Overhead and administrative costs are not affected by producing this tool.

The current purclase price is $$100,000$ per unit, so the report recommends that $K_{ty{k}_s}.$

tinue to purchase the product from CO $.$ Inc.

Required

Assume that Krylon could experience labor$-$cost improvements on the tool production cong

with in $80$ precent learning curve. Should Krylon produce or purchase its annual requifencist

eight tools? Explain your answer. $($Note that the $80$ percent learning rate coefficient is $-0\mathrm{.}321)$

TIVE CASE

$(0)5-4,5,9)5-72.$ Cost Estimation, CVP Analysis, and Decision Making

Luke Corporation produces a variety of products, each within their own division. Layd Jey,

managers at Luke developed and began marketing a new chewing gum, Basket success that faets

machines. The product, which sells for $$5\mathrm{.}25$ peopping Bubbs.

ers expected, and the company is considerg the past $12$ months follows.

The product$-$line income statement for

All products at Luke receive an allocation of corporate overhead costs, which is computed $2$

$5$ percent of product revenue. The $5$ percent rate is computed based on the most recent yeas

corporate cost as a percentage of revenue. Data on corporate costs and revenues for the posting

years follow.

Roy O$.$ Andre, the product manager for Bubbs, is concerned about whether the product w

dropped by the company and has employed you as a financial consultant to help with some an

sis. In addition to the information given, Mr$.$ Andre provides you with the following data oa mons

uet costs for Bubbs.

Required

Sunk Stores has requested a quote for a special order of Bubbs. This order would not be sub$-$

feet to any corporate allocation $($and would not affect corporate costs$).$ What is the minimum

price Mr$.$ Andre can offer Bunk without reducing profit any further?

h$.$ How many cases of Bubbs does Luke have to sell in order to break even on the product?

c$.$ Suppose Luke has a requirement that all products have to earn $5$ percent of sales $($after tax and

corporate allocations$)$ or they will be dropped. How many eases of Bubbs does Mr$.$ Andre

heed to sell to avoid seeing Bubbs dropped?

d$.$ Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much

will Luke's profits increase or decrease? Assume that fixed production costs can be avoided if

Bubbs is dropped.

SOLUTIONS TO SELF$-$STUDY

Average monthly fixed costs $=$$$115,10024=$$$4\mathrm{.}796$

Variable cost per $DLH=$$$90,00012,000=$$$7\mathrm{.}50$

Variable cost per machine$-$hour $=$$$90,00014,400=$$$6\mathrm{.}25$

Variable cost per unit produced $=$$$90,00020,000=$$$4\mathrm{.}50$

Based on the statistical results, overhead costs appear more closely related to output measured

in baskets than to labor$-$hours. The coefficient of determination $(R^2)$ is $\mathrm{.}54$ for labor$-$hours and

$\mathrm{.}78$ for baskets. This suggests that $54$ percent of the variation in overhead costs is "explained"

by labor$-$hours, but $78$ percent is "explained" by output. However, we would not want to make

the determination based on statistical results alone. We should ensure that there are good rea$-$

sons that overhead costs are related to output.How to solve

Overhead and administrative costs are not affected by producing this tool.

The current purclase price is $$100,000$ per unit, so the report recommends that $K_{ty{k}_s}.$

tinue to purchase the product from CO $.$ Inc.

Required

Assume that Krylon could experience labor$-$cost improvements on the tool production cong

with in $80$ precent learning curve. Should Krylon produce or purchase its annual requifencist

eight tools? Explain your answer. $($Note that the $80$ percent learning rate coefficient is $-0\mathrm{.}321)$

TIVE CASE

$(0)5-4,5,9)5-72.$ Cost Estimation, CVP Analysis, and Decision Making

Luke Corporation produces a variety of products, each within their own division. Layd Jey,

managers at Luke developed and began marketing a new chewing gum, Basket success that faets

machines. The product, which sells for $$5\mathrm{.}25$ peopping Bubbs.

ers expected, and the company is considerg the past $12$ months follows.

The product$-$line income statement for

All products at Luke receive an allocation of corporate overhead costs, which is computed $2$

$5$ percent of product revenue. The $5$ percent rate is computed based on the most recent yeas

corporate cost as a percentage of revenue. Data on corporate costs and revenues for the posting

years follow.

Roy O$.$ Andre, the product manager for Bubbs, is concerned about whether the product w

dropped by the company and has employed you as a financial consultant to help with some an

sis. In addition to the information given, Mr$.$ Andre provides you with the following data oa mons

uet costs for Bubbs.

INTEGRATIVE CASE

$($LO$)5-4,5,95-72.$ Cost Estimation, CVP Analysis, and Decision Making

Luke Corporation p