| a. | If the school receives actual sales orders for 735 shirts, what amount of profit will the school earn? What is the cost of waste due to excess inventory? PROFIT ( ) WASTE DUE TO EXCESS INVENTORY ( ) | b. | If the school receives actual sales orders for 835 shirts, what amount of profit will the school earn? What amount of opportunity cost will the school incur? PROFIT ( ) OPPORTUNITY COST ( ) | 11 Allocating overhead cost among products LO 12-3 | Chandler Hats Corporation manufactures three different models of hats: Vogue, Beauty, and Glamour. Chandler expects to incur $644,000 of overhead costs during the next fiscal year. Other budget information follows. | | | Vogue | Beauty | Glamour | Total | | Direct labor hours | | 4,200 | | | 6,200 | | | 3,600 | | | 14,000 | | | Machine hours | | 2,000 | | | 2,200 | | | 2,240 | | | 6,440 | | | | | a. | Use direct labor hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product. | | | PRODUCTION ALLOCATION x WEIGHT = ALLOCATED COST VOGUE BEAUTY GLAMOUR TOTAL | b. | Use machine hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product. | | | PRODUCTION ALLOCATION x WEIGHT = ALLOCATED COST VOGUE BEAUTY GLAMOUR TOTAL 5 Using the contribution margin approach for a special order decision LO 13-2 | Elsea Company, which produces and sells a small digital clock, bases its pricing strategy on a 25 percent markup on total cost. Based on annual production costs for 12,000 units of product, computations for the sales price per clock follow. | | | | | | Unit-level costs | $ | 228,000 | | | Fixed costs | | 60,000 | | | | | | | | Total cost (a) | | 288,000 | | | Markup (a 0.25) | | 72,000 | | | | | | | | Total sales (b) | $ | 360,000 | | | | | | | | Sales price per unit (b 12,000) | $ | 30 | | | | | | | | | | a-1. | Elsea has excess capacity and receives a special order for 5,000 clocks for $22 each. Calculate the contribution margin per unit from the special order. | | | CONTRIBUTION MARGIN ( ) PER UNIT | b. | Prepare a contribution margin income statement for the special order. ELSEA COMPANY INCOME STATEMENT (USE THESE WORDS BELOW TO COMPOSE INCOME STATEMENT) Direct labor Direct materials Fixed costs Incremental revenue Variable costs | 8 Asset replacement decision LO 13-5 | A machine purchased three years ago for $316,000 has a current book value using straight-line depreciation of $177,000; its operating expenses are $36,000 per year. A replacement machine would cost $239,000, have a useful life of ten years, and would require $10,000 per year in operating expenses. It has an expected salvage value of $71,000 after ten years. The current disposal value of the old machine is $81,000; if it is kept 10 more years, its residual value would be $16,000. | | | | Calculate the total costs in keeping the old machine and purchase a new machine. | | KEEP OLD MACHINE PURCHASE NEW MACHINE TOTAL COSTS ( ) ( ) 10 Eliminating a segment LO 13-4 | Niklos Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the mens department has a sales staff of nine employees, the manager of the womens department has six employees, and the manager of the childrens department has three employees. All departments are housed in a single store. In recent years, the childrens department has operated at a net loss and is expected to continue to do so. Last years income statements follow. | | | Mens Department | Womens Department | Childrens Department | | Sales | $ | 720,000 | | $ | 500,000 | | $ | 220,000 | | | Cost of goods sold | | (274,500 | ) | | (183,600 | ) | | (105,875 | ) | | | | | | | | | | | | | Gross margin | | 445,500 | | | 316,400 | | | 114,125 | | | Department managers salary | | (70,000 | ) | | (59,000 | ) | | (39,000 | ) | | Sales commissions | | (124,200 | ) | | (93,600 | ) | | (36,900 | ) | | Rent on store lease | | (39,000 | ) | | (39,000 | ) | | (39,000 | ) | | Store utilities | | (22,000 | ) | | (22,000 | ) | | (22,000 | ) | | | | | | | | | | | | | Net income (loss) | $ | 190,300 | | $ | 102,800 | | $ | (22,775 | ) | | | | | | | | | | | | | | | a-1. | Calculate the contribution to profit of the children's department. (Negative amount should be indicated by a minus sign.) | CONTRIBUTION TO PROFIT (LOSS) ( ) 11 Comprehensive problem including special order, outsourcing, and segment elimination decisions LO 13-2, 13-3, 13-4 | Lang Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The companys chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segments operating activities. The relevant range for the production and sale of the calculators is between 34,000 and 74,000 units per year. | | | | | | Revenue (47,000 units $11) | $ | 517,000 | | | Unit-level variable costs | | | | | Materials cost (47,000 $3) | | (141,000 | ) | | Labor cost (47,000 $2) | | (94,000 | ) | | Manufacturing overhead (47,000 $0.30) | | (14,100 | ) | | Shipping and handling (47,000 $0.25) | | (11,750 | ) | | Sales commissions (47,000 $2) | | (94,000 | ) | | | | | | | Contribution margin | | 162,150 | | | Fixed expenses | | | | | Advertising costs | | (31,000 | ) | | Salary of production supervisor | | (67,000 | ) | | Allocated companywide facility-level expenses | | (83,000 | ) | | | | | | | Net loss | $ | (18,850 | ) | | | | | | | | | (Consider each of the requirements independently.) CONTRIBUTION MARGIN LOSS ( ) | | a-1. | A large discount store has approached the owner of Lang about buying 7,000 calculators. It would replace The Math Machines label with its own logo to avoid affecting Langs existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $5.80 per calculator. Calculate the contribution margin from the special order. (Negative amount should be indicated by a minus sign.) | | b-1. | Lang has an opportunity to buy the 47,000 calculators it currently makes from a reliable competing manufacturer for $6.50 each. The product meets Langs quality standards. Lang could continue to use its own logo, advertising program, and sales force to distribute the products. Should Lang buy the calculators or continue to make them? | b-2. | Calculate the total cost for Lang to make and buy the 47,000 calculators. MAKE BUY TOTAL COST ( ) ( ) | c-1. | Calculate the contribution to profit from operating the calculator division. (Negative amount should be indicated by a minus sign.) CONTRIBUTION TO PROFIT (LOSS) ( ) | | | | | |
