #3

i.

Net Operating Income = Sales - Variable Costs - Fixed Costs

= 480,000 - 202,000 - 158,000
= 120,000
Avoidable Costs

ii.

Drop

Sales

480,000

Variable Costs

202,000

Fixed Costs

158,000

Net Operating Income

120,000

Fixed Selling & Administrative Costs

130,000

86,000

72,000

67,000

63,000

(10,000)
Based on these calculations, the product should not be dropped.

135,000

Bernina McKennie - Page 2 - #4

i.

Buy Outside = $28.30 x 7,000 units

= 198,100
Total Relevant
Costs - 7,000 units
Per Unit

Make

Buy

Direct Materials

$7.00

$49,000

Direct Labor

$6.00

42,000

Variable Overhead

$5.00

35,000

Supervisor's Salary

$4.70

32,900

Depreciation of special equipment

(Not relevant)

Allocated general overhead

(Not relevant)

Outside purchase price

Total Cost
Difference in favor of continuing to make

$198,100
$158,900

$198,100

$39,200

ii. Because it costs $39,200 less to make the part internally than to buy it from an outside supplier, Wilcutt
Corporation should reject the outside supplier's offer.

Bernina McKennie - Page 2 - #5

i.

Capacity =

18,000

Actual =

15,300

Difference of =

2,700 more to make

Special Order =

900

Difference of =

1,800
Unit Cost

Direct Materials (948,600/15,300)

Direct Labor (290,700/15,300)

$62
19

Cost to Make

$81

Selling Price

$73

Special Order Pricing (900 x $73)

$65,700

Cost to Make (900 x $81)

$72,900
($7,200)

Loss

The company should not accept the special order because the special order price is
below the unit product cost, which would cause an increase in the net operating
income.