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# Q.

## 1 Special Order Marshall Company recently approached Johnson Corporation regarding

manufacturing
a special order of 4,000 units of product CRB2B. Marshall would reimburse Johnson for all
variable manufacturing costs plus 35 percent. The per-unit data follow:
Unit sales price
\$28
Variable manufacturing costs 13
Variable marketing costs
5
Fixed manufacturing costs
4
Fixed marketing costs
2
Johnson would have a retooling cost of \$12,000 for the special order. Johnson has no alternative
use of capacity.
Required Should the special order be accepted?
Solution:
Since there are no marketing costs for the special order, the only relevant cost is the variable
manufacturing cost of \$13.00 per unit.
Revenue for the special order variable manufacturing cost
=((1.3 - \$13.00) - \$13.00) 4000 = \$18200
The special order should be accepted.

Q.2 Special Order Alton Inc. is working at full production capacity producing 20,000 units of a
unique product. Manufacturing costs per unit for the product are
Direct materials
\$9
Direct labor
8
10
Total manufacturing cost
\$27
The unit manufacturing overhead cost is based on a \$4 variable cost per unit and \$120,000 fixed
costs. The nonmanufacturing costs, all variable, are \$8 per unit, and the sales price is \$45 per
unit.
Sports Headquarters Company (SHC) has asked Alton to produce 5,000 units of a modification
of the new product. This modification would require the same manufacturing processes. SHC has
offered to share the nonmanufacturing costs equally with Alton. Alton would sell the modified
product to SHC for \$35 per unit.
Required
1. Should Alton produce the special order for SHC? Why or why not?
2. Suppose that Alton Inc. had been working at less than full capacity to produce 16,000 units of
the product when SHC made the offer. What is the minimum price that Alton should accept for
the modified product under these conditions?
Solution:
1)
Current
Revenue per unit
DM
DL
Variable nonmanufacturing cost
Total Variable Cost
Contributed Marginal Per Unit
Contributed MargiN FR 5000 unit

Special Order
\$45.00

\$9.00
\$8.00
\$4.00
\$8.00

\$35.00
\$9.00
\$8.00
\$4.00
\$4.00

\$29.00
\$16.00

\$25.00
\$10.00

\$80,000

\$50,000

The difference in favor of continuing with current production and turning down the special order
is \$30,000 (\$80,000 - \$5,000)
2) The minimum would be the total variable cost per unit (\$25) plus the per unit cost of lost
sales (\$3.20 = \$16,000/5000): \$25 + \$3.20 = \$28.20

Q.3 Make or Buy; Calista Company manufactures electronic equipment In 2009, it purchased
the special switches used in each of its products from an outside supplier. The supplier charged
Calista \$2 per switch. Calistas CEO considered purchasing either machine X or machine Y so
the company could manufacture its own switches. The CEO decided at the beginning of 2010 to
purchase Machine X, based on the following data:
Machine X Machine Y
Annual fixed cost
\$135,000
\$204,000
Variable cost per switch
0.65
0.30
Required
1. For machine X, what is the indifference point between purchasing the machine and purchasing
from the outside vendor?
2. At what volume level should Calista consider purchasing Machine Y?

Solutions:
1) Machine X
\$2Q = \$.65Q + \$135,000 Q = 100,000
2)

## Cost of using X = Cost of using Y

\$.65S = \$.30S + \$204,000
\$.35S = \$204,000
S = 582,857 units

Q.4 Special Order Grant Industries, a manufacturer of electronic parts, has recently received an
invitation to bid on a special order for 20,000 units of one of its most popular products. Grant
currently manufactures 40,000 units of this product in its Loveland, Ohio, plant. The plant is
operating at 50 percent capacity. There will be no marketing costs on the special order. The sales
manager of Grant wants to set the bid at \$9 because she is sure that Grant will get the business at
that price. Others on the executive committee of the firm object, saying that Grant would lose
money on the special order at that price.
Units
40,000
60,000
Manufacturing costs
Direct materials
\$ 80,000
\$120,000
Direct labor
120,000
180,000
240,000
300,000
Total manufacturing costs
\$440,000
\$600,000
Unit cost
\$ 11
\$ 10
Required
1. Why does the unit cost decline from \$11 to \$10 when production level rises from 40,000 to
60,000 units?
2. Is the sales manager correct? What do you think the bid price should be?
3. List some additional factors Grant should consider in deciding how much to bid on this special
order.

Solution:
1) Costs fall from \$11 to \$10 because of the fixed overhead cost, which are the same at each
level of the production, so that the per unit fixed costs decrease as production level
increases.
2) Minimum Bid price = (\$600,000 - \$440,000)/20,000 units = \$8.00 per unit
Q.5 Profitability Analysis Barbour Corporation, located in Buffalo, New York, is a retailer of
high-tech products known for its excellent quality and innovation. Recently the firm conducted a
relevant cost analysis of one of its product lines that has only two products, T-1 and T-2. The
sales for T-2 are decreasing and the purchase costs are increasing. The firm might drop T-2 and
sell only T-1.
Barbour allocates fixed costs to products on the basis of sales revenue. When the president of
Barbour saw the income statement, he agreed that T-2 should be dropped. If this is done, sales of
T-1 are expected to increase by 10 percent next year; the firms cost structure will remain the
same.
T-1
T-2
Sales
\$200,000
\$260,000
Variable cost of goods sold
70,000
130,000
Contribution margin
\$130,000
\$130,000
Expenses
Fixed corporate costs
60,000
75,000
20,000
50,000
12,000
21,000
Total expenses
\$ 92,000
\$146,000
Operating income
\$ 38,000
\$ (16,000)
Required
1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
2. What strategic factors should be considered?
Solution:
1) Change in annual Income
Product T-1:
Last year contribution = \$200,000 - \$70,000 - \$20,000 = \$110,000
Last year CM ratio = \$110,000/\$200,000 = 55%
Product T-2:
Last year contribution = \$260,000 - \$130,000 - \$50.000 = \$80,000
Last year CM ratio = \$80,000/\$260,000 = 30%
Incremental CM from T-1 if T-2 is dropped = \$110,000 0.10 = \$11000
= \$11000 - \$80,000 = \$69000

Q.6 Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky
Walters is considering an offer from a subcontractor to provide 2,000 units of product OP89 for
\$120,000. If Terry does not purchase these parts from the subcontractor, it must continue to
produce them in-house with these costs:
Costs per Unit
Direct materials
\$28
Direct labor
18
16
4
Required Should Terry Inc. accept the offer from the subcontractor? Why or why not?
Solution
The total cost for producing the product are as follows
Direct materials
Direct labor

## Costs per Unit

\$28
18
16
4

(62000*2000)=124000
The Total cost to purchase the units is 120000
Saving to purchase 124000-120000=4000
Since purchase price is less than production cost, terry inc should purchase
the units.
Q.7 Disposal of Assets A company has an inventory of 2,000 different parts for a line of cars
that has been discontinued. The net book value of inventory in the accounting records is \$50,000.
The parts can be either re-machined at a total additional cost of \$25,000 and then sold for
\$30,000 or sold as is for \$2,500. What should it do?

