This action might not be possible to undo. Are you sure you want to continue?
Problems Decision Making
Problem No 1 (Special order) The Modern Packing Corporation (MPC) specializes in the manufacture of one-liter plastic bottles. The plastic molding machines are capable of producing 100 bottles per hour. The firm estimates that the variable cost of producing a plastic bottle is 25 cents. The bottles are sold for 55 cents each. Management has been approached by a local toy company that would like the firm to produce a molded plastic toy for them. The toy company is willing to pay $3 per unit for the toy. The unit variable cost to manufacture the toy will be $2.40. In addition, MPC would have to incur a cost of $20,000 to construct the mold required exclusively for this order. Because the toy uses more plastic and is of a more intricate shape than a bottle, a molding machine can produce only 40 units per hour. The customer wants 100,000 units. Assume that MPC has a total capacity of 10,000 machine-hours available during the period in which the toy company wants delivery of the toys. The firm’s fixed costs, excluding the costs to construct the toy mold, during the same period will be $200,000. Required: 1. Suppose the demand for its bottles is 750,000 units, and the special toy order has to be either taken in full or rejected totally. Should MPC accept the special toy order? Explain your answer. 2. Suppose the demand for its bottles is 850,000 units, and the special toy order has to be either taken in full or rejected totally. Should MPC accept the special toy order? Explain your answer. 3. Suppose the demand for its bottles is 850,000 units, and MPC can accept any quantity of the special toy order. How many bottles and toys should it manufacture?
2 4. Suppose the demand for its bottles is 900,000 units, and the special toy order has to be either taken in full or rejected totally. Should MPC accept the special toy order? Explain your answer. 5. Suppose the demand for its bottles is 900,000 units, and MPC can accept any quantity of the special toy order. How many bottles and toys should it manufacture?
Bottles 100 per machine hour CM 0.30 Toys 40 per machine hour CM 0.60
SP = 0.55 SP = 3.00
VC = 0.25 VC = 2.40
Capacity = 10,000 machine hour $20,000 Order = 100,000 toys
Molding machine cost =
Machine hours required to manufacture 750,000 bottles = 750,000÷100 = 7,500 hours
Excess capacity 10,000 – 7,700 = 2,500 machine hours
Special order has to be taken in full
Toys 2,500 hours × 40 = 100,000 toys sacrifice)
OK (no regular sales
Revenue 100,000×$3 VC 100,000×$2.4 CM Less Molding Machine cost Additional Income
$300,000 240,000 60,000 (20,000) $40,000 ACCEPT
2. Demand 850,000 units machine hours
Hours required = 850,000÷100 = 8,500
Excess Capacity = 1,500 machine hours
Hours required to accept order 100,000 toys) Excess hours required to accept order Foregone hours
2,500 1,500 1,000
Special order has to be taken in full
Operating income from accepting order $40,000 (as per 1) Foregone CM(100,000×0.3) Additional income 30,000 $10,000 ACCEPT
000 bottles 900.500 × 40 = 60.30 = $ 30 40×0. Demand 900. Demand 850.000 (20.00 – 2.000 toys CM 60.000×0.000 ACCEPT 4.55 – 0.500 hours 1. Available machine hours 1.000 bottles • Special order has to be taken in full Hours required for 900.6 Molding machine $36.60 =$ 24 MPC should make as many bottles as it can rather than special toys.000 bottles • Special order taken any quantity Bottles Toys CM/unit CM/unit 0.000 hours Excess capacity = 10.000 = 100 machine hours .25 = $0.000) $16.60 Units made in 1 machine hour 100 bottles Units made in 1 machine hour 40 toys 100×0.000 – 9.4 3.40 = $0.30 3.000÷100 = 9.
000 ACCEPT .000×0. Demand 900.000×0.000) 5.000 Foregone profit (150.000×0.000) $4.6 = 24.000 – 2.6 = $60.000÷40 = 40.000÷40 = 2.500 machine hours Forgone hours = 1.000 Molding machine (20.500 = 1500 machine hours CM for accepting order 100.3) Loss REJECT (45.000) 40.000 toys CM from toys 40.000) ($5.5 Special order 100.000 Molding machine Increase in net income (20.000 Bottles • Special order taken any quantity Available excess hours = 1000 machine hours Toys = 100.
Its manufacturing plant has the capacity to produce 10.500 300.500 medals per month. current production and sales are 7.000 medals each month.000 .6 Problem No 2 (Special order) The Award plus Company manufactures medals for winners of athletic events and other contests. The company normally charges $150 per medal. Cost information for the current activity level ( 7500 medals)is as follows: Variable costs that vary with units produced: Direct materials Direct manufacturing labor $262.
000 medals each month.500 medals).500 medals and $100 per medal.000 275.000 175.50 0 Award plus has just received a special one-time-only order for 2. The special order must either be taken in full or rejected totally.000 $1.500 medals for price $100 per medal .150 batches×$500 each Fixed manufacturing costs Fixed marketing costs Total costs 75. Should Award Plus accept this special order? Why? Explain briefly 2.000 medals instead of 10. The special order requires Award Plus to make the medals in 25 batches of 100 each. quality control and so on) that vary with number of batches.7 Variable Costs ( for set ups.500 Normal Price = $150 per medal Special order 2. material handling.500 (regular sales) = 2. Excess Capacity = 10. Suppose plant capacity was only 9. Award plus makes medals for its existing customers in batch sizes of 50 medals (150 batches x 50 medals per batch = 7.087. Required: 1. Should Award Plus accept the special order? Solution (P-2) 1.000 medals (capacity) – 7.
