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Ch 12 1. Calculating Average Operating Assets, Margin, Turnover, and Return on Investment East Mullett Manufacturing earned operating income last year as shown in the following income statement: Sales Cost of goods sold Gross margin Selling and administrative expense Operating income Less: Income taxes (@ 40%) Net income $531, 250 280,0 00 $251, 250 180,8 00 $70,4 50 28,18 0 $42,2 70 At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000. Required: For East Mullett Manufacturing, calculate the following: $ 1. Average operating assets 2. Margin (round to two decimal places) % 3. Turnover (round to two decimal places) 4. Return on investment (round to one decimal place) % 2. Calculating Residual Income Pelican Manufacturing earned operating income last year as shown in the following income statement: Sales $531,250 Cost of goods sold Gross margin Selling and administrative expense Operating income Less: Income taxes (@ 40%) Net income 280,000 $251,250 186,000 $65,250 26,100 $39,150 At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000. Pelican requires a minimum rate of return of 10%. Required: For Pelican, calculate: $ 1. Average operating assets $ 2. Residual income 3. Calculating Economic Value Added East Mullett Manufacturing earned operating income last year as shown in the following income statement: Sales Cost of goods sold Gross margin $630, 000 380,0 00 $250, 000 Selling and administrative expense 174,4 00 $ Operating income 75,60 0 Less: Income taxes (@ 40%) 30,24 0 $ Net income 45,36 0 Total capital employed equaled $381,000. East Mullett's actual cost of capital is 8 percent. Required: Calculate the EVA for East Mullett Manufacturing. If required, round your answer to nearest whole number. $ 4. Calculating Transfer Price Trimble Crane, Inc. has a number of divisions, including the Palm Division, a producer of hydraulic pumps, and Acer Division, a manufacturer of motors. Palm Division produces the h20-model pump that can be used by Acer Division in the production of motors that regulate the raising and lowering of the motors's crane derrick. The market price of the h20-model is $684, and the full cost of the h20-model is $540. Required: 1. If Trimble Crane, Inc. has a transfer pricing policy that requires transfer at full cost: What will the transfer price be? $ Do you suppose that Palm Division and Acer Division will choose to transfer at that price? Acer Division Palm Division CHOOSES TO TRANSFER OR REFUSES TO TRANSFER? CHOOSES TO TRANSFER OR REFUSES TO TRANSFER? 2. If Trimble Crane, Inc. has a transfer pricing policy that requires transfer at market price: What would the transfer price be? $ Do you suppose that Palm Division and Acer Division would choose to transfer at that price? Acer CHOOSES TO TRANSFER OR Division REFUSES TO TRANSFER ? Palm Division CHOOSES TO TRANSFER OR REFUSES TO TRANSFER? 3. Now suppose that Trimble Crane, Inc. allows negotiated transfer pricing and that Palm Division can avoid $120 of selling expense by selling to Acer Division. Which division sets the minimum transfer price? PALM DIVISION OR ACER DIVISION? What is the minimum transfer price? $ Which division sets the maximum transfer price? PALM DIVISION OR ACER DIVISION? What is the maximum transfer price? $ Do you suppose that Palm Division and Acer Division would choose to transfer somewhere in the bargaining range? YES OR NO? 5. Calculating Cycle Time and Velocity Delko Company has the following data for one of its manufacturing plants: 1. Maximum units produced in a quarter (3-month period): 250,000 units 2. Actual units produced in a quarter (3-month period): 203,000 units 3. Productive hours in one quarter: 25,000 hours Required: 1. Compute the theoretical cycle time (in minutes). minutes per unit 2. Compute the actual cycle time (in minutes). Round your answer to two decimal places. minutes per unit 3. Compute the theoretical velocity in units per hour. units per hour 4. Compute the actual velocity in units per hour. Round your answer to two decimal places. units per hour 6. Calculating Manufacturing Cycle Efficiency Delko Company has the following data for one of its manufacturing plants: 1. Maximum units produced in a quarter (3-month period): 250,000 units 2. Actual units produced in a quarter (3-month period): 193,000 units 3. Productive hours in one quarter: 25,000 hours 4. Actual cycle time: 7.77 minutes 5. Theoretical cycle time: 6 minutes Required: 1. Calculate the amount of processing time and the amount of nonprocessing time. If required, round your answers to two decimal places. minutes Processing time minutes Nonprocessing time 2. Calculate the MCE. If required, round your answer to nearest whole number. % CHAPTER 13 1. Structuring a Make-or-Buy Problem Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following: Total Unit Cost Cost Direct materials $25,000 $5.00 15,000 3.00 7,500 1.50 Variable marketing overhead 11,500 2.30 Fixed plant overhead 30,000 6.00 $89,000 $17.80 Direct labor Variable manufacturing overhead Total Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number. Required: 1. What are the alternatives for Fresh Foods? BUY THE INGREDIENT EXTERNALLY AND SELL IT IN HOUSE, MAKE THE INGREDIENT IN HOUSE AND SELL IT EXTERNALLY, OR MAKE THE INGREDIENT IN HOUSE OR BUY IT EXTENALLY? 2. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.) $ BUY OR MAKE? 3. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.) $ BUY OR MAKE? 2. Structuring a Special-Order Problem The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $4.10 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows: Direct materials $1.75 Direct labor 2.50 Variable overhead 1.50 Fixed overhead 3.25 Total $9.00 Fixed overhead will not be affected by whether or not the special order is accepted. Required: 1. Should the company accept or reject the special order? ACCEPT OR REJECT? 