Incomplete Solution
Part b:
Disposal
of Assets
Data Input
Inventory of discontinued units
Net book value (NBV) of inventory
Estimated sales value of remachined parts
Current disposal value of parts ("as
is")

2,000
\$50,000
\$25,000
\$30,000
\$2,500

Q.8 Replacement of Asset An uninsured boat costing \$90,000 was wrecked the first day it was
used. It can be either sold as is for \$9,000 cash and replaced with a similar boat costing \$92,000
or rebuilt for \$75,000 and be brand new as far as operating characteristics and looks are
concerned. What should be done?
Part c: Asset Replacement
Data Input
Original cost of asset (boat)
Current disposal value of boat
Cost of new boat
Refurbishing cost (old boat)

\$90,000
\$9,000
\$92,000
\$75,000

Q.9 Profit from Processing Further Joint costs are allocated on the basis of relative
sales value at the end of the joint process.
Additional information for Deaton Corporation follows:
A
B
C
Total
Units produced
12,000
8,000
4,000
24,000
Joint costs
\$144,000
\$ 60,000
\$36,000
\$240,000
240,000
100,000
60,000
400,000
28,000
20,000
12,000
60,000
Sales value if processed further
280,000
120,000
70,000
470,000
Required Which, if any, of products A, B, and C should be processed further and then sold?
Solution:
A
Sales value
Incremental Revenue

\$280,000
(\$240,000)
\$40,000
\$28,000
\$12000

B
\$120,000
(\$100,000)
\$20,000
\$20,000
\$0

C
\$70,000
(\$60,000)
\$10,000
\$12,000
(\$2000)

Q.10 Make or Buy Eggers Company needs 20,000 units of a part to use in producing one of its
products.
If Eggers buys the part from McMillan Company for \$90 instead of making it, Eggers could not
use the released facilities in another manufacturing activity. Fifty percent of the fixed overhead
will continue irrespective of CEO Donald Mickeys decision. The cost data are
Cost to make the part
Direct materials
\$35
Direct labor
16
24
20
\$95
Required: Determine which alternative is more attractive to Eggers and by what amount

incomplete
Data Input
Volume of parts (units) required
Purchase price/unit from outside supplier
% of Fixed Overhead that is unavoidable

20,000
\$90.00
50%

## Full Manufacturing Costs:

Direct materials
Direct labor
Total

\$35.00
\$16.00
\$24.00
\$20.00
\$95.00

Q.11 Selection of the Most Profitable Product DVD Production Company produces two basic
types of video games, Flash and Clash. Pertinent data for DVD Production Company follows:
Flash
Clash
Sales price
\$250
\$140
Costs
Direct materials
50
25
Direct labor (\$25/Hr)
100
50
50
25
20
10
Marketing costs (all fixed)
10
10
Total costs
\$230
\$120
Operating profit
\$ 20
\$ 20
* Based on labor-hours.
The DVD game craze is at its height so that either Flash or Clash alone can be sold to keep the
plant operating at full capacity. However, labor capacity in the plant is insufficient to meet the
combined demand for both games. Flash and Clash are processed through the same production
departments.

incomplete
Part g: Special-order pricing
Data Input
Luncheon Information:
Average # of patrons
Selling price per lunch
Estimated variable cost per lunch
Current capacity per day
Fixed costs per day
Tour-Bus Information:
Number of patrons
Incremental fixed costs
Bid price for tour group

600
\$5.00
\$2.00
700
\$1,200
50
\$0
\$3.50

per meal

diners

Q.12 Special Order Pricing Barrys Bar-B-Que is a popular lunch-time spot. Barry is
conscientious about the quality of his meals, and he has a regular crowd of 600 patrons for his \$5
lunch. His variable cost for each meal is about \$2, and he figures his fixed costs, on a daily basis,
at about \$1,200. From time to time, bus tour groups with 50 patrons stop by. He has welcomed
them since he has capacity to seat 700 diners in the average lunch period, and his cooking and
wait staff can easily handle the additional load. The tour operator generally pays for the entire
group on a single check to save the wait staff and cashier the additional time. Due to competitive
conditions in the tour business, the operator is now asking Barry to lower the price to \$3.50 per
meal for each of the 50 bus tour members.
Required Should Barry accept the \$3.50 price? Why or why not? What if the tour company were
willing to guarantee 200 patrons (or four bus loads) at least once a month for \$3.00 per meal?

incomplete
Part g: Special-order pricing
Data Input
Luncheon Information:
Average # of patrons
Selling price per lunch
Estimated variable cost per lunch
Current capacity per day
Fixed costs per day
Tour-Bus Information:
Number of patrons
Incremental fixed costs
Bid price for tour group

600
\$5.00
\$2.00
700
\$1,200
50
\$0
\$3.50

per meal

diners

Q.13 Special Order Earth Baby Inc. (EBI) recently celebrated its tenth anniversary. The
company produces organic baby products for health-conscious parents. These products include
food, clothing, and toys. Earth Baby has recently introduced a new line of premium organic baby
foods. Extensive research and scientific testing indicate that babies raised on the new line of
foods will have substantial health benefits. EBI is able to sell its products at prices higher than
competitors because of its excellent reputation for superior products. EBI distributes its products
through high-end grocery stores, pharmacies, and specialty retail baby stores.
Joan Alvarez, the founder and CEO of EBI recently received a proposal from an old business
school classmate, Robert Bradley, the vice president of Great Deal Inc (GDI), a large discount
retailer. Mr. Bradley proposes a joint venture between his company and EBI, citing the growing
demand for organic products and the superior distribution channels of his organization. Under
this venture EBI would make some minor modifications to the manufacturing process of some
of its best-selling baby foods and the foods would then be packaged and sold by GDI. Under the
agreement EBI would receive \$3.10 per jar of baby food and would provide GDI a limited right
to advertise the product as manufactured for Great Deal by EBI. Joan Alvarez set up a meeting
with Fred Stanley, Earth Babys CFO, to discuss the profitability of the venture. Mr. Stanley
made some initial calculations and determined that the direct materials, direct labor, and other
variable costs needed for the GDI order would be about \$2 per unit as compared to the full cost
of \$3 (materials, labor, and overhead) for the equivalent EBI product.
Required Should Earth Baby Inc. accept the proposed venture from GDI? Why or why not?
Solution:
\$3.10 \$2 = \$1.10
Q.14 Special Order; Strategy, International Williams Company, located in southern
Wisconsin, manufactures a variety of industrial valves and pipe fittings that are sold to customers
in nearby states. Currently, the company is operating at about 70 percent capacity and is earning
a satisfactory returnon investment.
Glasgow Industries Ltd. of Scotland has approached management with an offer to buy
120,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost
identical to Williams pressure valve; however, a fire in Glasgow Industries valve plant has shut
down its manufacturing operations. Glasgow needs the 120,000 valves over the next four months
to meet commitments to its regular customers; the company is prepared to pay \$21 each for the
valves.
Williams product cost for the pressure valve, based on current attainable standards, is
Direct materials
\$6
Direct labor (0.5 hr per valve)
8
9
Total manufacturing cost
\$23
Additional costs incurred in connection with sales of the pressure valve are sales commissions of
5 percent and freight expense of \$1 per unit. However, the company does not pay sales
commissions on special orders that come directly to management. Freight expense will be paid
by Glasgow.