087.500 (regular sales) = 1.000÷7. Excess Capacity = 9.500×$40(300.0 00 87.000 77.500×$40 + 2.500×$35(262.000 1.500 Sales (6.00 0 12.500÷100 = 25 batches) Total variable cost Increase in income ACCEPT the order $250.202.500 medals = 1000 medals Original Income = ($7.000 360.000 175. Marketing Cost Increase in income $1.50 0 $22.500 100.500 200.500×$35) DL (6.000 medals (capacity) – 7.500×$35)) DM (6. 250÷100 = 25 F.500×$100) DM 2.500×$150) .$1.$22. Manufacturing Cost F.500 Foregone sales = 2.500÷50 = 130.500) Incremental batches 25×$500 (2.500 medals – 1.500 Loss on Operating income = $37.500÷7.500 .0 00 315.500×$150 + 2.500×$35 +2.500) DL 2.225.500×$40) Batch manufacturing (130×$500+25×$500) 6.000 REJECT the order .500 = $15.8 Incremental revenue (2.00 0 50.000 2.500 = $37.500 275.
000 Marketing and distribution costs $40.000 300.000 825.9 Problem No 3 (Deletion of a Product) The Northern Furniture Division of Grossman Corporation makes and sells tables and beds.000 270.000 160.000 90.500.000.000 70.000 tables 5.000 Variable direct material and direct labor costs ($75 x 4.000 .000) 525.000. 4.000 beds Total Revenue ($125 x 4.000 Allocated corporate-office costs allocated to product lines .000 $1.000 (fixed) + $750 per shipment x 100 shipments $500. $105 x 5.000 Fixed Gen Admin costs of the division allocated to Product lines on the basis of revenues 180. $200 x 5.000) $1.000 135.000 68.000 Amortization on equipment used exclusively by each product line 92.000 205.000 (fixed) + $750 per shipment x 40 shipments $60. The following revenue and cost information from the division activity based costing system is available.
Fixed general administration costs of the division and corporateoffice costs will not change if sales of individual product lines are increased or decreased.000 more tables? Assume that to do so the division would have to acquire equipment costing $68. b. .000 $(20. Required: 1.000 60. Fixed marketing and distribution costs of a product line can be avoided if the line is discontinued.000) a. Any equipment not used remains idle. Should the Furniture Division discontinue the table product line assuming the released facilities remain idle? Show all your calculations. Should the Furniture division sell 4.000 548. Equipment has a remaining useful life of one year and zero disposal price.000) Operating income (loss) $28.000 20.520.000 Total costs 1. 2. c.000 972.000 with a one year useful life.000 $(48.10 On the basis of revenue 40. or if product lines are added or dropped.
00 0 525.000 525.000 1.000 90.000 60.000 + 750×$80) Gen & Admin Corp Office cost Cost of equipment written off Operating income .000 180.000 135.000 ) Without Tables 1. Revenue in $ VC – DM & DL Amortization Mkt & distribution Fixed Gen & Admin Corp Office cost Operating income With tables $1.000 $54.000) 300.000 1.918.000 270.000 40.000 235.11 Assume further that the fixed marketing and distribution costs will not change but that the number of shipments will double.000 946.000 5000 Beds 1.500.000) Diff Analysis ($500.000 0 972.000 160.000 68.000.000 100.000 60.000 68.00 0 600.000 ($130.0 00 825.000 135.000 by dropping table line 2.000 20.000 Total $2.000 0 70.000 1.000 0 0 370.000 270.000.000 205.125.000 92.000 $28. Solution (P-3) 1.000.000.000 160.000 $82.00 0 1.000 60.000 270.000 160. Show all your calculations.520.00 0 ($20.150.000 Revenue in $ VC – DM & DL Amortization Mkt & distribution ( 40. 8000 tables $1.000 68.000 ($150.000) Operating loss will be higher by $130.
000 $(28.500×$40 + 2.00 0 30.000 932.0 00 300.00 0 60.000 60.00 0 $95.00 0 695. Revenue in $ Direct materials Direct labor Setups and material handling Amortization on tools and fixtures Marketing and distribution General administration & facilities Total Costs Operating income(Loss) Book Shelves $750. The following sales and cost information is available about the profitability of each of these lines.0 00 Home Furnishings makes bookshelves.000 Total $2.000 60.000 215.0 00 220.000 450.000 = $102.000 40.250.000 145.500×$40) Market & Dist (750×$40) Cost of equipment Operating income Problem No 4 (Deletion of a Product) $500.000 Incremental Sales (4000×$125) DM & DL (4.000 Beds $1.000 + 20.000×$105) DM (6.12 Increase in Income = 82.000 100.000 72.000 75.000 Tables $500.155.000 398.000 300.00 0) .00 0 100.000 200.000 255.000 80.000 120. and beds.000 528.0 00 920.000 150.000 45.00 0 $55.000 2.000 75.00 0 $102.0 00 400.000 50.000 68. tables.000 48.00×$75 +4.000.000 170.000 $68.
$112.500 are fixed costs allocated to product lines on the basis of sales revenue. The remaining marketing costs vary with the number of shipments made. Of the total marketing and distribution costs. Fixed marketing and distribution costs allocated to a product line can be avoided if the line is discontinued. e. a.13 Home Furnishings uses an activity-based cost system to assign costs to products. The following information is available. Direct material and direct labor costs vary with the number of units of products manufactured. General administration and facilities costs are fixed costs that will not change if sales of individual product lines are increased or decreased or if product lines are added or dropped. b. Tools and fixtures have one year lives and zero disposal prices. c. These costs are allocated to product lines on the basis of sales revenues. . d. Setups and materials-handling costs vary with the number of batches made.
This would require Home Furnishings to purchase tools and fixtures for $4. should Home Furnishings discontinue the table product lines? . Assume that there will be no change in either the number of batches in which beds are made or the number of shipments? a. 1.000. 2. On the basis of your calculations. Should Home Furnishings discontinue the tables product line assuming the leased facilities remain idle? Assume Home Furnishings has already acquired the tools and fixtures it needs to manufacture tables. assume that prices of the various products do not change.000.14 Required: In answering the following requirements. Suppose that if Home Furnishings discontinues the tables product line. the released facilities could be used to sell beds worth an additional $250.
