Assignment
Problem 1: Special Order
Gary's Company produces high quality shirts. Shirts must be well made because of frequent washings. Currently, Gary sells 10,000 shirts at $60 each with the capacity to produce 11,000 shirts. Gary is considering a special order for 1,800 shirts at a price of $40. Currently, Gary has the following costs:
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Unit Costs
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$200,000
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Facility Costs
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$140,000
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If Gary accepts the special order, they will incur an additional $2 per shirt in foreign currency transaction costs. No other product or facility costs will change.
Determine the impact of the special order on Gary's operating income.
Problem 2: Make or Buy
Bob's Auto manufactures cars and currently uses only 50% of its manufacturing facility to make 30,000 cars per year. Bob could rent the unused portion of its plant and receive $3,000 a month. Alternatively, the company could utilize more of its facility by producing its own tires. It currently purchases tires at $30 per set of four. If Bob produces the tires, it would incur $12 per set for direct materials, $10 for direct labor, and $24 for overhead (30% is avoidable).
Should the company make or buy the tires?
Problem 3: Keep or Drop a Product
Bern, Inc. is considering dropping one product line due to continuing losses. If the product line is discontinued, then Bern could avoid $111,300 per year in fixed costs. Revenue and cost data for the product line for the past year follow:
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Sales (20,000 units)
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$300,000
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Variable costs
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180,000
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Contribution margin
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120,000
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Fixed costs
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140,000
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a. From a purely economic perspective, Bern would be indifferent between discontinuing or continuing the product line at 18,550 units of annual sales. Why?
b. Suppose that if the product line were dropped, the production and sale of other products would increase so as to generate a $15,000 increase in the contribution margin received from the other products. If all other conditions are the same (and the fixed cost reduction of $111,300 is still applicable), what is the change in annual operating income from dropping the product line?
Problem 4: Keep or Drop a Service
Viena is a regional firm that offers audit, tax, and consulting services. The partners are concerned about the profitability of their audit business, and a closure decision might be forthcoming. If the firm drops the audit activities, it might do more tax work. Only 30 percent of facility costs associated with auditing disappears by dropping the auditing function. More tax work can increase tax revenues by 40 percent, but tax service-level costs also increase by 40 percent. Total facility cost is unchanged whether or not tax work is increased. Segmented income statements for these three product lines follow.
Auditing Tax Consulting
Sales $300,000 $500,000 $600,000
Service-level cost $250,000 $300,000 $350,000
Shared facility cost $50,000 $60,000 $80,000
Operating income (loss) $0 $140,000 $170,000
i. Determine which alternative Viena should choose: (1) keep the auditing (2) drop the auditing line without increasing tax work or (3) drop auditing and increase tax work.
Problem 5: Direct Method and Step-Down Method
Mike's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $320,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $80,000 are allocated based on the number of employees. The costs of operating departments A and B are $160,000 and $240,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
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Support Departments
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Production Departments
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Maintenance Department
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Personnel Department
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A
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B
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Budgeted costs
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$320,000
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$80,000
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$160,000
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$240,000
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Budgeted maintenance-hours
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NA
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800
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960
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640
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Number of employees
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40
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NA
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160
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480
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Using the direct method, what amount of Maintenance Department costs will be allocated to Department B?
Using the step-down method, what amount of Maintenance Department cost will be allocated to Department B if the service department with the highest percentage of interdepartmental support service is allocated first?
Problem 6: Performance Evaluation
Division A of Gwinnett Company, produces wedges. Division Z's manager has discretion in pricing and other decisions. Division Z is expected to generate a minimum required rate of return of at least 18% on its operating assets. The division has average operating assets of $900,000. The wedges are sold for $8 each. Variable costs are $3 per wedges, and fixed costs total $390,000 per year. The division has a capacity of 120,000 wedges each year.
How many wedges must Division Z sell each year to generate the desired rate of return on its assets
i. Assume that Division Z's current ROI equals the minimum required rate of 18%. The divisional manager wants to increase the selling price per wedge by 5%. Market studies indicate that an increase in the selling price would cause sales to drop by 15,000 units each year. However, operating assets could be reduced by $65,000 due to decreased needs for accounts receivable and inventory. Compute the new ROI if these changes are made.
ii. Refer to the original data (i.e. used for question A.). Assume again that the Division's current ROI equals the required rate of 18%. Rather than increase the selling price, the sales manager want to reduced the selling price by 10%. Market studies indicate that this would fill the plant to capacity. In order to carry the greater level of sales, however, operating assets would increase by $28,000. Compute ROI if these changes are made.