Graduate Managerial Accounting...Exercises 2, 4,8, 10(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.

---------------------~~ 1 310 310 l BASlO Chapter 7 2. volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead. The old Model BlOO machine is not the company's constraint, but management is considering replacing it with a new Model B300 machine because of the potential savings in direct materials with the new machine. The Model B 100 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste. EXERCISE 7-2 Dropping or Retaining a Segment [LO 7-2] The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Variable manufacturing. and selling expenses ............ 120,000 27,000 60,000 33,000 Contribution margin ........... Fixed expenses: Advertising, traceable ........ Depreciation of special equipment ............... Salaries of product-line managers ................ Allocated common fixed expenses* ................ 180,000 63,000 90,000 27,000 30,000 10,000 14,000 6,000 23,000 6,000 9,000 8,000 35,000 12,000 13,000 10,000 60,000 18,000 30,000 12,000 Total fixed expenses ........... 148,000 46,000 66,000 36,000 Net operating income {loss) ..... $ 32,000 $17,000 $ 24,000 $ (9,000) Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: 1. 2. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the vaiious product lines. EXERCISE 7-3 Make or Buy a Component [LO 7-3] Troy Engines, Ltd., manufactures a vaiiety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost 6f $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Direct materials. , ............................................... . Direct labor .................................................... . Variable manufacturing overhead ................................. . Fixed manufacturing. overhead, traceable .......................... . Fixed manufacturing overhead, allocated .......................... . Total cost ....... ; ............ : .... : ............................ . 'One-third supervisory sala~ies; $14 10 3 6' 9 $42 $210,000 150,000 45,000 90,000 135,000 $630,000 two-thirds depreciation of special equipment (no resale value). ___________M_a_na_g_e_dI A=ootiog foe M'"'9"'"o"rth Edltloo Differential Analysis: The Key to Decision Making Required: 1. 2. Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, should the outside supplier's offer be accepted? Show all computations. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Should Troy Engines, I:td., accept the offer to buy the carburetors for $35 per unit? Show all computations. EXERCISE 7-4 Evaluating a Special Order [LO 7-4] Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $189 .95 and its unit product cost is $149.00 as shown below: Direct materials ...................... . Direct labor ......................... . Manufacturing overhead .............. . Unit product cost .................... . $ 84.00 45.00 20.00 $149.00 Most of the 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 customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $2.00 per bracelet and would also require acquisition of a special tool costing $250 that would have no other use once the special order is completed. This order would have no effect on the company's regular sales and the order could be fulfilled using the company's existing capacity without affecting any other order. Required: What effect would accepting this order have on the company's net operating income if a special price of $169.95 per bracelet is offered for this order? Should the special order be accepted at this price? EXERCISE 7-5 Utilizing a Constrained Resource [LO 7-5] Outdoor Luggage Inc. makes high-end hard-sided luggage for sports equipment. Data concerning three of the company's most popular models appear below. Selling price per unit ........................ . Variable cost per unit. ....................... . Plastic injection molding machine processing time required to produce one unit. .......... . Pounds of plastic pellets per unit. ............. . 2 minutes 7 pounds 5 minutes 4 pounds The total time available on the plastic injection molding machine is the constraint in the production process. Which product would be the most profitable use of this constraint? Which product would be the least profitable use of this constraint? A severe shortage of plastic pellets has required the company to cut back its production so much that the plastic injection molding machine is no longer the bottleneck. Instead, the constraint is the total available pounds of plastic pellets. Which product would be the most profitable use of this constraint? Which product would be the least profitable use of this constraint? Which product has the largest unit contribution margin? Why wouldn't this product be the most profitable use of the constrained resource in either case? I;~ 3)1 : _ il 312 . l j I BA510 ~-~---+--- 312 Chapter 7 EXERCISE 7-6 Managing a Constrained Resource [LO 7-61 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. Information concerning three of the company's upholstered chairs appears below: Selling price per unit ............... Variable cost per unit ............... Upholstery shop time required to produce one unit ................ $1,400 $800 $1,800 $1,200 $1,500 $1,000 8 hours 10 hours 5 hours 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 should the company be willing to pay 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 should be able to work about as quicldy as Portsmouth's own craftsmen on the simpler upholstering,jobs such as the love seat. Should management accept this offer? Explain. EXERCISE 7-7 Sell or Process Further [LO 7-71 Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. 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: c ........... . 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: A .......... .. B .......... .. c ........... . $63,000 $80,000 $36,000 $20 per pound $13 per pound $32 per gallon Required: Which product or products should be sold at the split-off point and which product or products should be processed further? Show computations. EXERCISE 7-8 Utilization of a Constrained Resource [LO 7-5, LO 7-6] Barlow Company manufactures three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow: I . Managerial Accounting for Managers, Fourth Editi~--~ 13 ! Differential Analysis: The Key to Decision Making Variable expenses: Direct r.naterials .. , ......................... . Other variable expenses .................... . 24 102 72 90 32 148 Total variable expenses ....................... . 126 162 180 Contribution margin .......................... . $ 54 $108 $ 60 Contribution margin ratio ..................... . 30% 40% 25% The same raw material is used in all three products. Barlow Company has only 5,000 pounds of raw material on hand and will not be able to obtain any more of it for several weeks due to a strike in its supplier's plant. Management is trying to decide which product(s) to concentrate on next week in filling its backlog of orders. The material costs $8 per pound. Required: I. 2. 3. Compute the amount of contribution margin that will be obtained per pound of material used in each product. Which orders would you recommend that the company work on next week-the orders for product A, product B, or product C? Show computations. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials? Explain. EXERCISE 7-9 Special Order [LO 7-4] Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per year is: Direct materials .................................. . Direct labor ..................................... . Variable manufacturing overhead .................. . Fixed manufacturing overhead .................... . Variable selling and administrative expense ......... . Fixed selling and administrative expense ........... . $5.10 $3.80 $1.00 $4.20 $1.50 $2.40 The normal selling price is $21 per unit. The company's capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $14.00 per unit. This order would not affect regular sales. Required: I. 2. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company's total fixed costs.) Assume the company has 1,000 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain. EXERCISE 7-10 Make or Buy a Component [LO 7-3] For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $8.40 per unit purchase price: 313 314 314 BA510 Chapter 7 Direct materials ..... , ... , . , ........... , ...... . Direct labor ......... , ..................... , .. Supervision ..... , .. , ...... , , . , ........ , ..... . Depreciation .. , .. , . , , ....................... . Variable manufacturing overhead .......... , ... . Rent. ....................................... . Total production cost .................. , ...... . $3.10 2.70 1.50 1.00 0.60 0.30 $9.20 $60,000 $40,000 $12,000 A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: Prepare computations showing how much profits will increase or decrease as a result of making the starters. EXERCISE 7-11 Make or Buy a Component [LO 7-3] Han Products manufactures 30,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is: Direct materials ............................... . Direct labor .................................. . Variable manufacturing overhead ............... . Fixed manufacturing overhead ................. Total cost per part ............... , ............. . $ 3.60 10.00 2.40 9.00 $25.00 An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 per part. If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $80,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier. Required: Prepare computations showing how much profits will increase or decrease if the outside supplier's offer is accepted. EXERCISE 7-12 Utilization of a Constrained Resource [LO 7-5] Benoit Company produces three products, A, B, and C. Data concerning the three products follow (per unit): Variable expenses: Direct materials ...... , ................ . Other variable expenses ............... . Total variable expenses .................. . Contribution margin ..................... . Contribution margin ratio ................ . 24 24 -48 $32 40% 15 27 42 -$14 25% EXERCISE 7-2 Dropping or Retaining a Segment [LO 7-2] The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, a a racing bike. Data on sales and expenses for the past quarter follow: SOLUTION 1. No, productionand sale of the racingbikes should notbe discontinued. If the racingbikes were discontinued, then the net operating income for the company as a whole would decrease by $11,000 each quarter: Lost contribution margin Fixed costs that can be avoided: Advertising, traceable Salary of the product line manager Decrease in net operating income for the company as a whole The depreciationof the specialequipment is a sunk cost and is notrelevant to thedecision. The common costs areallocated and will continueregardless ofwhether or not theracing bikes a Alternative Solution: irt bike, a mountain bike, and ued. If the racingbikes s a whole would decrease $27,000 $6,000 10,000 16,000 $11,000 evant to thedecision. er or not theracing bikes arediscontinued;thus, they are notrelevant to thedecision. Current Total Sales Variable expenses Contribution margin Fixed expenses: Advertising, traceable Depreci ation on special equipme nt* Salaries of product managers Common allocated costs Total fixed $300,000 120,000 180,000 30,000 23,000 35,000 60,000 148,000 expenses Net operating income $32,000 nt to thedecision. Total If Racing Bikes Are Dropped $240,000 87,000 Difference: Net Operating Income Increase or (Decrease) $60,000 33,000 153,000 -27,000 24,000 6,000 23,000 25,000 60,000 132,000 $21,000 0 10,000 0 16,000 $11,000 EXERCISE 7-4 Evaluating a Special Order [LO 7-4] Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given gifts to members of a wedding party. The normal selling price of a gold bracelet is $189 .95 a unit product cost is $149.00 as shown below: Most of the manufacturing overhead is fixed and unaffected by variations in how much jewe However, $4.00 of the overhead is variable with respect to the number of bracelets produced the special bracelet order would like special filigree applied to the bracelets. This filigree wo $2.00 per bracelet and would also require acquisition of a special tool costing $250 that wou This order would have no effect on the company's regular sales and the order could be fulfill company's existing capacity without affecting any other order Required: What effect would accepting this order have on the company's net operating income if a spec offered for this order? Should the special order be accepted at this price? SOLUTION Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decis