Solution(P-4) 1. at the higher sales. What would be the effect on operating income if Home Furnishings could double it sales of tables? Assume that. both the number of batches and the number of shipments would be three times and purchases of tools and fixtures would be twice the current levels. What other factors should Home Furnishings consider before making a decision? 3. What is the opportunity cost of continuing the tables product lines? c. With tables Without Tables Different ial Analysis .15 b.
750.000 ($120.000 60.000 215.000 0 0 0 4. Selling more beds worth $250.000 155.000 170.155.000 450.000 and discontinue the table line product.0 1.000 450.00 0 0 $95.0 00 $126. .000 145.000 in incremental OI while discontinuing the table lines result in a decrease of operating income of $120.000 700.16 Revenue in $ DM DL Set ups Amortization Mkt & Dist Gen Admin Operating income $2.0 00 100.000 ($25. Additional Sales DM 40% of sales DL 8% of sales Set ups Amortization Mkt & Dist Cost of tool Operating Income 400.000÷1000 80.000÷1000 $250.775.000 195.000 2.0 00 HF should discontinue the table lines because selling more beds earn $126.00 00 0 920.000 40.000 0 380.000 $124.000 255.000 105.00 0) 2.00 0) 220.000.000) ($500.00 0 20.00 1.000 0 60.250.000 170.
Problem No 5 (Make or Buy) The Ace Bicycle Company produces bicycles. This year expected production is 10,000 units. Currently, Ace makes the chains for its bicycles. Ace’s accountant reports the following costs for making the 10,000 bicycles chains: Costs per unit $4.00 2.00 1.50 Costs for 10,000 units $40,000 20,000 15,000 2,000 3,000 30,000 $110,000
Direct materials Direct labor Variable mfg overhead (power and utilities) Inspection, setup, materials-handling Machine rent Allocated fixed costs of plant administration, taxes, and insurance Total Costs
Ace has received an offer from an outside vendor to supply any number of chains. Ace requires at $8.20 per chain. The following additional information is available.
a. Inspection, setup, and materials-handling costs vary with the number of batches in which the chains are produced. Ace produces chains in batch sizes of 1,000 units. Ace estimates that it will produce the 10,000 units in ten batches.
18 b. Ace rents the machine used to make the chains. If Ace buys all its chains from the outside vendor, it does not need to pay rent on this machine.
1. Assume that, if Ace purchases the chains from the outside supplier, the facility where the chains are currently made will remain idle. Should Ace accept the outside supplier’s offer at the anticipated production ( and sales) volume of 10,000 units?
2. For this question, assume that if the chains are purchased outside, the facilities where the chains are currently made will be used to upgrade the bicycle by adding mud flaps and reflectors. As a consequence, the selling price on bicycles will be raised by $20. The variable per unit cost of the upgrade would be $18, and additional tooling costs of $16,000 would be incurred. Should Ace makes or buy the chains, assuming that 10,000 units are produced (and sold)? Solution (P-5) 1. Expected Production 10,000 units
al Analysis ($82,000 ) 40,000 20,000 15,000 2,000 60,000 3,000 0 ($2,000)
Purchase (10,000×8.20) DM DL Variable MOH Inspection Machine rent Allocated FC Operating income
0 40,000 20,000 15,000 2,000 3,000 30,000 2,155,000 ($110,00 0)
$82,000 0 0 0 0 0 0 30,000 ($112,000)
Ace should not buy $82,000
Cost to make $80,000 Cost to purchase
Cost to make Cost of purchase $82,000
Additional tooling cost 16,000 Additional CM (20,000) 10,000×(20-18) $78,000 Ace Should buy the Chains now
Blender Direct material Direct labor Mfg overhead @ $16 per machine hour Cost if purchased from an outside supplier Annual demand (units) $6. and Geary Manufacturing desires to follow an optimal strategy.00 28. if Geary Manufacturing is able to reduce the direct material for an electric mixer to $6 per unit. If 50. Required: 1.00 20.00 32.00 9. how many units of each product should the firm manufacture? How many units of each product should Geary purchase? 2.00 16. Geary has a policy of filling all sales orders.00 4.000 Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $10.000 machine hours are available.000 Electric Mixer $11. how many units of each product should . even if it means purchasing units from outside suppliers.20 Problem No 6 (make or buy) Geary manufacturing has assembled the following data pertaining to its two most popular products. With all other things constant.00 38.00 20.
000 (M. hrs available) – 20.21 be manufactured? Purchased ? Solution (P-6) Unit Cost if purchased Unit cost of Make: DM DL V.MOH (16-10) Save if make Machine Hours required Cost saving per machine hour 4÷1.000 hrs Number of mixer to be produced = 30. 6÷2 Blender $20 6 4 6 16 4 1 $4 Mixer $38 11 9 3210×2=12 32 6 2 $3 Remaining hrs = 50.000÷2 = 15.000 (M.000 units . hrs required for Blender) = 30.
000 (28.000 15.000 Mixer 20.000 13.000-15.000) 2. Air Pacific cannot offer any more flights between Vancouver and Hawaii. Flights leave Vancouver on Mondays and Thursdays and depart from Hawaii on Wednesday and Saturdays.22 Make Blender Make Mixer Buy Mixer 20. An analyst had collected the following information: Seating Capacity 360 passengers .000 Hours to produce 25.000 Mixer 3.000 Mixer Manufacture Purchase Purchase 25. Only tourist-class seats are available on its planes.5 Devote all 50. If Geary is able to reduce the DM cost per mixer to $6 from $11 New UC saving if make Machine hours required Cost saving per machine hour Blender $4 1 4÷1= 4 Mixer (6+9+11)38=$11 2 11÷2 =5.000 Blenders Problem No 7 Air Pacific owns a a single jet aircraft and operates between Vancouver and the Hawaiian Islands.
Should Air Pacific lower its fare? .000 per flight $7. Required: 1.000 per flight $4. The market research department of Air Pacific indicates that lowering the average one-way fare to $480 will increase the average number of passengers per flight to 212.000 per flight $20 per passenger 8% of fare $53. What is the operating income that Air Pacific makes on each oneway flight between Vancouver and Hawaii? 2.23 Average number of passengers per flight Flights per week Flights per year Average one-way fare Variable fuel costs Food and beverages service cost ( no charge to passenger) Commission to travel agents (all booking through agents) Fixed annual lease costs allocated to each flight Fixed ground services cost allocated to each flight Fixed flight crew salaries allocated to each flight 200 passengers 4 flights 208 flights $500 $14.000 per flight For simplicity assume that fuel costs are unaffected by the actual number of passengers on a flight.
CM per Passenger = Revenue (480-38.000 64.000) 92.000 53.000 14. Revenue 200×$500 Less 8% Commission Net Revenue Variable cost 200×$20 Fuel Cost per flight Contribution margin per flight Fixed Costs: Allocated Leased Costs Baggage Handling Flight Crew Total FC OI per flight $100. Decrease in fare from $500 to $480 will increase passengers from 200 20 220.00 0 (8.24 Solution (P-7) 1.40) – Food and Beverages $ 20 = $421.000 74.000 $10.000 2.000 4.60 .000 4.000 7.000 18.
While the contract price of $17. .000 units of MTR-2000 that Paibec will need for 2000 at a unit price of $17. an outside supplier. a management Accountant with the Paibec Corporation. MTR-2000 should continue to be manufactured by Paibec or purchased from Marley Company. Marley is interested in entering into a ling-term arrangement beyond 2000.20 All other costs are irrelevant Problem No 8 (Make or Buy) Lynn Hardt.25 Total CM = $421.00 $1379.379.30 to be delivered according to Paibec’ production specifications and needs. is evaluating whether a component.000.60× 212 Total CM as per 1 $89.30 is only applicable in 2000. Marley has submitted a bid to manufacture and supply the 32.20 88.
Porter indicates to Hardt that the current performance of the plant can be significantly improved upon and that the price . The fixed manufacturing overhead costs are not expected to change whether or not MTR-2000 is manufactured. Paibec will have no need for this space if MTR-2000 is not manufactured. Fort percent of the other manufacturing overhead is considered variable. The rate per unit is not expected to change in 2000.000 225. Direct material Direct labor Plant space rental costs Equipment leasing costs Other manufacturing overhead costs Total manufacturing costs $195.000 $660. John Porter.000 Hardt has collected the following additional information related to manufacturing MTR-2000 Direct materials used in the production of MTR-2000 are expected to increase eight percent in 1999. Paibec’s direct manufacturing labor contract calls for a fivepercent increase in 2000. Variable overhead changes with the number of units produced. plant manager at the Paibec Corporation is concerned that Hardt’s analysis may lead to the closing down of the MTR-2000 line.000 36.000 units of MTE-2000 in 1999.000. The equipment lease can be terminated by paying $6.26 Hardt had gathered the following information regarding Paibec’s annual cost to manufacture 30. Paibec can withdraw from the plant space rental agreement without any penalty.000 120.000 84.
27 increases she is assuming are unlikely to occur. She is very confident about the accuracy of the information she has collected. should Paibec make MTR2000 or buy it? Show all your calculations. Porter will achieve the lower costs Porter describes. What other factors should Paibec consider before making a decision? . On the basis of the information Hardt has obtained. Furthermore. Required: 1. the analysis should be done assuming costs will be considerably below current levels. but she is unhappy about laying off employees. Hence. Hardt knows that Porter is concerned about outsourcing MTR-2000 because it will mean that some of his close friends will be laid off. 2.
4)÷30.05 Rental costs Variable MOH (225.000×$17. 1. Cost of Purchase 32.60 0 6.000÷30.000)×32.000×0.000 Fixed MOH (Irrelevant) Cost of Produce Saving if Purchased (575.400 84.000 559.000×32.000×1.04 0 $15.640 134.30 Equipment lease penalty Cost to Purchase 2.600) $553.000 0 $575.040-559.000)×32.28 Solution (P-8) 1.08 DL (120.600 224.000÷30.000×1.440 .000 96. Cost to Produce DM (195.
Problem No 9 .29 2. b) Should be reliable and timely deliver the product c) Lays off may result if the component is out sourced. It can be a labor problem. At least three factors should be considered before agreeing to purchase MTR-2000 a) The quality should be equal or better than the internally made component.
and allocated fixed manufacturing costs are $1. The manufacturing costs per unit for 20. Direct materials ………………………………. The Reno Company manufactures Part no 498 for use in its production line.000 increase c) $ 90.50 a pair.000 increase 2. The Company has enough idle capacity available to accept a one-time only special order of 20. The Woody Company manufactures slippers and sells them at $10 a pair. Variable manufacturing cost are $4. 16 . $6 Direct labor ……………………………………… 30 Variable manufacturing overhead …… 12 Fixed mfg overhead allocated ………….000 units of Part No 498 are as follows.30 1..000 increase d) $120.50 a pair. What would be the effect of operating income be if the special order could be accepted without effecting normal sales? a) $0 b) $30.000 pairs of slippers at $6 a pair. Woody will not incur any marketing costs as a result of the special order.
000 .50 = $ 1. Reno has determined that the released facilities could be used to save relevant costs in the manufacture of Part No 575.000 units of Part 498 to Reno for $60 per unit.000 b) $85.000 c) $125.000×30 $1.000 1. (b) $85.000×6 DL 20.000 increase CM = $6.0 00 120.000 Solution (P-9) 1. For Reno to have an overall savings of $25. If Reno accepts Tray’s offer.000 d) $140. Cost to Produce DM 20. Reno will make the decision to buy the part from Tray if there is an overall savings of at least $25.50 × 20. the amount of relevant costs that would have to be saved by using the released facilities in the manufacture of Part No 575 would be a) $80.000 for Reno.000 2.31 $64 The Tray Company has offered to sell 20. (b) 30. Cost of Purchase 20.50 Effect on income = $1.000×$60 2.00 – 4. $9 per unit of the fixed overhead allocated would be totally eliminated.200.000 600.000.000 Units = $30. Further more.