In determining selling prices, Williams adds a 40 percent markup to product cost. This provides
a \$32 suggested selling price for the pressure valve. The marketing department, however, has set
the current selling price at \$30 to maintain market share.
Production management believes that it can handle the Glasgow Industries order without
disrupting its scheduled production. The order would, however, require additional fixed factory
overhead of \$12,000 per month in the form of supervision and clerical costs.
If management accepts the order, Williams will manufacture and ship 30,000 pressure valves to
Glasgow Industries each month for the next four months. Shipments will be made in weekly
consignments,
FOB shipping point.
Required
1. Determine how many additional direct labor-hours will be required each month to fill the
Glasgow order.
2. Prepare an analysis showing the impact on profit before tax of accepting the Glasgow order.
3. Calculate the minimum unit price that Williams management could accept for the Glasgow
order without reducing net income.
4. Identify the strategic factors that Williams should consider before accepting the Glasgow
order.
5. Identify the factors related to international business that Williams should consider before
accepting the Glasgow order.

Solution:
1) The standard direct labour hour per finished value is hour. Therefore 30000 unit per
mount would require 15000 direct labour hours.
2) 120,000 (\$21-\$17)-\$48,000 = \$432,000
\$17 + (\$48000/\$120,000) = \$17.4

Q.15 Opening a New Restaurant; Use of Relevant Cost Analysis Brad and Judy Bailey both
enjoy preparing food and creating new recipes. So they are taking their passion to the workplace
and plan to open a new restaurant called Baileys. They have a two-year, renewable lease on a
property that was previously used as a fast food restaurant. You are a good friend of the couple.
Required Give an example (no numbers necessary) of how the Baileys could use the following
cost management methods in planning and operating their new restaurant.
1. Special order analysis.
3. Sell now or process further.
4. Profitability analysis for current and/or new products.
SOLUTION
1) Special order analysis: it involves determining the price of a meal for a
special group.
2) Should bailey purchase its bread and pastries or should they make these
items? The same would be true for desserts.
3) Does bailey wants to enhance a menu item, will the increased price covers
the increased cost of doing so.
4) Profitability analysis can be used to review the menu items to determine
which are the most profitable. Lunch and dinner menus can be compared in
this way. Also baileys could review the possibility of opening for a late night
crowd to project the revenues and costs of that plan, and to assess expected
profitability. In this situation the rent costs would be irrelevant, but the
additional cost of wait staff would be incremental; the cost of utilities may or
may not charge.
Q.16 Special Order; Use of Opportunity Cost Information Sharman Athletic Gear Inc (SAG)
is considering a special order for 15,000 baseball caps with the logo of East Texas University
(ETU) to be purchased by the ETU alumni association. The ETU alumni association is planning
to use the caps as gifts and to sell some of the caps at alumni events in celebration of the
universitys recent national championship by its baseball team. Sharmans cost per hat is \$3.50
which includes \$1.50 fixed cost related to plant capacity and equipment. ETU has made a firm
offer of \$35,000 for the hats, and
Sharman, considering the price to be far below production costs, decides to decline the offer.
Required
1. Did Sharman make the wrong decision? Why or why not?
2. Consider the management decision-making approach at Sharman that resulted in this decision.
How was opportunity cost included or not included in the decision? What decision biases are
apparent in this decision?
Solution:

The special order should have been accepted since the relevant cost is \$3.50-\$1.50 = \$2.00 per
cap or \$2.00 15000 = \$30000 total cost. Sharman would have received a contribution
of \$35000 - \$30000 = \$5000 on the order. This is a missed opportunity for sharman.
, caused by a mistaken reliance on full cost, instead of relevant cost.
Q.17 When Does Buying a Gas Guzzler Make Sense? Gasoline prices increased and also
fluctuated widely during 2007 and 2008, and car purchases fell, even for fuel-efficient cars.
Many new cars were selling for a discount and/or special promotions including reduced interest
rates on car loans.
These discounts and promotions were especially prominent for SUVs and larger cars, those with
the lowest gas mileage. The discounts and promotions were also prominent for used cars; in the
used car market it was hard to find a fuel efficient vehicle, but SUVs and larger cars were in
abundance.
Required You are shopping for a car for your youngest son who has just received his drivers
license. By clear agreement with your son, and because of local legal restrictions on new drivers
such as those limiting the time of day they can drive, you do not expect the car to be driven many
miles in the average month. Your son will be the only one allowed to use the car and he by
agreement must purchase the gasoline for it. You will pay for insurance and for any mechanical
repairs. Your criteria for the purchase of the car are first safety and then reliability and the cost of
insurance. What type of car would you considera small fuel-efficient car or a large car?
Q.18 Special Order Award Plus Co. manufactures medals for winners of athletic events and
other contests. Its manufacturing plant has the capacity to produce 10,000 medals each month;
current monthly production is 7,500 medals. The company normally charges \$175 per medal.
Variable costs and fixed costs for the current activity level of 75 percent follow:
Current Product Costs
Variable costs
Manufacturing
Labor
\$ 375,000
Material
262,500
Marketing
187,500
Total variable costs
\$ 825,000
Fixed costs
Manufacturing
\$ 275,000
Marketing
175,000
Total fixed costs
\$ 450,000
Total costs
\$1,275,000
Award Plus has just received a special one-time order for 2,500 medals at \$100 per medal. For
this particular order, no variable marketing costs will be incurred. Cathy Senna, a management
accountant with Award Plus, has been assigned the task of analyzing this order and
recommending whether the company should accept or reject it. After examining the costs, Senna
suggested to her supervisor,
Gerard LePenn who is the controller, that they request competitive bids from vendors for the
raw materials since the current quote seems high. LePenn insisted that the prices are in line with

other vendors and told her that she was not to discuss her observations with anyone else. Senna
later discovered that LePenn is a brother-in-law of the owner of the current raw materials supply
vendor.
Required
1. Determine if Award Plus Co. should accept the special order and why.
2. Discuss at least three other considerations that Cathy Senna should include in her analysis of
the special order.
3. Explain how Cathy Senna should try to resolve the ethical conflict arising out of the
controllers insistence that the company avoid competitive bidding.
Solution:
1) Price of special order \$100 Relevant Cost = (\$375,000+262,500)/7,500 = 85
Contribution on special order \$15 per unit \$15 x 2,500 = \$37,500 total
contribution Positive contribution: Accept the Special Order

## 2) Other considerations a. Is the order likely to lead to further regular business

with this customer? b. Is the order in the strategic best interest of the firm,
for example, will it support or undermine Award Plus desired image in the
market? c. While Award Plus has just enough capacity to complete the
special order, will there be other costs in addition to the variable
manufacturing costs in order to complete the order, that is, special tooling or
set up costs, etc d. See part 3. below

Q.19 Special Order Duvernoy Industries produces high-quality automobile seat covers. Its
success in the industry is due to its quality, although all of its customers, the automakers, are very
cost conscious and negotiate for price cuts on all large orders. Noting that the auto supply
business is becoming increasingly competitive, Duvernoy is looking for a way to meet the
challenge. It is negotiating with Chen, Inc., a large mail-order auto parts and accessories retailer,
to purchase a large order of seat covers. Much of Duvernoys business is seasonal and cyclical,
fluctuating with the varying demands of the large automakers. Duvernoy would like to keep its
plants busy throughout the year by reducing these seasonal and cyclical fluctuations. Keeping the
flow of product moving through the plants at a steady level is helpful in keeping costs down;
extra overtime and machine setup and repair costs are incurred
when production levels fluctuate. Chen has agreed to a large order but only at a price of \$30 per
set. The special order can be produced in one batch with available capacity. Duvernoy prepared
these data:
Next months operating information without the special order (per unit, for 10,000 units, made
in 10 batches of 1,000 each)
Sales price
Per unit costs
Variable manufacturing costs
Variable marketing costs
Fixed manufacturing costs
Fixed marketing costs
Special order information
Sales

