(Note: This type of decision is similar to dropping a product line.) Hallas Company manufactures a fast-bonding glue in its Northwest plant. The company normally produces and sells 40,000 gallons of the glue each month. This glue, which is known as MJ-7, is used in the wood industry to manufacture plywood. The selling price of MJ-7 is $35 per gallon, variable costs are $21 per gallon, fixed manufacturing overhead costs in the plant total $230,000 per month, and the fixed selling costs total $310,000 per month. Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Hallas Companys sales to temporarily drop to only 11,000 gallons per month. Hallas Companys management estimates that the strikes will last for two months, after which sales of MJ-7 should return to normal. Due to the current low level of sales, Hallas Companys management is thinking about closing down the Northwest plant during the strike. If Hallas Company does close down the Northwest plant, fixed manufacturing overhead costs can be reduced by $60,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $14,000. Because Hallas Company uses Lean Production methods, no inventories are on hand. The following additional information is available about the tour: a. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. b. The Bus maintenance and preparation cost on the previous page is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the companys fleet of buses in good operating condition. c. Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible. d. Liability insurance premiums are based on the number of buses in the companys fleet. e. Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff. Required: 1. Prepare an analysis showing what the impact will be on the companys profits if this tour is discontinued. 2. The companys tour director has been criticized because only about 50% of the seats on Bluelines tours are being filled as compared to an industry average of 60%. The tour director has explained that Bluelines average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen. PROBLEM 1219 Sell or Process Further [LO7] (Prepared from a situation suggested by Professor John W. Hardy.) Abilene Meat Processing Corporation is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as is or to process them further into filet mignon and New York cut steaks. Management believes that a 1-pound T-bone steak would yield the following profit: Wholesale selling price ($2.25 per pound) . . . . . . . . . . . . . . . . . . . $2.25 Less joint costs incurred up to the split-off point where T-bone steak can be identifi ed as a separate product . . . . . . . . . 1.70 Profi t per pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.55 gar11005_ch12_527-578.indd 565 19/11/10 3:43 PM Confi rming Pages 566 Chapter 12 Required: 1. The Finnish army would like to make a one-time-only purchase of 10,000 pairs of ski poles for its mountain troops. The army would pay a fixed fee of 4 per pair, and in addition it would reimburse the Pietarsaari Oy company for its unit manufacturing costs (both fixed and variable). Due to a recession, the company would otherwise produce and sell only 40,000 pairs of ski poles this year. (Total fixed manufacturing overhead cost would be the same whether 40,000 pairs or 50,000 pairs of ski poles were produced.) The company would not incur its usual variable selling expenses with this special order. If the Pietarsaari Oy company accepts the armys offer, by how much would net operating income increase or decrease from what it would be if only 40,000 pairs of ski poles were produced and sold during the year? 2. Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell 50,000 pairs of ski poles through regular channels. Thus, accepting the armys offer would require giving up sales of 10,000 pairs at the normal price of 32 a pair. If the armys offer is accepted, by how much will net operating income increase or decrease from what it would be if the 10,000 pairs were sold through regular channels? PROBLEM 1222 Make or Buy Decision [LO3] Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the companys Zippo pen line, at a price of $0.48 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity. Bronson Company estimates that if the suppliers offer were accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%. Under present operations, Bronson Company manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $4 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total $50,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pens (one box) is given below:

Required: 1. Assuming that the strikes continue for two months, would you recommend that Hallas Company close the Northwest plant? Explain. Show computations to support your answer. 2. At what level of sales (in gallons) for the two-month period should Hallas Company be indifferent between closing the plant or keeping it open? Show computations. (Hint: This is a type of break-even analysis, except that the fixed cost portion of your break-even computation should include only those fixed costs that are relevant [i.e., avoidable] over the two-month period.)