32 Variable MOH 20.000 25.000 200 8.000×$12 Fixed MOH 20.000 $85. The cost of manufacturing one unit of KJ37 I is the following.000 Problem No 10 (Make or Buy) Leland manufacturing Company uses 10 units of part KJ37 each month in the production of radar equipment.000 ×$9 Cost of Produce Extra cost of Purchasing Minimum savings required Relevant costs that have to be saved 240.000 180.000 .0 00 60.000 12.000 $1.140. Direct material Material handling (20% 0f direct material cost) Direct labor Manufacturing overhead (150% of direct $1.
Required: 1. Assume Leland Manufacturing is able to rent out all its idle capacity for $25.33 labor) Total manufacturing Cost $21. the capacity Leland used to manufacture these parts would be idle. Scott Supply. Leland’s monthly cost for KJ37 would increase (or decrease) by what amount? 3.000 per month. the unit cost of KJ37 would increase (or decrease) by what amount? 2. has offered to supply part number KJ37 at a unit price of $15. This is separate charge in addition to manufacturing overhead. If Leland decides to purchase the 10 units from Scott Supply. Assume Leland Manufacturing does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute .200 Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost.000. If Leland purchases the KJ37 units from Scott. Should Leland decide to purchase the parts from Scott. one of Leland’s reliable vendors. Leland’s annual manufacturing overhead budget is one-third variable and two thirds fixed.
Solution (P-10) 1.000) $23. If Leland elects to manufacture KJ37 in order to maintain quality control.000 200 8.34 $52.000 1.800 2. what is the net amount of Leland’s cost from using the space to manufacture part KJ37. Cost of Purchase 20.000 3.MOH 1/3 of variable Increase in UC if purchased 18. Cost of manufacture DM Material handling DL V.000 18.800×10 = $48.00013.000 Less rental income Increase in monthly cost (25.200 $15.000 $13. a.000 per month.000 .000 4.000×$60 Plus Material Handling 20% of DM cost b. Increase in monthly cost of if purchased 4.200 $4.
960.800×10 as per 1 (48.600.640.000 1.000) Net cost of using limited capacity to produce KJ37 $4.000 Kits) Cost of goods sold Gross Profit $4.000 Savings in the cost of acquiring KJ 37 4. A projected income statement for the next year shows: Sales (460.000 kits annually.000 2. The production capacity available will enable the firm to produce 500.000 Problem No 11 (Special order) Clean-it Company produces cleaning kits for shotguns.35 3.000 . Contribution forgone by not manufacturing alternate product $52.
a) Should the special offer be accepted? What would be the impact on net income? VC = 2.36 Selling and Administrative Expenses Net Income 1.000? Added profit required 480.000 ÷ 460.000 b) Assume that the offer was for 50. What is the lowest price the firm could accept if it wants to earn annual net income of $480.000 Fixed manufacturing overhead costs included in the cost of goods sold are $1.000 $ 390. Should it be accepted if it wants to earn annual net income of $480.000 units of Regular sales will be lost. 10.000 -390.250.000 units In order to accept 50.000 .000 – 1.000 50.960.000 units Regular Sales 460.000 × 2 = $60.840.960.120. The clean-it Company sales manager’s initial response is to refuse the offer because he concludes that the $6 price is below the firm’s average cost ($ 2. The purchasing department of a large discount chain has offered to purchase 30.000 × (10-4-1) Additional profit 100.000? Capacity 500.000 units.000 = 90. A 10% sales commission is paid to sales representatives for each kit sold.840.000.000 kits. The sales commission would not be paid on the special order.120.000×2 Loss CM from lost sales 10.000 = $ 4 CM = 6-4 = $2 Additional profit = 30.000 = 1.000). Special order sales: Additional CM 50.000 kits as $6 each.000 c) Ignore Part b.000 VC per unit = 1.000/460.000 50.
000 assemblies are needed each year. 2.000 are avoidable if the units are purchased. The new equipment would have a capacity of 75. Purchase new equipment at $5. Required: a) Show an analysis including relevant unit and total costs for each of the alternatives. The new equipment would be more efficient than the old and would reduce direct labor costs and variable overhead costs by 25%.000 X = $7 Problem No 12 Best Buy Company is trying to decide between two alternatives regarding the assemblies of KJF621 for the company’s main product. No alternative uses are available for the space currently occupied by Best Buy if the company decides to buy from the outside source. Best Buy’s cost of producing the assemblies is based on a current and normal activity of 50. $9 amortization. Supervisory costs of $400. The equipment would have a 5-year life with no salvage value. .000 units per year. Assume 50. Best Buy uses straight-line amortization and allocates that amount on a unit-of-production basis. The alternatives are: 1. and $20 general company overhead.000 X = 30. Purchase the needed KJF621 assembly from an outsider source that will sell them for $90 per unit on a 3-year contract.000.000 × 4 – 90.37 30.000 units per year and is as follows: Direct Material Direct Labor Variable overhead Fixed overhead $30 40 6 36 Fixed overhead includes $7 supervisory cost.000.
the facilities now being used to make the part could be used to make more units of a product that is in high demand.000 per year. even if the part were purchased from the outside supplier. Assume 60. However. c) Show an analysis including relevant unit and total costs for each of the two alternatives . The unit product cost of this part is computed as follows.$5. Required: a) How much of the unit product cost of $56.10 of the fixed manufacturing overhead cost that is being applied to the part would continue.38 b) Show an analysis including relevant unit and total costs for each of the two alternatives.80 a unit. Direct Materials Direct Labor Variable manufacturing Overhead Fixed Manufacturing Overhead Unit product cost $24. This fixed manufacturing overhead cost would be applied to the company’s remaining products.70 $16.30 $13. all of the direct labor cost of the part would be avoided.000 assemblies are needed each year. If the company accepts this offer.40 $56. If the part were purchased from the outside supplier.000 units per year of a part that it uses in the products it manufactures.Assume 75. The additional contribution margin on this other product would be $44.70 An outsider supplier has offered to sell the company all the parts that Foster needs for $51.000 assemblies are needed each year.70 is relevant in the decision of whether to make or buy the part? b) What is the net total dollar advantage (disadvantage) of purchasing the part rather .30 $2. Problem No 13 Foster Company makes 20.
000 units required each year? Problem No 14 Kramer Company makes 4. Data concerning the unit production costs of the Axial tap follow.000 units per year of a part called an Axial tap for use in one of its products. Assume Kramer Company has no alternative use for the facilities presently devoted to . Assume that direct labor is a variable cost. Required: A.39 than making it? c) What is the maximum amount of the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20. If Kramer Company decided to discontinue making the Axial taps 40% of the above fixed manufacturing overhead costs could be avoided. Direct Materials Direct labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Total Manufacturing Cost per unit $35 $10 $8 $20 $73 An outside supplier had offered to sell Kramer Company all of the Axial tap it requires.
What is the maximum price Kramer Company should be willing to pay the outside supplier for Axial Tap? Problem No 15 Qualls Company makes a product that has the following costs: Direct material Direct labor Variable manufacturing over head Fixed manufacturing overhead Variable S&A expenses Fixed S&A expenses Per unit $17.000 annually.80 0 $2.00 $907.20 0 . Assume that Kramer Company could use the facilities presently devoted to production of the Axial taps to expand production of another product that would yield an additional contribution margin of $80. should Kramer Company accept the offer? Fully support your answer with appropriate calculation.40 production of the Axial taps.90 $4.20 Per year $916. B. If the outside supplier offers to sell the Axial taps for $65 each .30 $12.
Required: a.00 0 0 285. Compute the mark up on absorption cost.000 in this product and expects a return on investment of 15%.000 Total 635. The pricing calculations are based on budgeted production and sales of 48. Isosceles.000 Scalene 125.000 350. Compute the target selling price of the product using the absorption costing approach.000 500. Equilateral and Scalene.500.00 0 150. B.000 Unit Sales Revenue Less Variable CGS .000 $925.000 units per year.000.0 00 785. Problem No 16 (Elimination of a product) Triangle limited manufactures and sells three different products.000 $2. The company has invested $360. Isoscele Equilateral s 10.000 $575. The projected income statements by production line for the year are presented below.41 The Company uses the absorption costing approach to cost plus pricing.00 $1.
Because of the increased quality of production of the new machine it is expected that sales of Isosceles will increase by 10%.42 Less Fixed CGS Gross Margin Less Variable S&A expenses Less Fixed S&A expenses New Income (loss) before taxes 304.00 0 760. Management expects that scalene production and revenues would increase by 50%.00 0) 289.000 550. Alternative B The Company would discontinue the manufacture of Isosceles. Use incremental analysis.000 The fixed selling and administrative expenses are allocated to products in proportion to revenue.000 per year.000 $55. The machinery would increase the total fixed cost and expenses (production and administrative) by $40.000 $361.200 $100.000 of rent expense per year.20 0 80. Required Prepare a schedule analyzing the effects of Alternative A and Alternative B on projected net income before income taxes.000 per year.000 78.000 340. Selling prices for Equilateral and Scalene would not change.80 0 270.000 $25.800 ($60. However production and revenues of Equilateral would decrease by 10%. Problem No 17 (make or buy) . Alternative A: The Company would lease some new machinery for the production of Isosceles.200 $335.000. The fixed cost of units sold is allocated to products by various allocation bases such as square meters for factory rent.000 136. Some of the production machinery devoted to Isosceles could be sold at scrap value.800 $258.000 125.000 200. Triangles management is concerned about the loss for the Isosceles products and is considering two alternative forces of corrective action. The annual rental of the new machinery would equal $50.500 per year.000 $65. The removal of this machinery would reduce the fixed costs and expenses by $30. The space previous used for Isosceles can be rented to an outside organization for $157. The remaining fixed costs and expenses allocated to Isosceles include $155. machine hours for repairs etc. which would equal its removal costs. Management expects that the new machinery would reduce variable production cost so that the total variable production costs for Isosceles would be 20% Isosceles revenues.000 166.
00 8. Explain each to the purchasing department.43 Newman Enterprises Ltd manufactures Widgies for use in the production of Winkle. Required: 1. The cost per unit for 10.000 Widgies is as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $3. What decision would you make and why? 2. a major sales product for the company.00 6.00 15.000 widgets for $30 each. Also $5 per unit of the fixed overhead applied to Widgets would be totally eliminated. What other things would you consider before making your decision. Problem No 18 .00 John Black Corporation has offered to sell Newman 10.00 $32.
what would be the change in net income resulting from this decision? b) What is the lowest selling price per unit that could be charged for the new product without reducing the net income from its current level? .000 units $309 $130 $50 $51. the contribution margin of the other existing product lines is expected to drop by $78.44 The Western Company is considering the addition of a new product to its current product lines. a) If the new product is added next year.000 $75. Therefore.000 If the new product is added to the existing product line. then sales of existing products will decline. The expected cost and revenue data for the new product are as follows: Annual Sales Selling price per unit Variable costs per unit: Production Selling Direct fixed costs per year: Production Selling Unavoidable allocated fixed corporate costs per year 3.000 per year.000 $54.
company K.000 laser machine hours and 1.700 2 Assume that both machines are operating 90% of capacity.800 $31. and 200 laser machine hours and 10 image machine hours would be required.300 $16. 4 laser machine hours.000. A prospective customer. WCL will just reach its operating capacity. Indirect overhead is allocated based on the following regression equation: y = 200. indirect variable overhead costs are Revenue Variable cost: Direct material Laser machine (200×$20) Image machine (10×$15) Variable OH (50×200) + (10×10) . By what amount would WCL’s income increase by accepting the offer? a) b) c) d) e) $8.700 $21. offered $ 35.800 $35. a producer of precision tools. where y is total overhead cost.300 $16. each unit requires $ 250 of direct materials.700 $26.45 Problem No 19 WCL.000 200 10.000 + 50 x + 10 z. x is laser machine hours and z is image machine hours.500 per unit. has a production capacity limit of 4. all current production is sold at $ 1. if the offer from company K is accepted. and 1 image machine hour to produce. respectively.000 to WCL to build a custom tool.000 image machine hours.000 $5. The direct costs per hour to operate the machines are $ 15 and $ 20. 1 Assume that.000 3.100 18. The materials involved are expected to cost $ 5.
