PROBLEM 1

Ample Power Company manufactures a variety of electrical switches. The company iscurrently manufacturing all of its own component parts. An outside supplier has offered to sell a switchto Ample Power for $32 per unit. To evaluate this offer, Ample Power has gatheredthe following information relating to its own cost of producing the switchinternally:

		12,000
	per unit	units per year
Direct materials	$12	$ 144,000
Direct labor	10	120,000
Variable manufacturing overhead	3	36,000
Fixed manufacturing overhead, traceable*	8	96,000
Fixed manufacturing overhead, common	16	192,000
Total cost	$49	$ 588,000
*25% of FMOH, traceable, is supervisory salary, and 75% the depreciation of special equipment with no resale value

Required:

1. Assuming that the company has no alternative use for the facilities now being usedto produce the switch, should the outside supplier's offer be accepted?

1. Suppose that if the switches were purchased, Ample Power could use thefreed capacity to launch a new product. The segment margin of the new product wouldbe $78,000 per year. Should Ample Power accept the offer to buy the switchesfrom the outside supplier for $32 each?

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PROBLEM 2

MiniMax Company makes two products from a common input. Joint processing costs up to the split-off point total $38,400 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

	Product X	Product Y	Total
Allocated Joint Processing Costs	20,800	17,600	38,400
Sales Value at Split-Off Point	26,000	22,000	48,000
Costs of Further Processing	22,600	20,400	43,000
Sales Value after Further Processing	45,000	45,900	90,900

Required:

1. Which products should be processed beyond the split-off point?

1. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

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PROBLEM 3

The following are the selling price, variable costs, and contribution margin for one unit of eachof Aurora Sign Ltd.'s three products: X1, X2, andX3:

Product
	X1	X2	X3
Sellingprice	$60	$90	$80
Variablecosts:
Directmaterials	27	14	40
Directlabor	12	32	16
Variable manufacturingoverhead	3	8	4
Total variablecost	42	54	60
Contributionmargin	$18	$36	$20
Contribution marginratio	30%	40%	25%

Due to a strike in the plant of one of its competitors, demand for the Aurora Sign's productsfar exceeds its capacity to produce. Management is trying to determine which product(s)to concentrate on next week in filling its backlog of orders. The direct labor rate is $8 per hour,and only 3,000 hours of labor time are available eachweek.

Required:

1. Compute the amount of contribution margin that will be obtained per hour of labor time spent on eachproduct.

1. Which orders would you recommend that the company work on next weektheorders for product X1, product X2, or product X3?

1. By paying overtime wages, more than 3,000 hours of direct labor time can bemade available next week. Up to how much should the Aurora Sign be willing to pay per hourin overtime wages as long as there is unfilled demand for the three products?Explain.