1.

Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:

	Total Cost		Unit Cost
Direct materials	$25,000		$5.00
Direct labor	15,000		3.00
Variable manufacturing overhead	7,500		1.50
Variable marketing overhead	8,500		1.70
Fixed plant overhead	30,000		6.00
Total	$86,000		17.20

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number.

Required:

2. List the relevant cost(s) of internal production and of external purchase.

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

????

3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

_______make__________

$ _________?________

4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

_________buy________

$ _________?________

2.

Structuring a Special-Order Problem

The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $4.20 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows:

Fixed overhead will not be affected by whether or not the special order is accepted.

Required:

1. What are the relevant costs and benefits of the two alternatives?

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

??????

Should the company accept or reject the special order? _______reject__________

2. By how much will operating income increase or decrease if the order is accepted? _______decrease__________ by $ _______?__________

4

Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint

Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 30 minutes of machine time.

Assume that a maximum of 47,650 units of each sweatshirt can be sold.

Required:

If required, round your answers to the nearest whole number.

1. What is the contribution margin per hour of machine time for each type of sweatshirt?

	Contribution Margin
Swoop	$ _______50__________
Rufus	$ ________30_________

2. What is the optimal mix of sweatshirt?

	Optimal Mix
Swoop	____________?_____ units
Rufus	___________?______ units

3. What is the total contribution margin earned for the optimal mix? $ ________?_________

5.

Special Order

Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $9.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 89,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $13 per unit. Unit cost information is as follows:

Direct materials	$3.10
Direct labor	2.50
Variable overhead	1.15
Fixed overhead	1.80
Total	$8.55

Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20.

Required:

Conceptual Connection: Should Smooth Move accept the special order? ________yes_________

By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value. _________increase________ $ __________?_______

6.

Keep or Buy, Sunk Costs

Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor: Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following:

In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am.

Required:

1. Conceptual Connection: In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern?

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

???????????

2. Conceptual Connection: Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am? ________?_________

7.

Sell or Process Further, Basic Analysis

Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow:

The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000.

Management is considering processing Delta beyond the split-off point, which would increase the sales value of Delta to $75,000. However, to process Delta further means that the company must rent some special equipment that costs $15,400 per quarter. Additional materials and labor also needed will cost $8,500 per quarter.

Required:

1. What is the operating profit earned by the four products for one quarter? $ ________?_________

2. Conceptual Connection: Should the division process Delta further or sell it at split-off? ________company should process delta further_________

What is the effect of the decision on quarterly operating profit?

Gross profit would _______increase__________ by $ _________________ .

8.

Target Costing

H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market. The toaster will have four slots that adjust in thickness to accommodate both slim slices of bread and oversized bagels. The target price is $65. Banks requires that new products be priced such that 24% of the price is profit.

Required:

If required, round your answers to two decimal places.

1. Calculate the amount of desired profit per unit of the new toaster. $ ________?_________

2. Calculate the target cost per unit of the new toaster. $ ________?_________

9.

Cost-Based Pricing Decision

Jeremy Costa, owner of Costa Cabinets Inc., is preparing a bid on a job that requires $2,250 of direct materials, $2,025 of direct labor, and $1,238 of overhead. Jeremy normally applies a standard markup based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of other factors (e.g., competitive pressure). Last year?s income statement is as follows:

Sales	$136,500
Cost of goods sold	80,535
	Gross margin	$55,965
Selling and administrative expenses	46,300
	Operating income	$9,665

Required:

1. Calculate the markup that Jeremy will use. ________?_________ %

2. What is Jeremy's initial bid price? $ _______?__________

1. Structuring a MakeorBuy Problem Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following: Total Cost Direct materials $25,000 Direct labor 15,000 Variable manufacturing overhead 7,500 Variable marketing overhead 8,500 Fixed plant overhead 30,000 Total $86,000 Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number. Required: 2. List the relevant cost(s) of internal production and of external purchase. The input in the box below will not be graded, but may be reviewed and considered by your instructor. ???? 3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.) _______make__________ $ _________?________ 4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.) _________buy________ $ _________?________ 2. Structuring a SpecialOrder Problem The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $4.20 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows: Fixed overhead will not be affected by whether or not the special order is accepted. Required: 1. What are the relevant costs and benefits of the two alternatives? The input in the box below will not be graded, but may be reviewed and considered by your instructor. ?????? Should the company accept or reject the special order? _______reject__________ 2. By how much will operating income increase or decrease if the order is accepted? _______decrease__________ by $ _______?__________ 4 Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 30 minutes of machine time. Assume that a maximum of 47,650 units of each sweatshirt can be sold. Required: If required, round your answers to the nearest whole number. 1. What is the contribution margin per hour of machine time for each type of sweatshirt? Contribution Margin Swoop $ _______50__________ Rufus $ ________30_________ 2. What is the optimal mix of sweatshirt? Optimal Mix Swoop ____________?_____ units Rufus ___________?______ units 3. What is the total contribution margin earned for the optimal mix? $ ________?_________ 5. Special Order Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a perunit price of $9.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 89,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $13 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.50 Variable overhead 1.15 Fixed overhead 1.80 Total $8.55 Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20. Required: Conceptual Connection: Should Smooth Move accept the special order? ________yes_________ By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value. _________increase________ $ __________?_______ 6. Keep or Buy, Sunk Costs Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor: Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following: In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am. Required: 1. Conceptual Connection: In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern? The input in the box below will not be graded, but may be reviewed and considered by your instructor. ??????????? 2. Conceptual Connection: Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am? ________?_________ 7. Sell or Process Further, Basic Analysis Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow: The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000. Management is considering processing Delta beyond the splitoff point, which would increase the sales value of Delta to $75,000. However, to process Delta further means that the company must rent some special equipment that costs $15,400 per quarter. Additional materials and labor also needed will cost $8,500 per quarter. Required: 1. What is the operating profit earned by the four products for one quarter? $ ________?_________ 2. Conceptual Connection: Should the division process Delta further or sell it at splitoff? ________company should process delta further_________ What is the effect of the decision on quarterly operating profit? Gross profit would _______increase__________ by $ _________________ . 8. Target Costing H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market. The toaster will have four slots that adjust in thickness to accommodate both slim slices of bread and oversized bagels. The target price is $65. Banks requires that new products be priced such that 24% of the price is profit. Required: If required, round your answers to two decimal places. 1. Calculate the amount of desired profit per unit of the new toaster. $ ________?_________ 2. Calculate the target cost per unit of the new toaster. $ ________?_________ 9. CostBased Pricing Decision Jeremy Costa, owner of Costa Cabinets Inc., is preparing a bid on a job that requires $2,250 of direct materials, $2,025 of direct labor, and $1,238 of overhead. Jeremy normally applies a standard markup based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of other factors (e.g., competitive pressure). Last year's income statement is as follows: Sales $136,500 Cost of goods sold Gross margin 80,535 $55,965 Selling and administrative expenses 46,300 $9,665 Operating income Required: 1. Calculate the markup that Jeremy will use. ________?_________ % 2. What is Jeremy's initial bid price? $ _______?__________ Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner