Special-Order Decision Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $9.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 82,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $14 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.75 Variable overhead 1.15 Fixed overhead 1.80 Total $8.80 If Smooth Move accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity. Required: 1. What are the alternatives for Smooth Move? Accept or reject the special order 2. CONCEPTUAL CONNECTION: Should Smooth Move accept the special order? Yes By how much will profit increase or decrease if the order is accepted? Increase $ 118,500 x 3. CONCEPTUAL CONNECTION: Briefly explain the significance of the statement in the exercise that "existing sales will not be affected" (by the special sale). It indicates that there will be no product-line cannibalization; in other words, there is sufficient excess capacity such that the acceptance of the special sales will not decrease Smooth Move's regular sales. Feedback Check My Work 2. Relevant costs are future costs and differ across alternatives. Relevant costs for the special order are the variable costs. Calculate the Contribution Margin for the special order. Special Order Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $7.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 94,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $16 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.75 Variable overhead 1.15 Fixed overhead 1.80 Total $8.80 Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20. Required: CONCEPTUAL CONNECTION: Should Smooth Move accept the special order? No By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value. Decrease Feedback Check My Work Relevant costs are future costs and differ across alternatives. Relevant costs for the special order are the variable costs. Calculate the Contribution Margin for the special order. Sell at Split-Off or Process Further Bozo Inc. manufactures two products from a joint production process. The joint process costs $110,000 and yields 6,000 pounds of LTE compound and 14,000 pounds of HS compound. LTE can be sold at split-off for $55 per pound. HS can be sold at split-off for $10 per pound. A buyer of HS asked Bozo to process HS further into CS compound. If HS were processed further, it would cost $35,700 to turn 14,000 pounds of HS into 4,000 pounds of CS. The CS would sell for $50 per pound. Required: 1. What is the contribution to income from selling the 14,000 pounds of HS at split-off? $ 126,000 x 2. CONCEPTUAL CONNECTION: What is the contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS? S Should Bozo continue to sell the HS at split-off or process it further into CS? Process it further into CSV Feedback Check My Work 1. Calculate revenue of HS when sold at split-off for $11. 2. Calculate revenue to process further. Multiply sales price by pounds of CS. Subtract processing cost from revenue for contribution margin. Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows: Alanson Boyne Conway Total Sales revenue $1,280 $185 $315 $1,780 Less: Variable expenses 1,115 45 252 1,412 Contribution margin $165 $140 $63 $368 Less direct fixed expenses: Depreciation 50 15 14 79 Salaries 95 85 120 300 Segment margin $20 $40 $(71) $-11 Direct fixed expenses consist of depreciation and plant supervisory salaries. All depreciation on the equipment is dedicated to the product lines. None of the equipment can be sold. Assume that each of the three products has a different supervisor whose position would be eliminated if the associated product were dropped. Required: Conceptual Connection: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, "15000" rather than "15". Should Petoskey keep or drop Conway? Structuring a Keep-or-Drop Product Line Problem Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines: Strip Plank Parquet Total Sales revenue $400,000 $200,000 $300,000 $900,000 Less: Variable expenses 225,000 120,000 250,000 595,000 Contribution margin $175,000 $ 80,000 $ 50,000 $305,000 Less direct fixed expenses: Machine rent (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) Segment margin $120,000 $ 40,000 $ (45,000) $115,000 Hickory's management is deciding whether to keep or drop the parquet product line. 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 $4,700 in supervision salaries. Required: 1. List the alternatives being considered with respect to the parquet flooring line. 2. List the relevant benefits and costs for keeping the parquet flooring line? 3. Which alternative is more cost effective and by how much? by s Special-Order Decision Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $9.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 82,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $14 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.75 Variable overhead 1.15 Fixed overhead 1.80 Total $8.80 If Smooth Move accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity. Required: 1. What are the alternatives for Smooth Move? Accept or reject the special order 2. CONCEPTUAL CONNECTION: Should Smooth Move accept the special order? Yes By how much will profit increase or decrease if the order is accepted? Increase $ 118,500 x 3. CONCEPTUAL CONNECTION: Briefly explain the significance of the statement in the exercise that "existing sales will not be affected" (by the special sale). It indicates that there will be no product-line cannibalization; in other words, there is sufficient excess capacity such that the acceptance of the special sales will not decrease Smooth Move's regular sales. Feedback Check My Work 2. Relevant costs are future costs and differ across alternatives. Relevant costs for the special order are the variable costs. Calculate the Contribution Margin for the special order. Special Order Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $7.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 94,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $16 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.75 Variable overhead 1.15 Fixed overhead 1.80 Total $8.80 Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20. Required: CONCEPTUAL CONNECTION: Should Smooth Move accept the special order? No By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value. Decrease Feedback Check My Work Relevant costs are future costs and differ across alternatives. Relevant costs for the special order are the variable costs. Calculate the Contribution Margin for the special order. Sell at Split-Off or Process Further Bozo Inc. manufactures two products from a joint production process. The joint process costs $110,000 and yields 6,000 pounds of LTE compound and 14,000 pounds of HS compound. LTE can be sold at split-off for $55 per pound. HS can be sold at split-off for $10 per pound. A buyer of HS asked Bozo to process HS further into CS compound. If HS were processed further, it would cost $35,700 to turn 14,000 pounds of HS into 4,000 pounds of CS. The CS would sell for $50 per pound. Required: 1. What is the contribution to income from selling the 14,000 pounds of HS at split-off? $ 126,000 x 2. CONCEPTUAL CONNECTION: What is the contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS? S Should Bozo continue to sell the HS at split-off or process it further into CS? Process it further into CSV Feedback Check My Work 1. Calculate revenue of HS when sold at split-off for $11. 2. Calculate revenue to process further. Multiply sales price by pounds of CS. Subtract processing cost from revenue for contribution margin. Keep-or-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows: Alanson Boyne Conway Total Sales revenue $1,280 $185 $315 $1,780 Less: Variable expenses 1,115 45 252 1,412 Contribution margin $165 $140 $63 $368 Less direct fixed expenses: Depreciation 50 15 14 79 Salaries 95 85 120 300 Segment margin $20 $40 $(71) $-11 Direct fixed expenses consist of depreciation and plant supervisory salaries. All depreciation on the equipment is dedicated to the product lines. None of the equipment can be sold. Assume that each of the three products has a different supervisor whose position would be eliminated if the associated product were dropped. Required: Conceptual Connection: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, "15000" rather than "15". Should Petoskey keep or drop Conway? Structuring a Keep-or-Drop Product Line Problem Shown below is a segmented income statement for Hickory Company's three wooden flooring product lines: Strip Plank Parquet Total Sales revenue $400,000 $200,000 $300,000 $900,000 Less: Variable expenses 225,000 120,000 250,000 595,000 Contribution margin $175,000 $ 80,000 $ 50,000 $305,000 Less direct fixed expenses: Machine rent (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) Segment margin $120,000 $ 40,000 $ (45,000) $115,000 Hickory's management is deciding whether to keep or drop the parquet product line. 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 $4,700 in supervision salaries. Required: 1. List the alternatives being considered with respect to the parquet flooring line. 2. List the relevant benefits and costs for keeping the parquet flooring line? 3. Which alternative is more cost effective and by how much? by s