\$80
20
8
40
3
2,000 units

## Sales price per unit

\$30
No variable marketing costs are associated with this order, but Marc Jones, the firms president,
has spent \$6,000 during the past three months trying to get Chen to purchase the special order.
Required
1. How much will the special order change Duvernoy Industries total operating income?
2. How might the special order fit into Duvernoys competitive situation?
Q.20 Special Order: ABC Costing (Continuation of Problem 19) Assume the same
information as for Problem 19, except that the \$40 fixed manufacturing overhead consists of \$15
per unit batch related costs and \$25 per unit facilities level fixed costs. Also, assume that each
new batch causes increased costs of \$15,000 per batch; the remainder of the fixed costs do not
vary with the number of units produced or the number of batches.
Required
1. Calculate the relevant unit and total cost of the special order, including the new information
2. If accepted, how would the special order affect Duvernoys operating income?
3. Suppose that Chen notifies Duvernoy it must reduce its order to 1,000 units because of
changes in orders it has received. How would this change affect your answer in Parts 1 and 2?

Q.21 Make or Buy Martens, Inc., manufactures a variety of electronic products. It specializes in
commercial and residential products with moderate to large electric motors such as pumps and
fans. Martens is now looking closely at its production of attic fans, which included 10,000 units
in the prior year and had the following costs. These costs included \$100,000 of allocated fixed
manufacturing overhead. Martens has capacity to manufacture 15,000 attic fans per year.
Martens believes demand in the coming year will be 20,000 attic fans. The company has looked
into the possibility of purchasing the attic fans from another manufacturer to help it meet this
demand. Harris Products, a steady supplier of quality products, would be able to provide up to
9,000 attic fans per year at a price of \$46 per fan delivered to Martenss facility.
For each unit of product that Martens sells, regardless of whether the product has been purchased
from Harris or is manufactured by Martens, there is an additional selling and administrative cost
of \$20, which includes an allocated \$6 fixed overhead cost per unit. The following is based on
the production of 10,000 units in the prior year.
Selling price per unit
\$72.00
Costs per unit
Electric motor
\$ 6.00
Other parts
8.00
Direct labor (\$15/hr.)
15.00
15.00
20.00
64.00
Profit per unit
\$ 8.00
Required
1. Assuming Martens plans to meet the expected demand for 20,000 attic fans, how many should
it manufacture and how many should it purchase from Harris Products? Explain your reasoning
with calculations.

2. Independent of Part 1 above, assume that Beth Johnson, Martenss product manager, has
suggested that the company could make better use of its fan department capacity by
manufacturing marine pumps instead of fans. Johnson believes that Martens could expect to use
the production capacity to produce and sell 25,000 pumps annually at a price of \$60 per pump.
Johnsons estimate of the costs to manufacture the pumps is presented below. If Johnsons
suggestion is not accepted, Martens would sell 20,000 attic fans instead. Should Martens
manufacture pumps or attic fans? Information on the sales price and costs for the marine pumps
follows.
Selling price per pump
Costs per unit
Electric motor
Other parts
Direct labor (\$15/hr.)
Profit per pump

\$60.00
\$ 5.50
7.00
7.50
9.00
20.00 49.00
\$11.00

Q.22 Special Order BallCards Inc. sells baseball cards in packs of 15 in drugstores throughout
the country. It is the third leading firm in the industry. BallCards has been approached by
Pennock Cereal Inc., which would like to order a special edition of cards to use as a promotion
with its cereal.
BallCards would be solely responsible for designing and producing the cards. Pennock wants to
order 25,000 sets and has offered \$23,750 for the total order. Each set will consist of 33 cards.
Ball- Cards currently produces cards in sheets of 132.
Production, marketing, and other costs (per sheet)
Direct materials
\$ 1.20
Direct labor
0.20
0.40
0.15
Variable marketing
0.10
Fixed marketing
0.35
0.10
Costs for special order
Design
2,000
Other setup costs
5,500
BallCards would incur no marketing costs for the special order. It has the capacity to accept this
order without interrupting regular production.
Required
1. Should Ballcards accept the special order? Support your answer with appropriate
computations.
2. What are the important strategic issues in the decision?
Solution:
1) Relevant Cost Data
Direct Material
Direct Labour
Total Cards per sheet
No of cards per set
No of set in each set
Required no of sheets to manufacture

\$1.20
\$0.20
\$0.40
\$1.80
132
33
4
6,250

Total Cost =
(1.80 6,250) + \$2,000 + \$5500 =
Total Cost per set (\$18750 / 25,000)=

\$18750
\$0.75

\$0.95

## Therefore. The company should Accept the Order

2)
Q.23 Special Order Green Grow Inc. (GGI) manufactures lawn fertilizer and because of its very
high quality often receives special orders from agricultural research groups. For each type of
fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for
that type of fertilizer. GGIs operating capacity is 22,000 one-hundred-pound bags per month,
and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm
just received a request for a special order of 5,000 one-hundred-pound bags of fertilizer for
\$125,000 from APAC, a research organization. The production costs would be the same,
although delivery and other packaging and distribution services would cause a one-time \$2,000
cost for GGI. The special order would be processed in two batches of 2,500 bags each. The
following information is provided about GGIs current operations:
Sales and production cost data for 20,000 bags, per bag
Sales price
\$38
Variable manufacturing costs 15
Variable marketing costs
2
Fixed manufacturing costs
12
Fixed marketing costs
2
No marketing costs would be associated with the special order. Since the order would be used in
research and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags.
Required
1. Should GGI accept the special order? Explain why or why not.
2. What would be the change in operating income if the special order is accepted?
3. Suppose that after GGI accepts the special order, it finds that unexpected production delays
will not allow it to supply all 5,000 units from its own plants and meet the promised delivery
date. It can provide the same materials by purchasing them in bulk from a competing firm. The
materials would then be packaged in GGI bags to complete the order. GGI knows the
competitors materials are very good quality, but it cannot be sure that the quality meets its own
exacting standards. There is not enough time to carefully test the competitors product to
determine its quality. What should GGI do?
Solution:
Offering price , special order
Less: Relevant Cost :
Variable Manufacturing Costs (\$15 5000 units =
Delivery Cost (limp sum)
Opportunity Cost (CM on lost sales):
=(sp var mfg cost var selling cost ) lost sales
Income effect of accepting special sales order

\$125,000
\$75,000
\$2000
\$63,000

\$140,000
(\$15,000)

Thus, based n short-term financial implications, the company should Reject the order

