Graduate Managerial Accounting...Case 29(Show all work). Once you have read over what is required please reply as to if you are comfortable to accept. Don't just accept and hold.

Differential Analysis: The Key to Decision Making Direct materials ........................................... . Direct labor .............................................. . Variable overhead ........................................ . Fixed overhead ($2.80 general company overhead, $1.60 depreciation and, $0.75 supervision) ...... . $10.35 6.00 1.50 Total cost per drum ....................................... . $23.00 325 5.15 A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are: Alternative 1: Alternative 2: Rent new equipment and continue to make the drums. The equipment would be rented for $135,000 per year. Purchase the drums from an outside supplier at $18 per drum. The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labor and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost ($45,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 90,000 drums per year. The company's total general company overhead would be unaffected by this decision. Required: I. To assist the managing director in maldng a decision, prepare an analysis showing the total cost and the cost per drum for each of the two alternatives given above. Assume that 60,000 drums are needed each year. Which course of action would you recommend to the managing director? 2. Would your recommendation in requirement 1 be the same if the company's needs were: (a) 75,000 drums per year or (b) 90,000 drums per year? Show computations to support your answer, with costs presented on both a total and a per unit basis. 3. What other factors would you recommend that the company consider before making a decision? Additional student resources are available with Connect. m1c.onnect CASE 7-29 Sell or Process Further Decision [LO 7-7] The Scottie Sweater Company produces sweaters under the "Scottie" label. The company buys , raw wool and processes it into wool yarn from which the sweaters are woven. One spindle of wool yarn is required to produce one sweater. The costs and revenues associated with the sweaters are given below: Selling price ........................... . Cost to manufacture: Raw materials: Buttons, thread, lining .............. . Wool yarn ......................... . Total raw materials ................... . Direct labor ......................... . Manufacturing overhead .............. . Manufacturing profit (loss) ............... . $ 2.00 16.00 18.00 5.80 8.70 32.50 $ (2.50) Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. The yam is purchased by other companies for use in production of wool blankets and other wool products. Since the development of the market for the wool yarn, a continuing dispute has existed in the Scottie Sweater Company as to whether the yarn should be sold simply as yarn or processed into sweaters. Current cost and revenue data on the yarn are given below: Cases l 326 Ij BASlO 1'--------------l 326 Chapter 7 Selling price ............................ . Cost to manufacture: Raw materials (raw wool) ............... . Direct labor .......................... . Manufacturing overhead ............... . Manufacturing profit. .................... . $20.00 $7.00 3.60 5.40 16.00 $ 4.00 The market for sweaters is temporarily depressed, due to unusually warm weather in the western states where the sweaters are sold. This has made it necessary for the company to discount the selling price of the sweaters to $30 from the normal $40 price. Since the market for wool yarn has remained strong, the dispute has again surfaced over whether the yarn should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued; she is upset about having to sell sweaters at a $2.50 loss when the yarn could be sold for a $4.00 profit. However, the production superintendent does not want to close down a large portion of the factory. He argues that the company is in the sweater business, not the yarn business, and that the company should focus on its core strength. All of the manufacturing overhead costs are fixed and would not be affected even if sweaters were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labor cost. Materials and direct labor costs are variable. Required: 1. Would you recommend that the wool yarn be sold outright or processed into sweaters? Sup- 2. port your answer with appropriate computations and explain your reasoning. What is the lowest price that the company should accept for a sweater? Support your answer with appropriate computations and explain your reasoning. CASE 7-30 Ethics and the Manager; Shut Down or Continue Operations [LO 7-2] Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Rocky Mountain Region has three check processing centers, which are located in Billings, Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey. Immediately after assuming her new position, Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region's controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows: Upon seeing this report, Ms. Romeros surnmoned John Littlebear for an explanation. Romeros: What's the story on Clayton? It didn't have a loss the previous year did it? Littlebear: No, the Clayton facility has had a nice profit every year since it was opened six years ago, but Clayton lost a big contract this year. Romeros: Why? Littlebear: One of our national competitors entered the local market and bid very aggressively on the contract. We couldn't afford to meet the bid. Clayton's costs-particularly their facility expenses-are just too high. When Clayton Jost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Clayton facility. Romeros: Why is Clayton's facility expense so high? It's a smaller facility than either Billings or Great Falls and yet its facility expense is higher. Littlebear: The problem is that we are able to rent suitable facilities very cheaply at Billings and Great Falls. No such facilities were available at Clayton; we had them built. Unfortunately, there were big cost overruns. The contractor we lilied was inexperienced at this kind of work and in fact went bankrupt before the project was completed. After hiring another contractor