Exercise $1$:

You are trying to decide whether to trade in your inkjet printer for a more recent model. Your

usage pattern will remain unchanged, but the old and new printers use different ink cartridges.

Indicate if the following items are relevant or irrelevant to your decision:

Item R $/$ IRR

a$.$ The price of the new printer

b$.$ The price paid for the old printer

c$.$ The trade$-$in value of the old printer

d$.$ Paper cost

e$.$ The difference between ink cartridges$$ costs

Exercise $2$:

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector$-$Cardz

with a special order. The Hall of Fame wishes to purchase $56,000$ baseball card packs for a special

promotional campaign and offers $$0\mathrm{.}38$ per pack, a total of $$21,280.$ Collector$-$Cardz$$s total

production cost is $$0\mathrm{.}58$ per pack, as follows:

Variable costs:

Direct materials $ $0\mathrm{.}11$

Direct labor $0\mathrm{.}09$

Variable

overhead

$0\mathrm{.}08$

Fixed overhead $0\mathrm{.}30$

Total cost $ $0\mathrm{.}58$

Collector$-$Cardz has enough excess capacity to handle the special order.

Requirements $($see next page$)$

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Exercise $2$ continued...

$1.$ Prepare a differential analysis to determine whether Collector$-$Cardz should accept the

special sales order.

$2.$ Now assume that the Hall of Fame wants special hologram baseball cards. Collector$-$Cardz

will spend $$5,700$ to develop this hologram, which will be useless after the special order is

completed. Should Collector$-$Cardz accept the special order under these circumstances,

assuming no change in the special pricing of $$0\mathrm{.}38$ per pack?

ACT $220$ You Do Chapter $11$

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Exercise $3$:

Top managers of Video Avenue are alarmed by their operating losses. They are considering

dropping the DVD product line. Company accountants have prepared the following analysis to

help make this decision:

Total fixed costs will not change if the company stops selling DVDs$.$

Requirements

$1.$ Prepare a differential analysis to show whether Video Avenue should drop the DVD product

line.

$2.$ Will dropping DVDs add $$37,000$ to operating income? Explain.

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$3.$ Assume that Video Avenue can avoid $$39,000$ of direct fixed costs by dropping the DVD

product line. Prepare a differential analysis to show whether Video Avenue should stop

selling DVDs$.$

Exercise $4$:

Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such

that Tread Light could use all its available machine hours to produce either model. The two models

are processed through the same production departments. Data for both models are as follows:

Per Unit

Deluxe Regular

Sales price $ $1,030$ $ $610$

Costs:

Direct materials $320130$

Direct labor $88180$

Variable manufacturing overhead $27090$

Fixed manufacturing overhead$*10234$

Variable operating expenses $12163$

Total costs $901497$

Operating income $ $129$ $ $113$

$*$allocated on the basis of machine hours

Requirements

$1.$ What is the constraint?

ACT $220$ You Do Chapter $11$

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$2.$ Which model should Tread Light produce? $($Hint: OH is allocated on basis of machine hours.

Deluxe uses $3$ times the Fixed OH that Regular uses. This means that the Deluxe uses $3$x the

machine hours compared to Regular. Consider CM per equivalent machine hour.$)$

$3.$ If Tread Light should produce both models, compute the mix that will maximize operating

income.

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Exercise $5$:

Suppose Roasted Pepper restaurant is considering whether to $(1)$ bake bread for its restaurant

in$-$house or $(2)$ buy the bread from a local bakery.

$$ The chef estimates that variable costs of making each loaf include $$0\mathrm{.}52$ of ingredients,

$$0\mathrm{.}27$ of variable overhead $($electricity to run the oven$),$ and $$0\mathrm{.}79$ of direct labor for

kneading and forming the loaves.

$$ Allocating fixed overhead $($depreciation on the kitchen equipment and building$)$ based

on direct labor, Roasted Pepper assigns $$0\mathrm{.}96$ of fixed overhead per loaf. None of the

fixed costs are avoidable.

$$ The local bakery would charge $$1\mathrm{.}78$ per loaf.

Requirements

$1.$ What is the full product unit cost of making the bread in$-$house?

$2.$ Should Roasted Pepper bake the bread in$-$house or buy from the local bakery? Why?