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Superior Door Company sells prehung doors to home builders. The doors are sold for $60 each. Variable costs are $42 per door, and fixed costs total $450,000 per year. The company is currently selling 30,000 doors per year. Required: 1. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage 2. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales). Compute the following: a. The expected percentage increase in net oper b. The expected net operating income for next y the degree of operating leverage to compute EXERCISE 12-3 Make or Buy a Component [LO3] Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $20 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: p. 558 Required: 1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier's offer be accepted? Show all computations. 2. Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $65,000 per year. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each? Show computations. QUESTIONS 1 .Mateo Company's average cost per unit is $1.425 at the 16,000 unit level of activity and $1.38 at the 20,000 unit level of activity. Assume that all of the activity levels mentioned in this problem are within the relevant range. Required: Predict the following items for Mateo Company: a. Variable cost per unit. b. Total fixed cost per period. c. Total expected costs at the 18,000 unit level of activity 2. The following is Alsatia Corporation's contribution format income statement for last month: The Company has no beginning or ending inventories and produced and sold 10,000 units during the month. Required: a. What is the company's contribution margin ratio? b. What is the company's break-even in units? c. If sales increase by 100 units, by how much should net operating income increase? d. How many units would the company have to sell to attain target profits of $225,000? e. What is the company's degree of operating leverage? 3. The following monthly data are available for the Challenger Company and its only product, Product SW: Required: a. Without resorting to calculations, what is the total contribution margin at the break-even point? b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made? c. Assume that Challenger Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? d. Assume that Challenger Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW thus resulting in an increase in monthly sales of 12%. Should these changes be made? 4. The management of Reagon Corporation expects sales in January to be $122,000. The company's contribution margin ratio is 69% and its fixed monthly expenses are $50,000. Required: Estimate the company's net operating income for January, assuming that the fixed monthly expenses do not change. Show your work! 5. TabComp Inc. is a retail distributor for MZB-33 computer hardware and related software. TabComp prepares annual sales forecasts of which the first six months of the coming year are presented below. Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank credit card, and the remaining 45% are on open account (TabComp's own charge accounts). The cash and bank credit card sale payments are received in the month of the sale. Bank credit card sales are subject to a 4 % discount which is deducted immediately. The cash receipts for sales on open account are 70% in the month following the sale, 28% in the second month following the sale, and the remaining are uncollectible. TabComp's month-end inventory requirements for computer hardware units are 30% of the next month's sales. The units must be ordered two months in advance due to long lead times quoted by the manufacturer. Required: a. Calculate the cash that TabComp can expect to collect during April. Show all of your calculations. b. Determine the number of computer hardware units that should be ordered in January. Show all of your calculations. 6. The selling and administrative expense budget of Hiser Corporation is based on the number of units sold, which are budgeted to be 1,900 units in August. The variable selling and administrative expense is $6.10 per unit. The budgeted fixed selling and administrative expense is $22,420 per month, which includes depreciation of $5,130. The remainder of the fixed selling and administrative expense represents current cash flows. Required: Prepare the selling and administrative expense budget for August. 7. The following labor standards have been established for a particular product: The following data pertain to operations concerning the product for the last month: Required: a. What is the labor rate variance for the month? b. What is the labor efficiency variance for the month? 8. Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows: Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Required: Based on this information, would Janeiro be better off to continue making the wheels or to buy them from Kasba? SHOW YOUR COMPUTATIONS. 9. Carner Lumber sells lumber and general building supplies to building contractors in a medium-sized town in Montana. Data regarding the store's operations follow: Sales are budgeted at $370,000 for November, $360,000 for December, and $340,000 for January. The cost of goods sold is 70% of sales. Carner's uncollectible accounts are 2% of sales. Other monthly expenses to be paid in cash are $24,600. Monthly depreciation is $17,000. Ignore taxes. Required: Calculate the net income for December. Show your work. EXTRA CREDIT TRUE / FALSE questions (optional) 10. Six Sigma is a process improvement method that targets a system's constraint for process improvement. True or False 11. The lean thinking model focuses on reducing defects to as close to zero as possible. True or False 12. The cost of shipping parts from a supplier is considered a product cost. True or False 13. The variable cost per unit is constant and does not depend on how many units are produced. True or False 14. In order to improve the accuracy of unit costs, most companies recompute the predetermined overhead rate each month. True or False EXERCISE 12-3 Make or Buy a Component [LO3] Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $20 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: p. 558 Required: 1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier's offer be accepted? Show all computations. 2. Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $65,000 per year. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each? Show computations. QUESTIONS 1 .Mateo Company's average cost per unit is $1.425 at the 16,000 unit level of activity and $1.38 at the 20,000 unit level of activity. Assume that all of the activity levels mentioned in this problem are within the relevant range. Required: Predict the following items for Mateo Company: a. Variable cost per unit. b. Total fixed cost per period. c. Total expected costs at the 18,000 unit level of activity 2. The following is Alsatia Corporation's contribution format income statement for last month: The Company has no beginning or ending inventories and produced and sold 10,000 units during the month. Required: a. What is the company's contribution margin ratio? b. What is the company's break-even in units? c. If sales increase by 100 units, by how much should net operating income increase? d. How many units would the company have to sell to attain target profits of $225,000? e. What is the company's degree of operating leverage? 3. The following monthly data are available for the Challenger Company and its only product, Product SW: Required: a. Without resorting to calculations, what is the total contribution margin at the break-even point? b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made? c. Assume that Challenger Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? d. Assume that Challenger Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW thus resulting in an increase in monthly sales of 12%. Should these changes be made? 4. The management of Reagon Corporation expects sales in January to be $122,000. The company's contribution margin ratio is 69% and its fixed monthly expenses are $50,000. Required: Estimate the company's net operating income for January, assuming that the fixed monthly expenses do not change. Show your work! 5. TabComp Inc. is a retail distributor for MZB-33 computer hardware and related software. TabComp prepares annual sales forecasts of which the first six months of the coming year are presented below. Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank credit card, and the remaining 45% are on open account (TabComp's own charge accounts). The cash and bank credit card sale payments are received in the month of the sale. Bank credit card sales are subject to a 4 % discount which is deducted immediately. The cash receipts for sales on open account are 70% in the month following the sale, 28% in the second month following the sale, and the remaining are uncollectible. TabComp's month-end inventory requirements for computer hardware units are 30% of the next month's sales. The units must be ordered two months in advance due to long lead times quoted by the manufacturer. Required: a. Calculate the cash that TabComp can expect to collect during April. Show all of your calculations. b. Determine the number of computer hardware units that should be ordered in January. Show all of your calculations. 6. The selling and administrative expense budget of Hiser Corporation is based on the number of units sold, which are budgeted to be 1,900 units in August. The variable selling and administrative expense is $6.10 per unit. The budgeted fixed selling and administrative expense is $22,420 per month, which includes depreciation of $5,130. The remainder of the fixed selling and administrative expense represents current cash flows. Required: Prepare the selling and administrative expense budget for August. 7. The following labor standards have been established for a particular product: The following data pertain to operations concerning the product for the last month: Required: a. What is the labor rate variance for the month? b. What is the labor efficiency variance for the month? 8. Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows: Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Required: Based on this information, would Janeiro be better off to continue making the wheels or to buy them from Kasba? SHOW YOUR COMPUTATIONS. 9. Carner Lumber sells lumber and general building supplies to building contractors in a medium-sized town in Montana. Data regarding the store's operations follow: Sales are budgeted at $370,000 for November, $360,000 for December, and $340,000 for January. The cost of goods sold is 70% of sales. Carner's uncollectible accounts are 2% of sales. Other monthly expenses to be paid in cash are $24,600. Monthly depreciation is $17,000. Ignore taxes. Required: Calculate the net income for December. Show your work. EXTRA CREDIT TRUE / FALSE questions (optional) 10. Six Sigma is a process improvement method that targets a system's constraint for process improvement. True or False 11. The lean thinking model focuses on reducing defects to as close to zero as possible. True or False 12. The cost of shipping parts from a supplier is considered a product cost. True or False 13. The variable cost per unit is constant and does not depend on how many units are produced. True or False 14. In order to improve the accuracy of unit costs, most companies recompute the predetermined overhead rate each month. True or False