Assignment:
Part A: Fixed and Variable Cost
Stuart Manufacturing produces metal picture frames. The company's income statements for the last two years are given below:
Last year This year
Units sold.............................. 50,000 70,000
Sales...................................... $800,000 $1,120,000
Cost of goods sold .................... 550,000 710,000
Gross margin ........................ 250,000 410,000
Selling and administrative expense ...50,000 190,000
Net operating income ................ $100,000 $220,000
The company has no beginning or ending inventories.
Required:
a. Estimate the company's total variable cost per unit and its total fixed costs per year. (Remember that this is a manufacturing firm.)
b. Compute the company's contribution margin for this year.
Part B: Cost-Volume-Profit Analysis
Belli-Pitt, Inc, produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:
Sales................................... $540,000
Variable expenses.............. 360,000
Contribution margin .......... 180,000
Fixed expenses .................. 120,000
Net operating income ........ $60,000
The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories.
Required:
a. Given the present situation, compute
1. The break-even sales in kilograms.
2. The break-even sales in dollars.
3. The sales in kilograms that would be required to produce net operating income of $90,000.
4. The margin of safety in dollars.
b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease.
1. Should the company choose the lease or the royalty plan?
2. Under the royalty plan compute break-even point in kilograms.
3. Under the royalty plan compute break-even point in dollars.
4. Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.
Part C: Relevant Cost/Special Order
Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead ....... $225,000
Fixed manufacturing overhead............ $630,000
Direct labor-hours................................ 45,000
Component P0 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows:
Direct materials ......................................... $21.00
Direct labor................................................ 40.80
Manufacturing overhead applied............... 32.30
Unit product cost ....................................... $94.10
An outside supplier has offered to supply component P0 for $78 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Gottshall chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?
Part D: Relevant Cost/Make or Buy Decision
Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year.
Per Unit
Direct materials.......................................... $8.70
Direct labor ................................................ $2.70
Variable overhead ...................................... $3.30
Supervisor's salary..................................... $1.90
Depreciation of special equipment ............ $1.80
Allocated general overhead........................ $5.50
An outside supplier has offered to make the part and sell it to the company for $21.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of buying part U67 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
Part E: Relevant Cost/Sell or Process Further
Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into end product X. Intermediate product B can be further processed into end product Y. The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed further into an end product? Explain.
Part F: Relevant Cost/Dropping a Product
The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:
Sales ................................................................ $150,000
Variable expenses............................................ $72,000
Fixed manufacturing expenses........................ $50,000
Fixed selling and administrative expenses...... $33,000
In the company's accounting system all fixed expenses of the company are fully allocated to products.
Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued.
A. According to the company's accounting system, what is the net operating income earned by product V86O?
B. What would be the effect on the company's overall net operating income if product V86O were dropped?