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Chapter 13 1. Lallone Company makes fine jewelry that it sells to department stores throughout the United States. Lallone is trying to decide which of two bracelets to manufacture. Cost data pertaining to the two choices follow. Cost of materials per unit Cost of labor per unit Advertising cost per year Annual depreciation on existing equip. Bracelet A $ 26 32 9,700 5,000 Bracelet B $ 42 32 7,700 6,000 a. Identify the fixed costs and determine the amount of fixed cost for each product. b. Identify the variable costs and determine the amount of variable cost per unit for each product. c. Identify the avoidable costs and determine the amount of avoidable cost for each product. 2. Ramos Corporation is considering the elimination of one of its segments. The segment incurs the following fixed costs. If the segment is eliminated, the building it uses will be sold. Advertising expense $ 88,000 Supervisory salaries 173,000 Allocation of companywide facility-level costs 64,000 Original cost of building 119,000 Book value of building 67,000 Market value of building 84,000 Maintenance costs on equipment 73,000 Real estate taxes on building 14,000 Based on this information, determine the amount of avoidable cost associated with the segment? 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) Allocated portion of companywide facility-sustaining costs Insurance cost for job Job A $808,000 244,500 251,050 19,000 114,870 25,700 20,800 11,000 17,300 Job B $694,000 224,350 306,900 13,700 114,870 28,300 20,800 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. Should Bennett accept or reject Job B? 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 Total costs $ 980,000 910,000 140,000 70,000 220,000 320,000 $ 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.Koch Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Koch produces a relatively small amount (19,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.10 each. If Koch purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Koch's accountant constructed the following profitability analysis. Revenue (19,000 units $11.50) Unit-level materials costs (19,000 units $1.60) Unit-level labor costs (19,000 units $0.50) Unit-level overhead costs (19,000 $0.10) Unit-level selling expenses (19,000 $0.10) $ (30,400) (9,500) (1,900) (1,900) Contribution margin Skin cream production supervisor's salary Allocated portion of facilitylevel costs Product-level advertising cost Contribution to 218,500 174,800 (62,000) (14,600) (42,000) $ 56,200 companywide income a. Identify the cost items relevant to the make-or-outsource decision. b-1. What is the avoidable cost per unit if the outsourcing decision is taken? b-2. Should Koch continue to make the product or buy it from the supplier? 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. Men's Department Sale 660,00 $ s 0 Cost of (268,50 ) goods 0 sold Gros s margi n Dep artme nt mana ger's salary Sale s comm ission s Rent on store lease Stor e utilitie s Women's Department $ 480,00 0 Children's Department $ 170,00 0 (178,80 ) 0 (99,875) 391,50 0 301,20 0 70,125 (58,000) (47,000) (27,000) (112,20 ) 0 (81,600) (30,900) (27,000) (27,000) (27,000) (10,000) (10,000) (10,000) Net incom e (loss) $ 184,30 0 $ 135,60 0 $ (24,775) a-1. Calculate the contribution to profit of the children's department. a-2. Should the children's department be eliminated? b-1. Calculate the net income for the company as the whole with the children's department 7. Rimes Company makes and sells lawn mowers for which it currently makes the engines. It has an opportunity to purchase the engines from a reliable manufacturer. The annual costs of making the engines are shown here. 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? A, Fixed cost Bracelet A Bracelet B Depreciation 5,000 6,000 Advertising 9,700 7,700 Total fixed cost $14,700 $13,700 B. Variable cost Bracelet A Bracelet B Cost of material per unit 26 42 Cost of labor per unit 32 32 $58 $74 C, Avoidable cost Bracelet A Bracelet B Cost of material per unit 26 42 Cost of labor per unit 32 32 $58 $74 2. Avoidable cost in Ramos Corporation Advertising expense $88,000 Supervisory salaries $173,000 Maintenance of costs on equipment $73,000 Real estate taxes on building $14,000 Total cost 348,000 3a Contribution to profit (loss) Job A Job B Contract price $808,000 $694,000 Less: unit-level materials 244,500 224,350 Unit-level labor 251,050 306,900 Unit-level overhead 19,000 13,700 Supervisors salary 114,870 114,870 Rental equipment cost 25,700 28,300 Allocated sustaining costs 11,000 9,900 Insurance cost 17300 17300 124,580 -21,320 Profit/loss B, Contribution to profit (loss) Job B Contract price $694,000 Less: unit-level materials 224,350 Unit-level labor 306,900 Unit-level overhead 13,700 Supervisors salary 114,870 Rental equipment cost 28,300 Allocated sustaining costs 9,900 Insurance cost 17300 Profit/loss -21,320 Bennett should not accept, it is a loss. 4a Material cost 28*500 14000 Labor 26*500 13000 Manufacturing supplies 4*500 20000 Cost per unit 47,000/500=$94 Should not accept B Material cost 28*3500 98000 Labor 26*3500 91000 Manufacturing supplies 4*3500 14000 Cost per unit 203,000/3500=$58 Levy should accept the special order. 5,a Total avoidable cost Material cost 30400 Labor cost 9500 Overhead cost 1900 Supervisors' salary 62000 Total 103,800 B1 Avoidable cost per unit= 103800/19000 =5.5 B2 Koch should buy the product as it is cheaper to buy ($5.1) than produce ($5.5) 6 a1 Contribution margin of children department Sales $170,000 Less: Cost of goods sold 99,875 Management salary-departmental 27,000 Sales commission 30,900 Contribution to profit 12,225 A2 It should not be eliminated, it is contributing to the income B1 Companies net income=$184,300+135,600-24,775 =$295,125 This was not completed either 7a Maximum price per unit=834,400/13400 =$62.3 B, Maximum price per unit=1059800/18300 =$60