problem 1:

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniorshome nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:

TotalHome NursingMeals On WheelsHouse-

keepingRevenues$925,000$264,000$401,000$260,000Variable expenses462,000110,000198,000154,000Contribution margin463,000154,000203,000106,000Fixed expenses:Depreciation69,3008,50040,70020,100Liability insurance43,20020,4007,70015,100Program administrators' salaries116,00040,40038,90036,700General administrative overhead*185,00052,80080,20052,000Total fixed expenses413,500122,100167,500123,900Net operating income (loss)$49,500$31,900$35,500$(17,900)*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, considers last year's net operating income of $49,500 to be unsatisfactory; therefore, she is considering the possibility of discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

1-b. Should the Housekeeping program be discontinued?

2-a. Prepare a properly formatted segmented income statement.

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?

Problem 2

(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers 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 they are initially cut or to process them further into filet mignon and the New York cut.

If the T-bone steaks are sold as initially cut, the company figures that a 1-pound T-bone steak would yield the following profit:

Selling price ($2.40 per pound)$2.40Less joint costs incurred up to the split-off point where

T-bone steak can be identified as a separate product1.40Profit per pound$1.00

If the company were to further process the T-bone steaks, then cutting one side of a T-bone steak provides the filet mignon and cutting the other side provides the New York cut. One 16-ounce T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. It costs $0.13 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $3.60 per pound, and the New York cut can be sold for $3.10 per pound.

Required:

1. What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks?

2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?

PROBLEM 3

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below:

UnitTotalDirect materials$20$880,000Direct labor10440,000Variable manufacturing overhead3132,000Fixed manufacturing overhead5220,000Variable selling expense288,000Fixed selling expense6264,000Total cost$46$2,024,000

The Rets normally sell for $51 each. Fixed manufacturing overhead is $220,000 per year within the range of 35,000 through 44,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 35,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain's name on the 9,000 units. This machine would cost $18,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. What is the financial advantage (disadvantage) of accepting the special order?(Round your intermediate calculations to 2 decimal places.)

2. Refer to the original data. Assume again that Polaski Company expects to sell only 35,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 9,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. What is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

3. Assume the same situation as described in (2) above, except that the company expects to sell 44,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 9,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

PROBLEM 4

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin.

After considerable research, a winter products line has been developed. However, Silven's president has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion in future years will be initiated.

The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $11 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $136,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing system.

Using the estimated sales and production of 170,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box:

Direct material$4.90Direct labor3.20Manufacturing overhead2.20Total cost$10.30

The costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off, Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.65 per box of 24 tubes. If Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 20%.

Required:

1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid? (Hint: You need to separate the manufacturing overhead of $2.20 per box that is shown above into its variable and fixed components to derive the correct answer.)

2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier?

3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys 170,000 boxes of tubes from the outside supplier?

4. Should Silven Industries make or buy the tubes?

5. What is the maximum price that Silven should be willing to pay the outside supplier for a box of 24 tubes?

6. Instead of sales of 170,000 boxes of tubes, revised estimates show a sales volume of 209,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $59,000 per year to make the additional 39,000boxes of tubes. Assuming that the outside supplier will not accept an order for less than 209,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 209,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes?

7. Refer to the data in (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.65 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?

PROBLEM 5

"In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. "At a price of $19 per drum, we would be paying $4.80 less than it costs us to manufacture the drums in our own plant. Since we use 70,000 drums a year, that would be an annual cost savings of $336,000." Antilles Refining's current cost to manufacture one drum is given below (based on 70,000 drums per year):

Direct materials$10.60Direct labor5.00Variable overhead1.50Fixed overhead ($3.60 general

company overhead, $2.00 depreciation,

and, $1.10 supervision)6.70Total cost per drum$23.80

A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are:

Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $231,000 per year.

Alternative 2: Purchase the drums from an outside supplier at $19 per drum.

The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labor and variable overhead costs by 20%. The old equipment has no resale value. Supervision cost ($77,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 110,000 drums per year.

The company's total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places.)

Required:

1. Assuming that 70,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

2. Assuming that 96,250 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

3. Assuming that 110,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?