Chapter 23 Assignment

Part 1 of 2

Exercise #1 (Special Order):

The ABC Company is a manufacturer of coffee makers, which it then sells to retail stores such as Walmart, Target, etc. During the first half of the year, the company reported the following operating results while operating at 80% of plant capacity:

Sales (500,000 units) $90,000,000

Cost of goods sold 54,000,000

Gross profit 36,000,000

Operating expenses 24,000,000

Net income $12,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit.

In September, the ABC company received a request for a special order for 40,000 machines at $135 each from a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should the ABC Company accept the special order? Justify your answer.

Exercise #2 (Make or Buy):

The Triangle Company is a major bicycle manufacturer in the USA. In so doing, it manufactures all bicycle components, including bicycle seats. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year.

A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.

Instructions

(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.

(b) Should the Triangle Company buy the seats from the outside supplier? Justify your answer.

Exercise #3 (Sell as is or Process Further):

The Dupont Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2019, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $12.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below:

Direct materials $6.00

Direct labor 1.20

Variable manufacturing overhead .80

Fixed manufacturing overhead .60

Total manufacturing costs $8.60

The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon.

Instructions

Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint. Justify your answer.

Exercise #4 (Retain or Replace):

A Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines:

Old Machine New Machine

Original purchase cost $340,000 $370,000

Accumulated depreciation 230,000

Estimated life 5 years 5 years

It is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives.

Instructions

Determine whether the company should purchase the new machine. Justify your answer.