Decision 3
Prechem Limited, also a subsidiary of Precizion, produces a chemical product which is sold to cleaning products manufacturers. In 2022, the company incurred $9,030,000 of costs to produce 15,000 gallons of the chemical. The selling price of the chemical is $840.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below:
Direct materials: $420.00
Direct labor: $84.00
Variable manufacturing overhead: $56.00
Fixed manufacturing overhead: $42.00
Total manufacturing costs: $602.00
The company is considering manufacturing cleaning products itself. If the company processes the chemical further and manufactures the cleaning product itself, the following additional costs per gallon will be incurred:
Direct materials: $120.00
Direct labor: $42.00
Variable manufacturing overhead: $35.00
No increase in fixed manufacturing overhead is expected. The company can sell their cleaning product at $1,085.00 per gallon.
Required: Prepare an incremental analysis, per gallon, for the sell-or-process-further decision and compute the total increase in net income if the company does process further. 10 Marks
Decision 4
Precizion is contemplating acquiring Lumberly Corporation which operates two divisions, the Christmas Division and the DIY Division. The Christmas division manufactures and sells Christmas trees to retail providers. The DIY Division operates a lumber mill which sells a variety of wood products for the do-it-yourself homeowners market.
In reviewing the Income Statement of the company, Judy suggested to the Finance Director that the DIY Division should be eliminated. "If the Division is eliminated," she said, "our total profits would increase by $30,000." The income statements for the two divisions for the year ended December 31, 2022 are presented below:
Christmas Division:
Sales: $1,500,000
Cost of goods sold: $900,000
Gross profit: $600,000
Selling & administrative expenses: $250,000
Net income: $350,000
DIY Division:
Sales: $500,000
Cost of goods sold: $350,000
Gross profit: $150,000
Selling & administrative expenses: $180,000
Net income: ($30,000)
Total:
Sales: $2,000,000
Cost of goods sold: $1,250,000
Gross profit: $750,000
Selling & administrative expenses: $430,000
Net income: $320,000
In the DIY Division, 70% of the cost of goods sold are variable costs and 40% of selling and administrative expenses are variable costs. Judy also feels it can save $45,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Division.
Required:
a) Prepare an incremental analysis in a CVP Income Statement format to show whether Judy is right about discontinuing the DIY Division.
b) If the company had discontinued the division for 2022, determine what net income would have been. 10 Marks