Q.24 Special Order; ABC Costing (Continuation of Problem 23) Assume the same
information as for
Problem 23, except that the \$12 fixed manufacturing overhead consists of \$8 per unit batch
related costs and \$4 per unit facilities level fixed costs. Also, assume that each new batch causes
increased costs of \$5,000 per batch; the remainder of the batch level costs consists of tools and
supervision labor that do not vary with the number of batches. The remainder of fixed costs do
not vary with the number of units produced or the number of batches.
Required
1. Calculate the relevant unit and total cost of the special order, including the new information
2. If accepted, how would the special order affect GGIs operating income?
Solution:
Breakdown of total fixed manufacturing cost (\$12 per unit 20,000 unit):
Total batch-related costs (\$8 20,000)
Incremental costs (\$5000 20 batches) =
Non-incremental batch-related cost =
Facilities related fixed overhead costs = \$4 20,000 =
Total fixed manufacturing overhead costs =

\$160,000
\$100,000
\$60,000
\$80,000
\$240,000

First determine relavent batch-related fixed ovh cost: the special order would cause two new
batches, at an incremental cost of \$5000 per batch so the relevant batch-related cost is
\$10,000 then,

## Relevant cost for the special order :

Variable manufacturing cost (\$15 5000) =
\$75,000
Incremental batch-related both ovh costs (see above)=
\$10,000
One-time delivery cost =
\$2,000
CM on lost sales (opportunity cost):
Sales (\$38 3,000) =
\$114,000
Less: Variable cost (\$5 + \$2) 3,000=
\$51,000
Less: cost for three batches (@\$5000 per batch )= \$15,000
\$48000
Total relevant cost for special order

\$135000

\$125000

\$10000

## Should reject the order

Q.25 Profitability Analysis, Scarce Resources Santana Company has met all production
requirements for the current month and has an opportunity to produce additional units of product
with its excess capacity. Unit selling prices and costs for three models of one of its product lines
are as follows:
No Frills
Standard Options
Super
Selling price
\$30
\$35
\$50
Direct materials
9
11
11
Direct labor (\$10/hour)
5
10
15
3
6
9
3
6
6
Variable overhead is charged to products on the basis of direct labor dollars; fixed overhead is
charged to products on the basis of machine-hours.
Required
1. If Santana Company has excess machine capacity and can add more labor as needed (neither
machine capacity nor labor is a constraint), the excess production capacity should be devoted to
producing which product or products?
2. If Santana Company has excess machine capacity but a limited amount of labor time, the
production capacity should be devoted to producing which product or products?
Solution:
1) When there is no limit on production capacity, the super model should be manufactured
since it has the highest contribution margin per unit.
No Frills
Selling price
DM
DL(\$10 / hour)
Total Variable cost
Contribution Margin

\$30
\$9
\$5
\$3
\$17
\$13

Standard options

Super

\$35

\$50

\$11
\$10
\$6
\$27

\$11
\$15
\$9
\$35

\$8

\$15

2) When labor is in short supply, the No Frills Model should be manufactured since it has
the highest
Hourly wage rate DL = \$10.00
No Frill
DL cost per unit (above)
\$5.00
No. of DLHs required
0.50

Standard options
\$10.00
1.00

Super
\$15.00
1.50

Contribution margin
Labor hours required
CM/DLH

\$13
0.5
\$26.00

\$8
1.0
\$8.00

\$15
1.5
\$10.00

Q.26 Profitability Analysis Im not looking forward to breaking the news, groaned Charlie
Wettle, the controller of Meyer Paint Company. He and Don Smith, state liaison for the firm,
were returning from a meeting with representatives of the Virginia General Services
Administration (GSA), the agency that administers bidding on state contracts. Charlie and Don
had expected to get the specifications to bid on the traffic paint contract, soon to be renewed.
Instead of picking up the bid sheets and renewing old friendships at the GSA, however, they
were stunned to learn that Meyers paint samples had performed poorly on the road test and the
firm was not eligible to bid on the contract.
Meyers two main product lines are traffic paint, used for painting yellow and white lines on
highways, and commercial paints, sold through local retail outlets. The paint production process
is fairly simple. Raw materials are kept in the storage area that occupies approximately half of
the plant space.
Large tanks that resemble silos are used to store the latex that is the main ingredient in their
paint.
These tanks are located on the loading dock just outside the plant so that when a shipment of
latex arrives, it can be pumped directly from the tank truck into these storage tanks. Latex is
extremely sensitive to cold. It cannot be stored outside or even shipped in the winter without
heated trucks, which are very expensive for a small firm such as Meyer.
Currently, Meyer has the traffic paint contracts for the states of Pennsylvania, North Carolina,
Delaware, and Virginia. Of last years total production of 380,000 gallons, 90 percent was traffic
paint. Of this amount, 88,000 gallons were for the Virginia contract. Each state has unique
specifications for color, thickness, texture, drying time, and other characteristics of the paint. For
example, paint sold to Pennsylvania must withstand heavy use of salt on roads during the winter.
Paint for North Carolina highways must tolerate extended periods of intense heat during summer
months.
Due to the high cost of shipping paint, most paint producers can be competitive on price only in
locations fairly close to their production facilities. Accordingly, Meyer has enjoyed an advantage
in bidding on contracts in the eastern states close to Virginia. However, one of their biggest
competitors,
Heron Paint Company of Houston, Texas, is building a new plant in North Carolina. With lower
costs due to their efficient new facility and their proximity, Heron will become a major
competitive threat. Meyers commercial paint line includes interior and exterior house paints in a
wide range of colors formulated to approximate authentic colonial colors. Because of the
historical association, the line has been well received in Virginia. Most of these paints are sold
through paint and hardware stores as the stores second or third line of paint. The large national
firms such as Benjamin Moore or Sherwin Williams provide extensive services to paint retailers
such as computerized color matching equipment. Partly because they lack the resources to
provide such amenities and partly because they have always considered the commercial paint a
sideline, Meyer has never tried to market the commercial line aggressively. Meyer sells 38,000
gallons of commercial paint per year.
Charlie is worried about the future of the company. The firms strategic goal is to provide a

quality product at the lowest possible cost and in a timely fashion. After absorbing the shock of
losing the Virginia contract, Charlie wondered whether the firm should consider increasing
production of commercial paints to lessen the companys dependence on traffic paint contracts.
Carl Bunch, who manages the day-to-day operation of the firm, believes the company can double
its sales of commercial paint if it undertakes a promotional campaign estimated to cost \$60,000.
The average price of traffic paint sold last year was \$10 per gallon. For commercial paint, the
average price was \$12.
Charlie Wettle has assembled the following data to evaluate the financial performance of the two
lines of paint. The primary raw material used in paint production is latex. The list price for latex
is \$16 per pound; 450 pounds of latex are needed to produce 1,000 gallons of traffic paint.
Commercial paint requires 325 pounds of latex per 1,000 gallons of paint. In addition to the cost
of the latex, other variable costs are as shown below.
Traffic
Commercial
Raw materials cost per gallon of paint:
Camelcarb (limestone)
0.38
0.54
Silica
0.37
0.52
Pigment
0.12
0.38
Other ingredients
0.06
0.03
Direct labor cost per gallon
0.46
0.85
Freight cost per gallon
0.78
0.43
Last year, fixed overhead costs attributable to the traffic paint totaled \$85,000, including an
estimated \$25,000 of costs directly associated with the Virginia contract; the \$25,000 can be
eliminated in approximately two years. Fixed overhead costs attributable to the commercial paint
are \$13,000.
Other manufacturing overhead costs total \$110,000. Charlie estimates that \$40,000 of this
amount is inventory handling costs that will be avoided due to the loss of the Virginia contract.
Both the remaining manufacturing overhead and the general and administrative costs of
\$140,000 are allocated equally to all gallons of paint produced.
Required
1. Calculate the contribution margin for each type of paint and total firmwide contribution under
each of the following scenarios:
Scenario A Current production, including the Virginia contract
Scenario B Without either the Virginia contract or the promotion to expand sales of commercial
paint
Scenario C Without the Virginia contract but with the promotion to expand sales of the
commercial paint
2. Determine whether scenario B or C (per Part 1 above) should be chosen by Meyer and explain
why, including a consideration of the strategic context.
Solution:

