Problem 12-20 Sell or Process Further [LO12-7]

(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 ($2.00 per pound)	$	2.00
Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product		1.60
Profit per pound	$	0.40

As mentioned above, instead of being sold as initially cut, the T-bone steaks could be further processed into filet mignon and New York cut steaks. 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. The cost of processing the T-bone steaks into these cuts is $0.18 per pound. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.40 per pound.

Required:

1.	Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

2.

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

	T-bone steaks should be processed further.
	T-bone steaks should be sold as initially cut.

Problem 12-23 Make or Buy Decision [LO12-3]

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, Silvens 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 $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $60,000 charge for fixed manufacturing overhead will be absorbed by the product under the companys absorption costing system.

Using the estimated sales and production of 120,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:

Direct materials	$	3.40
Direct labor		2.00
Manufacturing overhead		1.40
Total cost	$	6.80

The costs above include costs for producing both the lip balm and the tube that contains it. As an alternative to making the tubes, Silven has approached a supplier to discuss the possibility of purchasing the tubes for Chap-Off. The purchase price of the empty tubes from the supplier would be $1.30 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by 25%.

Required:
1a.	Calculate the total variable cost of producing one box of Chap-Off? (Round your intermediate calculations and final answer to 2 decimal places.)

1b.	Assume that the tubes for the Chap-Off are purchased from the outside supplier, calculate the total variable cost of producing one box of Chap-Off? (Round your intermediate calculations and final answer to 2 decimal places.)

1c.

Should Silven Industries make or buy the tubes?

	Make
	Buy

2.	What would be the maximum purchase price acceptable to Silven Industries? (Round your intermediate calculations and final answer to 2 decimal places.)

3.	Instead of sales of 120,000 boxes, revised estimates show a sales volume of 160,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $60,000. Assume that the outside supplier will not accept an order for less than 160,000 boxes.

a.	Calculate the total relevant cost of making 160,000 boxes and total relevant cost of buying 160,000 boxes. (Round intermediate calculations to 2 decimal places.)

b.

Based on the above calculations, should Silven Industries make or buy the boxes?

	Make
	Buy

4.

Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $1.35 per box. Which of these is the best alternative?

	Make all 160,000 boxes
	Buy all 160,000 boxes
	Make 120,000 boxes and buy 40,000 boxes
	Make 80,000 boxes and buy 80,000 boxes

Problem 12-26 Close or Retain a Store [LO12-2]

Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:

Superior Markets, Inc. Income Statement For the Quarter Ended September 30
	Total			North Store			South Store			East Store
Sales	$	3,800,000		$	760,000		$	1,520,000		$	1,520,000
Cost of goods sold		2,090,000			420,000			834,000			836,000
Gross margin		1,710,000			340,000			686,000			684,000
Selling and administrative expenses:
Selling expenses:		833,000			239,400			319,000			274,600
Administrative expenses		423,000			114,000			162,900			146,100
Total expenses		1,256,000			353,400			481,900			420,700
Net operating income (loss)	$	454,000		$	(13,400	)	$	204,100		$	263,300

The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:

a.	The breakdown of the selling and administrative expenses is as follows:

	Total		North Store		South Store		East Store
Selling expenses:
Sales salaries	$	248,200	$	59,000	$	87,800	$	101,400
Direct advertising		173,000		59,000		80,000		34,000
General advertising*		57,000		11,400		22,800		22,800
Store rent		300,000		93,000		110,000		97,000
Depreciation of store fixtures		20,000		5,400		6,800		7,800
Delivery salaries		23,400		7,800		7,800		7,800
Depreciation of delivery equipment		11,400		3,800		3,800		3,800
Total selling expenses	$	833,000	$	239,400	$	319,000	$	274,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store management salaries	$	82,000	$	25,000	$	34,000	$	23,000
General office salaries*		57,000		11,400		22,800		22,800
Insurance on fixtures and inventory		33,000		9,900		13,000		10,100
Utilities		94,410		33,220		32,240		28,950
Employment taxes		61,590		15,480		22,860		23,250
General office other*		95,000		19,000		38,000		38,000
Total administrative expenses	$	423,000	$	114,000	$	162,900	$	146,100

*Allocated on the basis of sales dollars.

b.	The lease on the building housing the North Store can be broken with no penalty.
c.	The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
d.	The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $10,400 per quarter. The general manager of the North Store would be retained at her normal salary of $11,400 per quarter. All other employees in the store would be discharged.
e.	The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This persons salary is $4,800 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.
f.	The companys employment taxes are 15% of salaries.
g.	One-third of the insurance in the North Store is on the stores fixtures.
h.	The General office salaries and General officeother relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This persons compensation is $5,700 per quarter.

Required:

1.

Prepare a schedule showing the change in revenues and expenses and the impact on the companys overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.)

2.

Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?

	The North Store should be closed.
	The North Store should not be closed.

3.

Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store.

a.

Calculate the net advantage of closing the North Store. (Any reductions or outflows should be indicated by a minus sign.)

b.

What recommendation would you make to the management of Superior Markets, Inc.?

	The North Store should be closed.
	The North Store should not be closed.

Per 1 T-Bone Sales from further processing Sales price of one filet mignon Sales price of one New York cut Total revenue from further processing Less sales revenue from one T-bone s ncremental revenue from further processing Less cost of further processing Profit (loss) per pound from further processing