Question 1

Make-or-Buy Decision for a Service Company

The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service is quoting a price of $13 per layout page. The budget for the Publication Department for the current year is as follows:

Salaries	$224,000
Benefits	36,000
Supplies	21,000
Office expenses	39,000
Office depreciation	28,000
Computer depreciation	24,000
Total	$372,000

The department expects to lay out twenty four thousand pages for the current year. The Publication Department office space and equipment would be used for future administrative needs, if the department's function were purchased from the outside.

a. A differential analysis dated February 22 to determine whether TAG-D should lay out pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2). If an amount is zero, enter "0".

	Lay Out Pages Internally (Alternative 1)	Purchase Layout Services (Alternative 2)	Differential Effects (Alternative 2)
Costs:
Purchase price of layout work	$fill in the blank 8b526107004d07b_1	$fill in the blank 8b526107004d07b_2	$fill in the blank 8b526107004d07b_3
Salaries	fill in the blank 8b526107004d07b_4	fill in the blank 8b526107004d07b_5	fill in the blank 8b526107004d07b_6
Benefits	fill in the blank 8b526107004d07b_7	fill in the blank 8b526107004d07b_8	fill in the blank 8b526107004d07b_9
Supplies	fill in the blank 8b526107004d07b_10	fill in the blank 8b526107004d07b_11	fill in the blank 8b526107004d07b_12
Office expenses	fill in the blank 8b526107004d07b_13	fill in the blank 8b526107004d07b_14	fill in the blank 8b526107004d07b_15
Office depreciation		fill in the blank 8b526107004d07b_16	fill in the blank 8b526107004d07b_17
Computer depreciation		fill in the blank 8b526107004d07b_18	fill in the blank 8b526107004d07b_19
Total costs	$fill in the blank 8b526107004d07b_20	$fill in the blank 8b526107004d07b_21	$fill in the blank 8b526107004d07b_22

b. The benefit from using an outside service is shown to be

greaterless

than performing the layout work internally. The fixed costs (depreciation expenses) in the budget are

relevantirrelevant

to the decision. Thus, the work should

benot be

purchased from the outside on a strictly financial basis.

c. Before electing to

keeplay off

the five employees, the TAG-D should consider the

short-run impactlong-run impact

of the decision.

Question 2

Total Cost Method of Product Pricing

Smart Stream Inc. uses the total cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 8,000 units of cell phones are as follows:

Variable costs per unit:		Fixed costs:
Direct materials	$ 75		Factory overhead	$301,900
Direct labor	35		Selling and administrative expenses	106,100
Factory overhead	23
Selling and administrative expenses	17
Total variable cost per unit	$150

Smart Stream desires a profit equal to a 14% return on invested assets of $941,830.

a. Determine the total costs and the total cost amount per unit for the production and sale of 8,000 cellular phones. Round the cost per unit to two decimal places.

Total cost	$fill in the blank 1
Total cost amount per unit	$fill in the blank 2

b. Determine the total cost markup percentage for cellular phones. Round your answer to two decimal places. fill in the blank 3 %

c. Determine the selling price of cellular phones. Round to the nearest cent. $fill in the blank 4 per cellular phone

Question 3

Variable Cost Method of Product Pricing

Smart Stream Inc. uses the variable cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cell phones are as follows:

Variable costs per unit:				Fixed costs:
	Direct materials	$150				Factory overhead	$350,000
	Direct labor	25				Selling and admin. exp.	140,000
	Factory overhead	40
	Selling and administrative expenses	25
		Total variable cost per unit	$240

Smart Stream desires a profit equal to a 30% return on invested assets of $1,200,000.

a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones.

Total variable costs	$fill in the blank 1
Variable cost amount per unit	$fill in the blank 2

b. Determine the variable cost markup percentage for cellular phones. Round to two decimal places. fill in the blank 3 %

c. Determine the selling price of cellular phones. If required, round to the nearest dollar. $fill in the blank 4 per cellular phone

Question 4

Differential Analysis for a Discontinued Product

A condensed income statement by product line for Warrick Beverage Inc. indicated the following for Mango Cola for the past year:

Sales	$233,800
Cost of goods sold	(111,000)
Gross profit	$122,800
Operating expenses	(144,000)
Operating loss	$(21,200)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 23% of the operating expenses are fixed. Because Mango Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

a. A differential analysis dated February 29 to determine whether Mango Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

	Continue Mango Cola (Alternative 1)	Discontinue Mango Cola (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 09453e054fee068_1	$fill in the blank 09453e054fee068_2	$fill in the blank 09453e054fee068_3
Costs:
Variable cost of goods sold	fill in the blank 09453e054fee068_4	fill in the blank 09453e054fee068_5	fill in the blank 09453e054fee068_6
Variable operating expenses	fill in the blank 09453e054fee068_7	fill in the blank 09453e054fee068_8	fill in the blank 09453e054fee068_9
Fixed costs	fill in the blank 09453e054fee068_10	fill in the blank 09453e054fee068_11	fill in the blank 09453e054fee068_12
Profit (Loss)	$fill in the blank 09453e054fee068_13	$fill in the blank 09453e054fee068_14	$fill in the blank 09453e054fee068_15

b. Should Mango Cola be retained?