Q.27 Special Order New Life, Inc., manufactures skin creams, soaps, and other products
primarily for people with dry and sensitive skin. It has just introduced a new line of product that

removes the spotting and wrinkling in skin associated with aging. It sells these products in
pharmacies and department stores at prices somewhat higher than those of other brands because
of New Lifes excellent reputation for quality and effectiveness.
New Life currently has very low utilization of plant capacity. Two years ago, in anticipation of
rapid growth, the company opened a large new manufacturing plant, which has yet to be utilized
more than 50 percent. Partly for this reason, New Life has sought new partners and was able,
with the help of financial analysts, to locate suitable business partners. The first potential partner
identified in this search was a large supermarket chain, SuperValue, which is interested in the
partnership because it wants New Life to manufacture an age cream to sell in its stores. The
product would be essentially the same as the New Life product but packaged with the
SuperValue brand name.
The agreement would pay New Life \$2.00 per unit and would allow SuperValue a limited right
to advertise the product as manufactured for SuperValue by New Life. New Lifes CFO has made
some calculations and has determined that the direct materials, direct labor, and other variable
costs needed for the SuperValue order would be about \$1.00 per unit as compared to the full cost
of \$2.50 (materials, labor, and overhead) for the equivalent New Life product.
Required Should New Life accept the proposal from SuperValue? Why or why not?
Solution:
Q.28 Project-Analysis, Sales Promotions Hillside Furniture Company makes outdoor furniture
from recycled products, including plastics and wood by-products. Its three furniture products are
gliders, chairs with footstools, and tables. The products appeal primarily to cost-conscious
consumers and those who value the recycling of materials. The company wholesales its products
to retailers and various mass merchandisers. Because of the seasonal nature of the products, most
orders are manufactured during the winter months for delivery in the early spring. Michael Cain,
founder and owner, is dismayed that sales for two of the products are tracking below budget. The
following chart shows pertinent year-to-date data regarding the companys products.
Certain that the shortfall was caused by a lack of effort by the sales force, Michael has suggested
to Lisa Boyle, the sales manager, that the company announce two contests to correct this
situation before it deteriorates. The first contest is a trip to Hawaii awarded to the top salesperson
if incremental glider sales are attained to close the budget shortfall. The second contest is a golf
weekend, complete with a new set of golf clubs, awarded to the top salesperson if incremental
sales of chairs with footstools are attained to close the budget shortfall. The Hawaiian vacation
would cost \$16,500 and the golf trip would cost \$12,500.

Number of units
Average sales price
Variable costs
Direct labor
Hours of labor
Cost per hour
Direct material
Sales commission

Glider
Actual Budget
2,600
4,000
\$80.00 \$85.00

## Chair with Footstool

Actual Budget
6,900
8,000
\$61.00 \$65.00

Table
Actual Budget
3,500
3,300
\$24.00 \$25.00

2.50
\$11.00
\$16.00
\$15.00

3.25
\$ 9.50
\$11.00
\$10.00

0.60
\$ 9.00
\$ 6.00
\$ 5.00

2.25
\$10.00
\$15.00
\$15.00

3.00
\$ 9.25
\$10.00
\$10.00

0.50
\$ 9.00
\$ 5.00
\$ 5.50

Required
1. Explain whether either contest is desirable or not.

Q.29 Make or Buy GianAuto Corporation manufactures parts and components for
manufacturers and suppliers of parts for automobiles, vans, and trucks. Sales have increased each
year based in part on the companys excellent record of customer service and reliability. The
industry as a whole has also grown as auto manufacturers continue to outsource more of their
production, especially to cost-efficient manufacturers such as GianAuto. To take advantage of
lower wage rates and favorable business environments around the world, Gian has located its
plants in six different countries.
Among the various GianAuto plants is the Denver Cover Plant, one of Gian Autos earliest
plants.
The Denver Cover Plant prepares and sews coverings made primarily of leather and upholstery
fabric and ships them to other GianAuto plants where they are used to cover seats, headboards,
door panels, and other GianAuto products.
Ted Vosilo is the plant manager for the Denver Cover Plant, which was the first GianAuto plant
in the region. As other area plants were opened, Ted was given the responsibility for managing
them in recognition of his management ability. He functions as a regional manager although the
budget for him and his staff is charged to the Denver Cover Plant.
Ted has just received a report indicating that GianAuto could purchase the entire annual output
of Denver Cover from suppliers in other countries for \$60 million. He was astonished at the low
outside price because the budget for Denver Cover Plants operating costs for the coming year
was set at \$82 million. He believes that GianAuto will have to close operations at Denver Cover
to realize the \$22 million in annual cost savings.
Denver Covers budget for operating costs for the coming year follows:
DENVER COVER PLANT
Budget for Operating Costs
For the Year Ending December 31, 2010
(000s omitted)
Materials
\$ 32,000
Labor
Direct
\$ 23,000
Supervision
3,000
Indirect plant
4,000
30,000
Depreciationequipment
\$ 5,000
Depreciationbuilding
3,000
Pension expense
4,000
Plant manager and staff
2,000
Corporate allocation
6,000
20,000
Total budgeted costs
\$ 82,000
Additional facts regarding the plants operations are as follows:

Due to Denver Covers commitment to use high-quality fabrics in all its products, the
purchasing department placed blanket purchase orders with major suppliers to ensure the receipt
of sufficient materials for the coming year. If these orders are canceled as a result of the plant
closing, termination charges would amount to 15 percent of the cost of direct materials.
Approximately 400 plant employees will lose their jobs if the plant is closed. This includes all
direct laborers and supervisors as well as the plumbers, electricians, and other skilled workers
classified as indirect plant workers. Some would be able to find new jobs, but many would have
difficulty doing so. All employees would have difficulty matching Denver Covers base pay of
\$14.40 per hour, the highest in the area. A clause in Denver Covers contract with the union
could help some employees; the company must provide employment assistance to its former
employees for 12 months after a plant closing. The estimated cost to administer this service is \$1
million for the year.
Some employees would probably elect early retirement because GianAuto has an excellent
plan.
In fact, \$3 million of the 2010 pension expense would continue whether Denver Cover is open or
not.
Ted and his staff would not be affected by closing Denver Cover. They would still be
responsible for managing three other area plants.
Denver Cover considers equipment depreciation to be a variable cost and uses the units-of
production method to depreciate its equipment and the customary straight-line method to
depreciate its building.
Required
1. Explain GianAutos competitive strategy and how this strategy should be considered with
regard to the Denver Plant decision. Identify the key strategic factors that should be considered
in the decision.
2. GianAuto Corporation plans to prepare a strategic analysis to use in deciding whether to close
the Denver Cover Plant. In your analysis, use the above information, and include consideration
of global competition and GianAutos competitive strategy.
Solution