2. By how much will operating income increase or decrease if the order is accepted? INCREASE OR DECREASE? by $ Structuring a Keep-or-Drop Product Line Problem 3. Shown below is a segmented income statement for Orzo Company's three laminated flooring product lines: Strip Plank $400,000 $200,000 $300,000 $900,000 225,000 120,000 250,000 595,000 $175,000 $ 80,000 $ 50,000 $305,000 (5,000) (20,000) (50,000) (75,000) Supervision (15,000) (10,000) (20,000) (45,000) Depreciation (35,000) (10,000) (25,000) (70,000) Sales revenue Less: Variable expenses Contribution margin Parquet Total Less direct fixed expenses: Machine rent Segment margin $120,000 $ 40,000 $ (45,000) $115,000 Orzo's management is deciding whether to keep or drop the parquet product line. Orzo's parquet flooring product line has a contribution margin of $50,000 (sales of $300,000 less total variable costs of $250,000). All variable costs are relevant. Relevant fixed costs associated with this line include $30,000 in machine rent and $4,700 in supervision salaries. Required: 1. List the alternatives being considered with respect to the parquet flooring line. DROP THE PARQUET FLOORING LINE OR KEEP IT, EXPAND THE PARQUET FLOORING LINE, OR NEITHER OF THESE ALTERNATIVES ARE BEING CONSIDERED? 2. Which alternative is more cost effective and by how much? DROP OR KEEP? by $ 4. Structuring a Keep-or-Drop Product Line Problem with Complementary Effects Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines: Strip Plank $400,000 $200,000 $300,000 $900,000 225,000 120,000 250,000 595,000 $175,000 $ 80,000 $ 50,000 $305,000 (5,000) (20,000) (30,000) (55,000) Supervision (15,000) (10,000) (5,000) (30,000) Depreciation (35,000) (10,000) (25,000) (70,000) Segment margin $120,000 $ 40,000 $ (10,000) $150,000 Sales revenue Less: Variable expenses Contribution margin Parquet Total Less direct fixed expenses: Machine rent Hickory's parquet flooring product line has a contribution margin of $50,000 (sales of $300,000 less total variable costs of $250,000). All variable costs are relevant. Relevant fixed costs associated with this line include $30,000 in machine rent and $5,000 in supervision salaries. Assume that dropping the parquet product line would reduce sales of the strip line by 22% and sales of the plank line by 20%. All other information remains the same. Required: 1. If the parquet product line is dropped, what is the contribution margin for the strip line? $ For the plank line? $ 2. Which alternative (keep or drop the parquet product line) is now more cost effective and by how much? DROP OR KEEP? by $ 5. Structuring the Sell-or-Process-Further Decision Jack's Lumber Yard receives 8,000 large trees each period that it subsequently processes into rough logs by stripping off the tree bark and leaves. Jack's then must decide whether to sell its rough logs (for use in log cabin construction) at split-off or to process them further into refined lumber (for use in regular construction framing). Jack's normally sells logs for a per-unit price of $505. Alternately, each log can be processed further into 800 feet of lumber at an additional cost of $0.05 per board foot. Also, lumber can be sold for $0.75 per board foot. (Note: One tree is equal to one rough log.) Required: 1. What is the total contribution to income from selling the logs for log cabin construction? $ 2. What is the total contribution to income from processing the logs into lumber? $ 3. Should Jack's continue to sell the logs or process them further into lumber? JACK'S SHOULD CONTINUE TO SELL THE LOGS OR JACK'S SHOULD PROCESS THE LOGS INTO LUMBER? 6. Determining the Optimal Product Mix with One Constrained Resource Casual Essentials, Inc. manufactures two types of team shirts, the Homerun and the Goalpost, with unit contribution margins of $4 and $15, respectively. Regardless of type, each team shirts must be fed through a stitching machine to affix the appropriate team logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Homerun shirt requires 6 minutes of machine time, and each Goalpost shirt requires 30 minutes of machine time. Assume that there are no other constraints. Required: If required, round your answers to the nearest whole number. If an amount is zero, enter "0". 1. What is the contribution margin per hour of machine time for each type of team shirts? Contribution Margin $ Homerun $ Goalpost 2. What is the optimal mix of team shirts? Optimal Mix units Homerun units Goalpost 3. What is the total contribution margin earned for the optimal mix? $ 7. Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint Casual Essentials, Inc. manufactures two types of team shirts, the Homerun and the Goalpost, with unit contribution margins of $5 and $15, respectively. Regardless of type, each team shirts must be fed through a stitching machine to affix the appropriate team logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Homerun shirt requires 6 minutes of machine time, and each Goalpost shirt requires 30 minutes of machine time. Assume that a maximum of 49,880 units of each team shirts can be sold. Required: If required, round your answers to the nearest whole number. 1. What is the contribution margin per hour of machine time for each type of team shirts? Contribution Margin $ Homerun $ Goalpost 2. What is the optimal mix of team shirts? Optimal Mix units Homerun units Goalpost 3. What is the total contribution margin earned for the optimal mix? $ 8. Calculating Price by Applying a Markup Percentage to Cost The J. Escobar Law Firm provides various legal services to organizations. J. Escobar has decided to price its jobs at the total variable costs of the job plus 15.1 percent. The job for a medium-sized dance club client included the following costs: Direct materials Direct labor (partners and staff accountants) $ 5,000 90,000 Depreciation (using straight-line method) on Integrity's office building 50,000 Required: Calculate the price charged by The J. Escobar Law Firm to the dance club. If required, round to the nearest dollar. $ 9. Calculating a Target Cost RU Listening manufactures cell phones and is developing a new model with a feature (targeted at parents of teens) that prevents the phone from dialing an owner-defined list of phone numbers between the hours of midnight and 6:00 a.m. The new phone model has a target price of $330. Management requires a 10% profit on new product revenues. Required: If required, round to the nearest dollar. 1. Calculate the amount of desired profit. $ 2. Calculate the target cost. $