Answer exercise 11-4 to 11-7
EXERCISE 11-4 Special Order Decision LO11-4 Imperial Jewelers manufactures and sells a gold bracelet for $189.95. The company's accounting system says that the unit product cost for this bracelet is $149.00 as shown below: Direct materials . . . . . . . . . ....... $ 84.00 Direct labor. .. . . . . . . 45.00 Manufacturing overhead . . . . . . . ... 20.00 Unit product cost. .. $149.00 The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $169.95 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $250 and that would increase the direct materials cost per bracelet by $2.00. The special tool would have no other use once the special order is completed. To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $4.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party's order using its existing manufacturing capacity. Required: I. What is the financial advantage (disadvantage) of accepting the special order from the wedding party? 2. Should the company accept the special order? EXERCISE 11-5 Volume Trade-Off Decisions LO11-5 Outdoor Luggage, Inc., makes high-end, hard-sided luggage for sports equipment. Data concerning three of the company's most popular models appear below. Ski Guard Golf Guard Fishing Guard Selling price per unit. . . . . . . . . . . .. ........... $200 $300 $255 Variable cost per unit . .. . . . . ... $60 $140 $55 Plastic injection molding machine processing time required to produce one unit .. . . . . . 2 minutes 5 minutes 4 minutes Pounds of plastic pellets per unit . . . . . . . . . . . . ... . . 7 pounds 4 pounds 8 pounds Required: 1. If we assume that the total time available on the plastic injection molding machine is the constraint in the production process, how much contribution margin per minute of the constrained resource is earned by each product? 2. Which product offers the most profitable use of the plastic injection molding machine? 3 If we assume that a severe shortage of plastic pellets has required the company to cut back its production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product? 4. Which product offers the most profitable use of the plastic pellets? 5. Which product has the largest contribution margin per unit? Why wouldn't this product be the most profitable use of the constrained resource in either case? EXERCISE 11-6 Managing a Constrained Resource LO11-6 Portsmouth Company makes fine colonial reproduction furniture. Upholstered furniture is one of its major product lines and the bottleneck on this production line is time in the upholstery shop. Upholstering is a craft that takes years of experience to master and the demand for upholstered furniture far exceeds the company's capacity in the upholstering shop. The company's only variable cost is direct materials. Infor- mation concerning three of its upholstered chairs appears below: Recliner Sofa Love Seat Selling price per unit. ..... . . . . . . .... $1,400 $1,800 $ 1,500 Variable cost per unit . . $800 $1,200 $1,000 Upholstery shop time required to produce one unit.. . . . . . .. 8 hours 10 hours 5 hours Chapter 11 Required: 1. More time could be made available in the upholstery shop by asking the employees who work in this shop to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of a premium should the company be willing to pay in terms of an overtime premium per hour to keep the upholstery shop open after normal working hours? 2. A small nearby upholstering company has offered to upholster furniture for Portsmouth at a fixed charge of $45 per hour, The management of Portsmouth is confident that this upholstering company's work is high quality and their craftsmen can work as quickly as Portsmouth's own craftsmen on the simpler upholstering jobs such as the Love Seat. How much additional contribution margin per hour can Portsmouth earn if it provides the raw materials to the nearby company and then hires it to upholster the Love Seats? 3. Should Portsmouth hire the nearby upholstering company? Explain. EXERCISE 11-7 Sell or Process Further Decisions LO11-7 Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,090 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows: Product Selling Price Quarterly Output A. .. . .. ............ $16 per pound 15,000 pounds $8 per pound 20,000 pounds C. .. ............. $25 per gallon 4,000 gallons Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below: Additional Product Processing Costs Selling Price A. ... .......IN $63,000 $20 per pound $80,000 $13 per pound C... ............ $36,000 $32 per gallon Required: 1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point? 2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further