Excel

2. The following costs can be avoided by closing the plant, and are therefore relevant to the plant-closing decision:

Materials

\$32,000

Labor:
Direct

\$23,000

Supervision

\$3,000

Indirect--plant

\$4,000

\$30,000

\$1,000

## Term charges on cancelled DM purchases

\$4,800

Employment assistance

\$1,000
TOTAL

\$68,800

## The following costs are not relevant to the decision:

Depreciation--equipment

\$5,000

Depreciation--building

\$3,000

\$3,000

## Plant manager and staff

\$2,000

Corporate allocation

\$6,000
\$19,000

The depreciation amounts are not relevant to the decision because they represent
portions of sunk costs that are being written off during 2007. Three-fourths of the
annual pension expense (\$3,000) is not relevant because it would continue whether
or not the plant is closed. The amount for plant manager and staff is not relevant
because Vosilo and his staff would continue with GianAuto and administer three
remaining plants. Corporate allocation is not relevant because this represents costs
incurred outside Denver Cover and assigned to the plant.

Q.30 Make or Buy Bernards Specialty Manufacturing (BSM) produces custom vehicles
limousines, buses, conversion vans, and small trucksfor special order customers. It customizes
each vehicle to the customers specifications. BSM has been growing at a steady rate in recent
years in part because of the increased demand for specialty luxury vehicles. The increased
demand has also caused new competitors to enter the market for these types of vehicles. BSM
management considers its competitive advantage to be the high quality of its manufacturing.
Much of the work is handmade, and the company uses only the best parts and materials. Many
parts are made in-house to control for highest quality. Because of the increased competition,
price competition is beginning to become a factor for the industry, and BSM is becoming more
concerned about cost controls and cost reduction. It has controlled them by purchasing materials
and parts in bulk, paying careful attention to efficiency in scheduling and working different jobs,
and improving employee productivity.
The increased competition has also caused BSM to reconsider its strategy. Upon review with the
help of a consultant, BSM management has decided that it competes most effectively as a
differentiator based on quality of product and service. To reinforce the differentiation strategy,
BSM has implemented a variety of quality inspection and reporting systems. Quality reports are
viewed at all levels of management, including top management.
To decrease costs and improve quality, BSM has begun to look for new outside suppliers for
certain parts. For example, BSM can purchase a critical suspension part, now manufactured inhouse, from Performance Equipment Inc. for a price of \$105. Buying the part would save BSM
10 percent of the labor and variable overhead costs and \$68 of materials costs. The current
manufacturing costs for the suspension assembly are as follows:
Materials
\$192
Labor
75
150
150
Total cost for suspension assembly \$567
Required
1. How would total costs be affected if BSM chose to purchase the part rather than to continue to
manufacture it?
2. Should BSM purchase or manufacture the part? Include strategic considerations in your
Solution:
EXCEL Pr-9-53
Q.31 Make or Buy, Review of Learning Curves Henderson Equipment Company has produced
a pilot run of 50 units of a recently developed cylinder used in its finished products. The cylinder
has a one-year life, and the company expects to produce and sell 1,650 units annually. The pilot
run required 14.25 direct labor-hours for the 50 cylinders, averaging 0.285 direct labor-hours per
cylinder.
Henderson has experienced an 80 percent learning curve on the direct labor-hours needed to
produce new cylinders. Past experience indicates that learning tends to cease by the time 800
partsare produced.

## Hendersons manufacturing costs for cylinders follows:

Direct labor
\$12.00 per hour
10.00 per hour
16.60 per hour
Materials
4.05 per unit
Henderson has received a quote of \$7.50 per unit from Lytel Machine Company for the
additional 1,600 cylinders needed. Henderson frequently subcontracts this type of work and has
always been satisfied with the quality of the units produced by Lytel.
Required
1. If Henderson manufactures the cylinders, determine
a. The average direct labor-hours per unit for the first 800 cylinders (including the pilot run)
produced. Round calculations to three decimal places.
b. The total direct labor-hours for the first 800 cylinders (including the pilot run) produced.
2. After completing the pilot run, Henderson must manufacture an additional 1,600 units to fulfill
the annual requirement of 1,650 units. Without regard to your answer in requirement 1, assume
that
The first 800 cylinders produced (including the pilot run) required 100 direct labor-hours.
The 800th unit produced (including the pilot run) required 0.079 hour.
Calculate the total manufacturing costs for Henderson to produce the additional 1,600 cylinders
required.
3. Determine whether Henderson should manufacture the additional 1,600 cylinders or purchase
Solution:
Excel Pr-9-54
Q.32 CC Ltd manufactures four types of camera which all use lens, a component made only in
one factory. Each lens costs \$50 to purchase. Due to a prolonged strike of workers in the
lens factory, CC Ltd will only be able to purchase 20 000 this year.
The following information relates to each type of camera manufactured by CC Ltd.
Digital
cameras

Cine
cameras

10 000

4 000

Lens

50

100

200

350

Other direct
materials
Direct labour

40

90

98

300

20

30

30

55

Maximum
demand(units)
Costs per camera

Closed Medical
Circuit cameras
cameras
3 000
500

Fixed costs

60

80

40

70

50

70

52

490

## Selling price per

camera

220

370

420

1 265

REQUIRED:
a) Calculate the numbers of each type of camera to be produced and sold that would
maximise the profit of CC Ltd.
b) Prepare a marginal cost statement showing the profit for the year.
c) Calculate the total annual sales revenue required by CC Ltd to break-even this year.

Q.33 Profitability Analysis; Review of Master Budget RayLok Incorporated has invented a
secret process to improve light intensity and manufactures a variety of products related to this
process. Each product is independent of the others and is treated as a separate profit/loss
division. Product (division) managers have a great deal of freedom to manage their divisions as
they think best. Failure to produce target division income is dealt with severely; however,
rewards for exceeding ones profit objective are, as one division manager described them, lavish.
The DimLok Division sells an add-on automotive accessory that automatically dims a vehicles
headlights by sensing a certain intensity of light coming from a specific direction. DimLok has
had a new manager in each of the three previous years because each manager failed to reach
RayLoks target profit. Donna Barnes has just been promoted to manager and is studying ways to
meet the current target profit for DimLok.
DimLoks two profit targets for the coming year are \$800,000 (20 percent return on the
investment in the annual fixed costs of the division) plus an additional profit of \$20 for each
DimLok unit sold. Other constraints on division operations are
Production cannot exceed sales because RayLoks corporate advertising program stresses
completely new product models each year, although the models might have only cosmetic
changes.
DimLoks selling price cannot vary above the current selling price of \$200 per unit but may
vary as much as 10 percent below \$200.
A division manager can elect to expand fixed production or selling facilities; however, the
target objective related to fixed costs is increased by 20 percent of the cost of such expansion.
Furthermore, a manager cannot expand fixed facilities by more than 30 percent of existing fixed
cost levels without approval from the board of directors.
Donna is now examining data gathered by her staff to determine whether DimLok can
achieve its target profits of \$800,000 and \$20 per unit. A summary of these reports shows the
following:
Last years sales were 30,000 units at \$200 per unit.
DimLoks current manufacturing facility capacity is 40,000 units per year but can be increased
to 80,000 units per year with an increase of \$1,000,000 in annual fixed costs.