YesNo

Question 5

Product Pricing and Profit Analysis with Bottleneck Operations

Wilmington Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Wilmington Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Wilmington wants to improve chemical operation profitability. The variable conversion cost is $10 per process hour. The fixed cost is $400,000. In addition, the cost analyst was able to determine the following information about the three products:

	Ethylene	Butane	Ester
Budgeted units produced	9,000		9,000		9,000
Total process hours per unit	4.0		4.0		3.0
Reactor hours per unit	1.5		1.0		0.5
Unit selling price	$170		$155		$130
Direct materials cost per unit	$115		$88		$85

The reaction operation is part of the total process for each of these three products. Thus, for example, 1.5 of the 4.0 hours required to process ethylene is associated with the reactor.

Required:

1. Determine the unit contribution margin for each product.

	Contribution Margin Per Unit
Ethylene	$fill in the blank 1
Butane	$fill in the blank 2
Ester	$fill in the blank 3

2. Provide an analysis to determine the relative product profitabilities, assuming that the reactor is a bottleneck.

	Contribution Margin Per Reactor Hour
Ethylene	$fill in the blank 4
Butane	$fill in the blank 5
Ester	$fill in the blank 6

Question 6

Differential Analysis for Machine Replacement Proposal

Franklin Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine
Cost of machine, ten-year life	$107,100
Annual depreciation (straight-line)	10,710
Annual manufacturing costs, excluding depreciation	37,600
Annual nonmanufacturing operating expenses	11,700
Annual revenue	94,400
Current estimated selling price of the machine	35,500
New Machine
Cost of machine, six-year life	$138,600
Annual depreciation (straight-line)	23,100
Estimated annual manufacturing costs, exclusive of depreciation	17,400

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Required:

1. A differential analysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the differential profit that would result over the six-year period if the new machine is acquired. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues
Proceeds from sale of old machine	$fill in the blank adeda2f76fff063_1	$fill in the blank adeda2f76fff063_2	$fill in the blank adeda2f76fff063_3
Costs
Purchase price	fill in the blank adeda2f76fff063_4	fill in the blank adeda2f76fff063_5	fill in the blank adeda2f76fff063_6
Annual manufacturing costs (6 yrs.)	fill in the blank adeda2f76fff063_7	fill in the blank adeda2f76fff063_8	fill in the blank adeda2f76fff063_9
Profit (loss)	$fill in the blank adeda2f76fff063_10	$fill in the blank adeda2f76fff063_11	$fill in the blank adeda2f76fff063_12

2. What other factors should be considered before a final decision is reached?

1. Are there any improvements in the quality of work turned out by the new machine?
2. What opportunities are available for the use of the funds required to purchase the new machine?
3. Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine?
4. What affect would this decision have on employee morale?
5. None of these choices are correct.

abcde

Question 7

Differential Analysis for a Lease or Sell Decision

Burlington Construction Company is considering selling excess machinery with a book value of $281,600 (original cost of $400,600 less accumulated depreciation of $119,000) for $275,300, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $286,200 for five years, after which it is expected to have no residual value. During the period of the lease, Burlington Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,300.

a. A differential analysis dated January 15 to determine whether Burlington Construction Company should lease (Alternative 1) or sell (Alternative 2) the machinery. If required, use a minus sign to indicate a loss.

	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank b68316fbc071fae_1	$fill in the blank b68316fbc071fae_2	$fill in the blank b68316fbc071fae_3
Costs	fill in the blank b68316fbc071fae_4	fill in the blank b68316fbc071fae_5	fill in the blank b68316fbc071fae_6
Profit (Loss)	$fill in the blank b68316fbc071fae_7	$fill in the blank b68316fbc071fae_8	$fill in the blank b68316fbc071fae_9

b. On the basis of the data presented, would it be advisable to lease or sell the machinery?

Lease the machinerySell the machinery

Question 8

Differential Analysis Involving Opportunity Costs

On July 1, Matrix Stores Inc. is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $149,100 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:

Cost of store equipment	$149,100
Life of store equipment	16 years
Estimated residual value of store equipment	$18,800
Yearly costs to operate the warehouse, excluding depreciation of equipment	$56,300
Yearly expected revenuesyears 1-8	74,500
Yearly expected revenuesyears 9-16	69,100

Required:

1. A differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

	Operate Warehouse (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank f675acf86fed04d_1	$fill in the blank f675acf86fed04d_2	$fill in the blank f675acf86fed04d_3
Costs:
Costs to operate warehouse	fill in the blank f675acf86fed04d_4	fill in the blank f675acf86fed04d_5	fill in the blank f675acf86fed04d_6
Cost of equipment less residual value	fill in the blank f675acf86fed04d_7	fill in the blank f675acf86fed04d_8	fill in the blank f675acf86fed04d_9
Profit (Loss)	$fill in the blank f675acf86fed04d_10	$fill in the blank f675acf86fed04d_11	$fill in the blank f675acf86fed04d_12

2. Based on the results disclosed by the differential analysis, should the proposal be accepted?

YesNo

3. If the proposal is accepted, what is the total estimated operating income of the warehouse for 16 years? $fill in the blank 4cdb5afeff8cfb7_2