Courtney Alfery

Chapter 26 Homework

P26-1A

a) Incremental analysis for the special order of 10000 basketballs:

Incremental revenue (10000*27) 270000

Incremental costs:

variable cost of goods sold @ 22 -220000

variable selling & admn exps -20000 -240000

(1.5+0.5 = $ 2.0)

Incremental net income if order is accepted 30000

Calculations:

variable cogs = (3600000-960000)/120000 = $22/unit

variable selling and admn = (405000-225000)/120000 = $1.5/unit

 b) Yes, Shurshot should accept the offer as the firm has spare
capacity

and there would be incremental profit from the order.

c) Minimum price to produce net income of $4 per unit = 22+2+4 =

$28/unit

(for the special order)

d) Non financial factors to be considered:

● Whether the balls would find their way back to the domestic market, considering the
substantial price difference of $13 per unit.
● Whether maintenance jobs planned for the slack months would not be affected.

P26-3A

a. The book value of the old elevator = Cost - Accumulated depreciation = $ 120,000 - $ 24,000 = $
96,000

Gain or (loss) if the old elevator is replaced = $ 25,000 - $ 96,000 = $ (71,000)

b. Summarized income statement:

1. The old elevator is retained:

2014 2015 2016 2017 Total

240,00 240,00 240,00 240,00

Sales
0 0 0 0

Selling and administrative

29,000 29,000 29,000 29,000
expenses
 Elevator operating costs 58,000 58,000 58,000 58,000

Depreciation expense of
24,000 24,000 24,000 24,000
elevator

111,00 111,00 111,00 111,00

Total costs
0 0 0 0

129,00 129,00 129,00 129,00 516,00

Net operating income
0 0 0 0 0

2. The old elevator is replaced:

2014 2015 2016 2017 Total

240,00 240,00 240,00 240,00

Sales
0 0 0 0

Selling and administrative

29,000 29,000 29,000 29,000
expenses

Elevator operating costs 18,500 18,500 18,500 18,500

Depreciation expense of
40,000 40,000 40,000 40,000
elevator

Proceeds from sale of old

25,000
elevator

158,50
Total cost 87,500 87,500 87,500
0

177,50 152,50 152,50 152,50 635,00

Net operating income
0 0 0 0 0

c. The old elevator should be replaced, since there would be incremental profit of $ ( 635,000 - 516,000 )
= $ 119,000
d. Any gain or loss on sale of the old elevator should be ignored in the decision to replace the old
elevator, because, the book value of the old elevator, being a sunk cost, is not relevant to decision
making.