Present variable costs amount to \$80 per unit, but DimLoks vendors are willing to offer raw
materials discounts amounting to \$20 per unit, beginning with unit number 60,001.
Sales can be increased up to 100,000 units per year by committing large blocks of product to
institutional buyers at a discounted unit price of \$180. However, this discount applies only to
sales in excess of 40,000 units per year.
Donna believes that these projections are reliable and is now trying to determine what DimLok
must do to meet the profit objectives that RayLoks board of directors assigned to it.
Required
1. Determine the dollar amount of DimLoks present annual fixed costs.
2. Determine the number of units that DimLok must sell to achieve both profit objectives. Be
3. Without regard to your answer in Part 2, assume that Donna decides to sell 40,000 units at
\$200 per unit and 24,000 units at \$180 per unit. Prepare a master budget income statement for
DimLok showing whether her decision will achieve DimLoks profit objectives.
4. Assess DimLoks competitive strategy.
5. Identify the strategic factors that DimLok should consider.
Solution:
Excel
Pr-9-55
Q.34 Motiwala Jewelers is considering a special order for 10 handcrafted gold bracelets to be
given as gifts to members of a wedding party. The normal selling price of a gold bracelet is
\$389.95 and its unit product cost is \$264.00 as shown below:
Direct materials . . . . . . . . . . . . . . \$143.00
Direct labor . . . . . . . . . . . . . . . . . 86.00
Manufacturing overhead . . . . . . . 35.00
Unit product cost . . . . . . . . . . . . . \$264.00
Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry
is produced in any given period. However, \$7 of the overhead is variable with respect to the
number of bracelets produced. The customer who is interested in the special bracelet order would
like special filigree applied to the bracelets. This filigree would require additional materials
costing \$6 per bracelet and would also require acquisition of a special tool costing \$465 that
would have no other use once the special order is completed. This order would have no effect on
the companys regular sales and the order could be fulfilled using the companys existing
capacity without affecting any other order.
Required:
What effect would accepting this order have on the companys net operating income if a special
price of \$349.95 is offered per bracelet for this order? Should the special order be accepted at
this price?
Q.35 Profitability Analysis; Pricing Home Suites Inn is a national chain of high-quality hotels,
which is popular with business travelers. Many of Home Suites best customers will stay for a
week or longer during their business trip. Top management of the hotel chain made a strategic
move in the prior year to raise profitability by raising room rates an average of 10 percent, from

an average of \$80 to \$88. Home Suites main competitors (the total market for hotels that
compete with Home- Suites is about 50,000,000 daily room occupancy per year) responded by
keeping their rates low, and as a result, Home Suites sales fell from 5,000,000 annual room
occupancy to 4,000,000 rooms,
a 20 percent fall in room sales, and a new low in occupancy rate for the firm. The fall in room
sales was greater than expected, so Home Suites consulted a marketing expert who explained
that customers in this market are very sensitive to price changes, and furthermore, that while a
reduction in price increases volume and an increase in price reduces volume, the effect is not
proportional; price decreases improve sales at a faster rate than price increases reduce sales.
Home Suites is now considering a reduction in price to \$76, with the expectation of increasing
sales by as much as 50 percent over the current level of 4,000,000 rooms. The consultant assures
Home Suites that if it returned to the \$80 price, sales would return to the 5,000,000 level. The
table below shows the room costs per occupied rooms at various annual occupancy levels.
Room Occupancy (thousands)
4,000
4,500 5,000 5,500 6,000 6,500
Per Room Costs
Supplies
\$ 3.30 \$ 3.32 \$ 3.28 \$ 3.31 \$ 3.31 \$ 3.30
Direct labor
15.41
15.37 15.41 15.40 15.38
15.31
Room level
10.55
10.48 10.46 10.44 10.59
10.48
Hotel level
23.35
21.01 19.12 18.01 16.33
15.11
Total operating cost
\$52.61 \$50.18 \$48.27 \$47.16 \$45.64 \$44.20
30.11
27.66 25.12
22.88 21.01
19.43
Total cost
\$82.72 \$77.84 \$73.39 \$70.04 \$66.65 \$63.63
Note: Room-level overhead costs are laundry, housekeeping, and supplies, which vary with the
number of rooms occupied; hotel-level overhead includes general maintenance, registration staff,
pool expense, and other expenses, which do not vary with the number of rooms occupied. Selling
and administrative expense is the cost of hotel management, the reservation network, and other
fixed costs.
Required What do you think is the best strategy for Home Suites regarding room pricing?
Develop a spreadsheet analysis that shows what would be the effect on contribution of the
different pricing policies Home Suites has used or is considering.
Solution:
EXCEL= Pr-9-56
Q.36 Make or Buy The Midwest Division of the Paibec Corporation manufactures
subassemblies used in Paibecs final products. Lynn Hardt of Midwests profit planning
department has been assigned the task of determining whether Midwest should continue to
manufacture a subassembly component,
MTR-2000, or purchase it from Marley Company, an outside supplier. Marley has submitted
a bid to manufacture and supply the 32,000 units of MTR-2000 that Paibec will need for 2010 at
a unit price of \$17.30. Marley has assured Paibec that the units will be delivered according to

Paibecs production specifications and needs. The contract price of \$17.30 is applicable only in
2010, but Marley is interested in entering into a long-term arrangement beyond 2010.
Lynn has submitted the following information regarding Midwests cost to manufacture 30,000
units of MTR-2000 in 2009.
Direct material
\$195,000
Direct labor
120,000
Factory space rental
84,000
Equipment leasing costs
36,000
Other manufacturing costs 225,000
Total manufacturing costs
\$660,000
Lynn has collected the following information related to manufacturing MTR-2000:
Equipment leasing costs represent special equipment used to manufacture MTR-2000. Midwest
can terminate this lease by paying the equivalent of one months lease payment for each of the
two years left on its lease agreement.
Forty percent of the other manufacturing overhead is considered variable. Variable overhead
changes with the number of units produced, and this rate per unit is not expected to change
in 2010. The fixed manufacturing overhead costs are not expected to change whether Midwest
manufactures or purchases MTR-2000. Midwest can use equipment other than the leased
equipment in its other manufacturing operations.
Direct materials cost used in the production of MTR-2000 is expected to increase 8 percent in
2010.
Midwests direct labor contract calls for a 5 percent wage increase in 2010.
The facilities used to manufacture MTR-2000 are rented under a month-to-month rental
agreement.
Midwest would have no need for this space if it does not manufacture MTR-2000. Thus,
Midwest can withdraw from the rental agreement without any penalty.
John Porter, Midwest divisional manager, stopped by Lynns office to voice his opinion
regarding the outsourcing of MTR-2000. He commented, I am really concerned about
outsourcing MTR- 2000. I have a son-in-law and a nephew, not to mention a member of our
bowling team, who work on MTR-2000. They could lose their jobs if we buy that component
from Marley. I really would appreciate anything you can do to make sure the cost analysis shows
that we should continue making MTR-2000. Corporate is not aware of materials cost increases
and maybe you can leave out some of those fixed costs. I just think we should continue making
MTR-2000.
Required
Prepare a relevant cost analysis that shows whether the Midwest Division should make MTR2000 or purchase it from Marley Company for 2010.
Solution: EXCEL Pr-9-56