1. Wood Chuck Furniture currently manufactures rocking chairs as its main product.

Each chair uses one seat

cushion and one back cushion with the following costs per set of cushions (one seat and one back):
Direct materials $ 1
Direct labor 10
Variable overhead 5
Fixed overhead 8
Total $24

Shepert Company has contacted Wood Chuck with an offer to sell it 5,000 sets of cushions for $18 each. If Wood
Chuck makes the cushions, $5 of the fixed overhead per unit will be allocated to other products.

Instructions
Should Wood Chuck make or buy the cushions?

2. Parino Company has three product lines in its retail stores: books, videos, and music. The allocated fixed
costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes
in other product lines. Results of the fourth quarter are presented below:
Books Music Videos Total
Units sold 1,000 2,000 2,000 5,000
Revenue $24,000 $48,000 $32,000 $104,000
Variable departmental costs 15,000 22,000 23,000 60,000
Direct fixed costs 3,000 6,000 4,000 13,000
Allocated fixed costs 4,400 8,800 8,800 22,000
Net income (loss) $ 1,600 $11,200 $ (3,800) $ 9,000

Instructions
Prepare an incremental analysis of the effect of dropping the Video product line.

3. Smooth Brew Company manufactures cappuccino makers. For the first eight months of 2008, the company
reported the following results while operating at 80% of plant capacity:

Sales (50,000 units) $9,000,000

Cost of goods sold 5,400,000
Gross profit 3,600,000
Operating expenses 2,400,000
Net income $1,200,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating
expenses are $35 per unit.

In September, Smooth Brew receives a special order for 3,000 machines at $135 each from a major coffee shop
franchise. Acceptance of the order would result in $2,000 of shipping costs but no increase in fixed expenses.

Instructions
(a) Prepare an incremental analysis for the special order.
(b) Should Smooth Brew accept the special order? Justify your answer.