If the offer is accepted. and indirect fixed overhead costs are $ 225 per unit based on full capacity.500 $250 60 20 200 530 $970 At maximum capacity. Available capacity = 10% x 1000 = 100 units.800 $106. By what amount would WCL’s income change if company L’s offer is accepted and the machinery is leased? a) b) c) d) $254.800 increase increase increase increase . 1000 units of product can be produces.000 $72.350 per unit.800 e) $232.000 b) $36.000 c) $104. offers to buy 240 units at $1.000 $90.000. all 240 units must be delivered by the end of the year. customer L.300 d) $135. The opportunity cost = $ 970x 140 = $135. WCL must forgo 240-100 = 140 units of regular sales in order to accept the offer.800 3 Assume the same information as in item 2 except that WCL can lease machinery to accommodate company L’s order at a cost of $ 70. A new prospective customer.46 $ 200 per unit. What is the opportunity cost of accepting this offer? a) $21.800 CM per unit of regular production: Price Variable Costs: Direct material Laser machine (4×$15) Image machine (1×$20) Variable OH $1.
800 Problem No 20 Dirk Paul. and quarterly.47 e) $126. Quarterl y Sales Variable expenses Fixed expenses: Depreciation of special equipment Salary of editor Common cost allocated Net Income $125.000 .250 $15.800 increase Contribution margin per unit from company L = $ 1. monthly.000 $500.250 Monthly $175.500 70.750 $(11.500 175.000 11.000 61. Data for the past year are as follows.000 80.000 $20. The firm publishes magazines weekly.800 Less cost of leased machinery to increase capacity 70. president of the ace Publishing Company. is analyzing the firm’s financial statements for the past year.000 27.000 Weekly Total $200.000 7.00 0 65.000 Total increase in income from company L’s offer $126.000 43.500 20.250 215.000 70.500 62.$ 530 = $ 820 Total contribution margin from company L ($820x240) $196.250 22.000 8.000 $16.750 20.350 .
Paul’s advisor. because he claims it is decreasing the company’s profitability. Required: As Mr. Paul is considering discontinuing the quarterly magazine. assist him in determining whether to continue the quarterly magazines. Use contribution margin income statement to support your advice.48 ) • Allocation base for sales dollars The equipment used is very specialized and has no resale value if its use is discontinued. Solution (P-20) .
00 0 215.000) Differenti al Analysis ($125.000) .000 27.000 ($40.500 62.00 0) 65.000 27.500 62.000 Without Quarterly l $375.500 175.49 With Quarterl y Sales Variable expenses Fixed expenses: Depreciation of special equipment Salary of editor Common cost allocated Net Income $500.000 0 0 0 ($60.000 $20.000 150.500 175.
000 70. 0ne in Gurgaon and the other in Noida.000 42.000 90.000 47.000 Revenue Cost of Goods sold Lease rent(renewable each year) Labor costs(paid on hourly basis) Depreciation of Equipment Utilities Allocated corporate costs Total operating cost Operating Income The equipment has a zero disposal value.000 1.000 46.000 42.000 50.000 89.000 $45.000 84.070. Operating income for each store in 2006 is as follows: Gurgaon Store $1.000.000 Noida Store $860.50 Problem No 21 (Closing and opening store) Ravi.000 40.930. Required: .000 165. Ravi can increase his profitability by closing down The Nodia store or by adding another store like it.000 22.000 75.000) Total $1.000 43.000 1.000 90.000 25. an entrepreneur runs two convenience stores.000 660.000 885.885.410.00 0 1.000 (25. Mohan the accountant has the following comment.00 0 750.
410. Revenue Cost of Goods sold With Noida Store $1. 2. Differental analysis by adding new store like Nodia.000 Without Differentia Noida l Analysis Store $1.00 $(860. Differental analysis by closing Nodia Store.00 0 1.51 1.070. Solution (Problem No 21) 1.930.000 0 ) 750.000 660.000 .
000 1.000 75.000 90.000 8.000 47.000 90.000 42.000 47.000 1.000 43.000 90.000 ($37.52 Lease rent(renewable each year) Labor costs(paid on hourly basis) Depreciation of Equipment Utilities Allocated corporate costs Total operating cost Operating Income 165.000 $45.000 89.000 0 823.000 0 46.000 42.000 84.000.000) .885.
The owner figures the new oven would save him $2. He is using straight line depreciation for the oven. Required How do you suppose the owner came up with $400 as the loss for the next year if the new pizza oven were purchased? Criticize the owner’s decision and prepare correct analysis of the owner’s decision. Saving in annual operating expenses if old pizza oven is replaced $2. since doing so would result in a loss of $00 over the next year.53 Problem No 21 (Machine Replacement) Village Pizza’s owner bought his current Pizza oven two years ago for $9.600 in annual operating expenses compared to the old one.900.600 BV (3. and it has one more year of life remaining.000÷3) .000) Loss ($400) of old oven ($9. Consequently. He could purchase a new oven for $1. Solution (P-21) 1. he has decided against buying the new oven. but it would last only one year.000.
