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1. c.Identify the avoidable costs and determine the amount of avoidable cost for each product. 2. Based on this information, determine the amount of avoidable cost associated with the segment? 3 3.Bennett Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and Bennett does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow. Cost Category Contract price Unit-level materials Unit-level labor Unit-level overhead Supervisor's salary Rental equipment costs Depreciation on tools (zero market value) Job A Job B $ 808,000 $ 694,000 244,500 224,350 251,050 306,900 19,000 13,700 114,870 114,870 25,700 28,300 20,800 20,800 Allocated portion of companywide facility-sustaining costs Insurance cost for job 11,000 17,300 9,900 17,300 a-1. Calculate the contribution to profit from Job A and Job B b-Assume that Job A is no longer available. Bennett's choice is to accept or reject Job B alone. Calculate the contribution to profit from Job B. 4. 4.Levy Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 3,500 units. Levy made 35,000 blankets during the prior accounting period. The cost of producing the blankets is summarized as follows. Materials cost ($28 per unit 35,000) Labor cost ($26 per unit 35,000) Manufacturing supplies ($4 35,000) Batch-level costs (10 batches at $7,000 per batch) Product-level costs Facility-level costs $ 980,000 910,000 140,000 70,000 220,000 320,000 Total costs $ 2,640,000 Cost per unit = $2,640,000 35,000 = $75.43 a-1. Rios Motels has offered to buy a batch of 500 blankets for $64 each. Levy's normal selling price is $93 per unit, calculate the relevant cost per unit for the special order. Should Levy Accept? b-Rios offered to buy a batch of 3,500 blankets for $64 per unit, calculate the relevant cost per unit for the special order. Should Levy accept the special order? 5 Niklos Boot Co. sells men's, women's, and children's boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the men's department has a sales staff of nine employees, the manager of the women's department has six employees, and the manager of the children's department has three employees. All departments are housed in a single store. In recent years, the children's department has operated at a net loss and is expected to continue to do so. Last year's income statements follow. 6 Niklos Boot Co. sells men's, women's, and children's boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the men's department has a sales staff of nine employees, the manager of the women's department has six employees, and the manager of the children's department has three employees. All departments are housed in a single store. In recent years, the children's department has operated at a net loss and is expected to continue to do so. Last year's income statements follow. Cost of materials (13,400 Units $20) Labor (13,400 Units $26) Depreciation on manufacturing equipment* Salary of supervisor of engine production Rental cost of equipment used to make engines Allocated portion of corporate-level facilitysustaining costs Total cost to make 13,400 engines $ 268,000 348,400 41,000 67,000 23,000 87,000 $ 834,400 *The equipment has a book value of $107,000 but its market value is zero. a. Determine the maximum price per unit that Rimes would be willing to pay for the engines. b. Determine the maximum price per unit that Rimes would be willing to pay for the engines, if production increased to 18,300 units? Solution-1 c Avoidable Costs Cost of materials per unit Advertising cost Bracelet A $26 $9,700 Advertising expense Supervisory salaries Market value of building (opportunity cost) Maintenance costs on equipment Real estate taxes on building Total $88,000 173,000 84,000 73,000 14,000 $432,000 Decision Contract price Unit-level materials Unit-level labor Unit-level overhead Rental equipment costs Contribution to profit (loss) Job A $808,000 ($244,500) ($251,050) ($19,000) ($25,700) $267,750 Decision Job B $694,000 ($224,350) ($306,900) ($13,700) ($28,300) ($114,870) ($17,300) ($11,420) Bracelet B $42 $7,700 Solution-2 Solution-3 a-1 b Contract price Unit-level materials Unit-level labor Unit-level overhead Rental equipment costs Supervisor's salary Insurance cost for job Contribution to profit (loss) Solution-4 a-1 Production Cost for 500 Blankets Materials ($28 per unit x 500) Labor ($26 per unit x 500) Manufacturing supplies ($4 x 500) Batch-level costs (1 batch at $7,000) Total costs Cost per unit = $36,000 500 = $72 $14,000 $13,000 $2,000 $7,000 $36,000 Job B $694,000 ($224,350) ($306,900) ($13,700) ($28,300) $120,750 Cost Per Unit $72.00 Levy reject the order. This order will be rejected because revenue generated from sales is lower than the avoidable cost of production. b Production Cost for 3500 Blankets Materials ($28 per unit x 3500) Labor ($26 per unit x 3500) Manufacturing supplies ($4 x 3500) Batch-level costs (1 batch at $7,000) Total costs Cost per unit = $210,000 3,500 = $60 Cost Per Unit $98,000 $91,000 $14,000 $7,000 $210,000 $60.00 Levy accept the order. This order will be accepted because revenue generated from sales is higher than the avoidable cost of production Solution-6 a Avoidable Costs Cost of materials Labor Production supervisor's salary Rental cost of equipment used to make engines Total cost to make 13,400 engines Cost per unit ($706,400 13,400 units) = $52.72 $268,000 $348,400 $67,000 $23,000 $706,400 Maximum price $52.72 per unit b Fxied cost per unit for 18,300 units Total avoidable cost per unit Maximum price $50.92 per unit $4.92 $50.92 ble cost of production. dable cost of production. Solution-1 c Avoidable Costs Cost of materials per unit Advertising cost Bracelet A $26 $9,700 Advertising expense Supervisory salaries Market value of building (opportunity cost) Maintenance costs on equipment Real estate taxes on building Total $88,000 173,000 84,000 73,000 14,000 $432,000 Decision Contract price Unit-level materials Unit-level labor Unit-level overhead Rental equipment costs Contribution to profit (loss) Job A $808,000 ($244,500) ($251,050) ($19,000) ($25,700) $267,750 Decision Job B $694,000 ($224,350) ($306,900) ($13,700) ($28,300) ($114,870) ($17,300) ($11,420) Bracelet B $42 $7,700 Solution-2 Solution-3 a-1 b Contract price Unit-level materials Unit-level labor Unit-level overhead Rental equipment costs Supervisor's salary Insurance cost for job Contribution to profit (loss) Solution-4 a-1 Production Cost for 500 Blankets Materials ($28 per unit x 500) Labor ($26 per unit x 500) Manufacturing supplies ($4 x 500) Batch-level costs (1 batch at $7,000) Total costs Cost per unit = $36,000 500 = $72 $14,000 $13,000 $2,000 $7,000 $36,000 Job B $694,000 ($224,350) ($306,900) ($13,700) ($28,300) $120,750 Cost Per Unit $72.00 Levy reject the order. This order will be rejected because revenue generated from sales is lower than the avoidable cost of production. b Production Cost for 3500 Blankets Materials ($28 per unit x 3500) Labor ($26 per unit x 3500) Manufacturing supplies ($4 x 3500) Batch-level costs (1 batch at $7,000) Total costs Cost per unit = $210,000 3,500 = $60 Cost Per Unit $98,000 $91,000 $14,000 $7,000 $210,000 $60.00 Levy accept the order. This order will be accepted because revenue generated from sales is higher than the avoidable cost of production Solution-6 a Avoidable Costs Cost of materials Labor Production supervisor's salary Rental cost of equipment used to make engines Total cost to make 13,400 engines Cost per unit ($706,400 13,400 units) = $52.72 $268,000 $348,400 $67,000 $23,000 $706,400 Maximum price $52.72 per unit b Fxied cost per unit for 18,300 units Total avoidable cost per unit Maximum price $50.92 per unit $4.92 $50.92 ble cost of production. dable cost of production