Incremental revenue Total for 20 Per Unit Bracelets $169.95 $3,399.00 Incremental costs: Variable costs: Direct materials Direct labor Variable manufacturing overhead Special filigree $ 84.00 1,680.00 45 900 4 80 2.00 40.00 Total variable cost $135.00 2,700.00 Fixed costs: Purchase of special tool 250.00 Total incremental cost 2,950.00 Incremental net operating income $ 449.00 Even though the price for the special order is below the company's regular price for such an i the special order would add to the company's net operating income and should be accepted. T conclusion would not necessarily follow if the special order affected the regular selling price bracelets or if it required the use of a constrained resource. old bracelets to be given as old bracelet is $189 .95 and its tions in how much jewelry is produced in any given period. er of bracelets produced. The customer who is interested in acelets. This filigree would require additional materials costing ol costing $250 that would have no other use once the special order is completed. the order could be fulfilled using the perating income if a special price of $169.95 per bracelet is nly the variable overhead costs in this not affected by the decision. egular price for such an item, nd should be accepted. This the regular selling price of EXERCISE 7-8 Utilization of a Constrained Resource [LO 7-5, LO 7-6] Barlow Company manufactures three products: A, B, and C. The selling price, variable costs contribution margin for one unit of each product follow: raw material on hand and will not be able to obtain any more of it for several weeks due to a strike in its supplier's plant. Management is trying to decide which product(s) to concentrate next week in filling its backlog of orders. The material costs $8 per pound. Required: I. Compute the amount of contribution margin that will be obtained per pound of material us in each product. 2. Which orders would you recommend that the company work on next week-the orders for product A, product B, or product C? Show computations. 3. A foreign supplier could furnish Barlow with additional stocks of the raw material at a sub premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials? Explain. SOLUTION 1 A 1 Contribution margin per unit 2 Direct material cost per unit 3 Direct material cost per pound 4 Pounds of material required per unit (2) (3) 5 Contribution margin per pound (1) (4) 2. The company should concentrate its available material on product A: $54 $24 $8 3 $18 A Contribution margin per pound (above) Pounds of material available Total contribution margin $18 5,000 $90,000 Although productA has the lowest contributionmargin per unit and thesecond lowest contribution marginratio, it is preferred over the othertwo products becauseit has the greatest amount of contributionmargin per poundof material, and material is thecompany's constrained resource. 3. The price BarlowCompany would be willingto pay per poundfor additional raw materials depends on how thematerials would beused. If there are unfilledorders for allof the products, Barlow would presumably use theadditional raw materialsto make more of product A. Each pound of raw materials used in product A generates $18 of contribution margin over andabove the usual cost ofraw materials. Therefore,Barlow should be willing to pay up to $26 per pound ($8 usual price plus $18 contribution margin per pound) for the additional rawmaterial, but would of coursepreferto pay far less. The upper limit of$26 per pound to manufacture more product A signalsto managers howvaluable additional raw materials are to the company. If all of the ordersfor product A have beenfilled, Barlow Company wouldthen use additional raw materials tomanufacture product C. The companyshould be willing topay up to $23 per pound ($8 usual price plus $15 contribution margin per pound) for theadditional raw materials tomanufacturemore product C, and up to $20 per pound ($8 usual price plus $12 contribution margin per pound) tomanufacture more product B if all of the orders for product C have been filled as well. ng price, variable costs, and several weeks due to a duct(s) to concentrate on r pound of material used xt week-the orders for e raw material at a substantial products, what an additional pound of B C $108 $72 $8 9 $12 $60 $32 $8 4 $15 B C $12 $15 5,000 5,000 $60,000 $75,000 second lowest causeit has the rial is thecompany's ditional raw materials for allof the make more of 18 of contribution w should be willing in per pound) for the upper limit of$26 per e additional raw uldthen use d be willing topay up nd) for theadditional ($8 usual price plus all of the orders for EXERCISE 7-10 Make or Buy a Component [LO 7-3] For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $8.40 per unit purchase price A supervisor would have to be hired to oversee production of the starters. However, the company has su and machinery that no new equipment would have to be purchased. The rent charge above is based on s The total rent on the plant is $80,000 per period. Depreciation is due to obsolescence rather than wear a Required: Prepare computations showing how much profits will increase or decrease as a result of making the star SOLUTION The target production level is 40,000 starters per period, as shown by the relation \"Cost\" Per Unit Direct materials Differential Costs Make $3.10 $3.10 Direct labor Variable manufacturing overhead 2.7 2.7 0.6 0.6 Supervision Depreciation 1.5 1 1.5 Rent 0.3 Outside purchase price Total cost $9.20 $7.90 The company should make the starters, rather than continuing to buy from the out Making the starters will result in a $0.50 per starter cost savings, or a total savings $0.50 per starter 40,000 starters = $20,000 its standard line of at could be used to e, however, pointing .40 per unit owever, the company has sufficient idle tools t charge above is based on space utilized in the plant. olescence rather than wear and tear s a result of making the starters od, as shown by the relations between per-unit and total fixed costs. Differential Costs Buy Explanation Can be avoided by buying Can be avoided by buying Can be avoided by buying Can be avoided by buying Sunk Cost Allocated Cost $8.40 $8.40 ntinuing to buy from the outside supplier. st savings, or a total savings of $20,000 per period: = $20,000