54 2. It should not enter in equipment replacement decision.600 Cost (1. Saving in annual operating expenses if old pizza oven is replaced $2.900) Net benefit $700 of new machine The owner’s analysis is flawed. because the book value of the old Pizza oven is a sunk cost. Problem 7-2 Evaluating a Special Order ( page 324) . Problems from Helmkamp ( 7th Edition) (A) Decision Making 1.
375.425.000 units) Cost of goods sold: Direct material Direct labor Manufacturing overhead Gross Profit Selling expenses Administrative expenses Net Income 575.0 00) 1. The grills would be sold under a different brand name and would not influence Falme’s Company’s current sales. Fixed manufacturing overhead and fixed selling expense would not change.500 The company’s variable manufacturing overhead is $10 per unit and the variable selling expense is $5 per unit.900.00 0 $7.000 units per year. The company’s income statement for the previous year is presented below: Sales ( 95. so the company would have to reduce the production of units sold under its own brand name by 3.425.000 237.000 units per year.700.000 if the special order is accepted.00 0 812.55 Flame Company manufactures gas grills and is considering expanding production.000 units if the special order is accepted. The company’s direct labor cost per unit for the special order would increase 20% while direct material cost per unit for the special order would increase 10%. A distributor has asked the company to produce a special order of 8.500 $2. There would be no variable selling expense associated with the special order.0 00 1.000 grills to be sold overseas.00 0 1. and variable manufacturing overhead per unit would remain constant.500 $ 612. The company’s maximum capacity is 100. The plant is currently producing 95.0 00 (5. The administrative expense is completely fixed and would increase by $5.. .125.
000 ( 75-25-2010-5) Net loss from special order $220. should the company accept the offer? Justify your answer.000 80.000) × 1.000 (45.56 Required: If the distributor has offered to pay $65 per unit for the special order.00 2.000 ÷ 95.000 $520.900.00 0 (497.375.000 × $65) Cost of goods sold: Direct material ( 8.000 ÷ 95.000) The special order should not be accepted DM ($2.000 5. He is trying to find a way to . Problem 7-5 ( page 326) Considering the Deletion of a product The controller of Sanford Company is reviewing the financial summary of the company’s three products.000) × 1.00 0 192.000) $ (22. Revenue from Special order (8.000 × $27.50) Direct labor ( 8.10 = $ 27.000 × $24) V.20 = $ 24.000 ) 23.50 DL ($1.000 × $10) Administrative expenses Profit from special order Less profit on lost regular sales 3. Manufacturing overhead ( 8.
150 $5. 5= 9.000 5000×1.250 5000×0.585 Sales Cost of goods sold Gross Profit Selling & Administrative expenses Net Income Sales price per unit Variable CGS per unit Variable selling and admin expenses per unit Units sold The controller analyzes the above data and decides that Product X should be discontinued because it is showing a net loss.230 63.640 27.000 Product Z $45.435 37. The financial data for the past twelve months are as follows: Product X $ 31.500 11.770 (37.125 4.5 = 4.250) $17.500 64.000 6000×0.000 Total $101.585 .480 – 11.440 $19.420) 7.920 $7.360 7.220 Total $101.50 1.000 11.63 6.065 19. 59 = 2.065 $ (10.500 15.50 1.50 0.25 0.59 5.875 13. 63 = 3.780 32.500) S & A (19.485) $3.000 6000×1. What will be effect on net income if it is discontinued? Product X Sales V.25 0.950 15.50 9.500 9000×1.230) NI $ 31.750 Product Y $25.500 26.935) (8.800 Product Z $45. Required: (A)The controller analysis the above data and decides that Product X should be discontinued because it is showing a net loss.00 1.57 increase the profitability. 25 = 6.250 9000×0.635 – 26.000 Product Y $25.480 $17.000 17.2 5= 11. CGS S&A CM FC Mfg (64.500 34.975 $ 8.920 (3.
000 units of B.750 537 $ 16. The annual production is 10. Product X can be sold for $10 per unit at the split-off point and Product Y can be sold for $16 per unit. X and Y.000 into products A and B.000 units of A and 2. The additional processing will produce 4.000.58 Since Product X has a positive CM of 15. . what will be the total impact on net income? Decrease in profit from Part A Lost CM from product Z 100 units × (32. Which product should be sold at the split-off point and which should be processed further. The selling price of product A is $12 per unit and Product B sells for $20 per unit.000 units of X and 6. the firm’s profit will be increased by that amount if product is dropped.220 ÷ 6000) $15. Product X can be processed further at an annual cost of $20.750. Problem 7-12 products ( page 330) Differential Analysis and Joint Stewart Company produces two joint products.000 units of Y at a joint cost of $102.287 3. (B) If Product X is discontinued causing an additional loss of 100 units of Product Z.000 and sold for $20 per unit. Product Y can be further processed at cost of $2.
000 × 12 + 2. it will be able to reduce fixed manufacturing . Oklahoma Generator Company manufactures small electric motors for which a small part is needed. Problem 7-10 329 Evaluating a make-buy decision ( page 1.000 × 10 = $100. The following cost data have been accumulated for the 16.59 At Split off Product X Product Y 10.000= $180.000 Process Further Product X Product Y 10. If the firm buys the item.000 112.00 0 88.000 × 16 = $96.000 6.000 parts the company manufactured during the previous year: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $32.000 Process X further and sell Y at split off 4.000 × 20 – 2000 = $86.00 0 The company can buy the part from another firm for $19 per unit.000 72.000 × 20 – 20.000 4.
000 – 60. Required: Should the Company continue to make the part.000) Less rental income $304.000 52.000 $304.000 .000 112.000 $32. or should it be purchased from the other firm.000.60 overhead costs by $60. Cost of Producing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Cost of Purchasing Purchsae 16.000 Advantage of Producing = 316.0000×$19 New FC (112. It will also be able to rent some of the facilities currently used to make the part to another firm for $40.000 = $12.000 – 304.000 $316.000 72.000 88.000 per year.000 40.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.