Suppose Super Clean sells air filters for $3.15 each. Assume that a mail-order company has offered Super Clean $34,400 for 16,000 air filters, or $2.15 per filter. The manufacturing cost per unit is $2.25 under absorption costing. Suppose Super Clean's variable manufacturing cost is $1.15 per air filter. In addition, Super Clean would have to buy a special stamping machine that costs $6,500 to mark the customer's logo on the special-order air filters. The machine would be scrapped when the special order is complete. This sale will use manufacturing capacity that would otherwise be idle. not change fixed costs. not require any variable nonmanufacturing expenses (because no extra marketing costs are incurred with this special order). not affect regular sales. Would you recommend that Super Clean accept the special order under these conditions? Show your analysis. Complete the following incremental analysis to help you make your recommendation. (Use parentheses or a minus sign to enter a decrease in operating income.) Super Clean Incremental Analysis of Special Sales Order Expected increase in revenues Expected increase in expenses: Total expected increase in expenses Expected increase (decrease) in operating incomeSnow Showers operates a Rocky Mountain ski resort. The company is planning its lift-ticket pricing for the coming ski season. Investors would like to earn a 18% return on the compaan $115 million of assets. The company incurs primarily xed costs to groom the runs and operate the lifts. Snow Showers projects xed costs to be $35,250,000 for the ski season. The resort serves about 900,000 skiers and snowboarders each season. Variable costs are about $12.00 per guest. Currently, the resort has such a favourable reputation among skiers and snowboarders that it has some control over the lift-ticket prices. 1. Would Snow Showers emphasize target costing or cost-plus pricing? Why? 2. If other resorts in the area charge $70 per day, what price should Snow Showers charge? 1. Would Snow Showers emphasize target costing or cost-plus pricing? Why? Snow Showers should emphasize a cost-plus approach to pricing because it has been able to differentiate its ski resort from others in the area. Because of its favourable reputation, managers will have some control over pricing. Of course, they still need to consider whether the cost-plus price is within the range customers are willing to pay. 2. If other resorts in the area charge $70 per day, what price should Snow Showers charge? Complete the following table to calculate the price Snow Showers should charge. (Round your nal answer to the nearest dollar.) Plus: Plus: Target revenue Divided by: Price per lift ticket Mount Snows operates a Rocky Mountain ski resort. The company is planning its lift-ticket pricing for the coming ski season. Investors would like to earn a 15% return on the company's $110 million of assets. The company incurs primarily xed costs to groom the runs and operate the lifts. Mount Snows projects xed costs to be $32,500,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about 11 per guest. Currently, the resort had such a favourable reputation among skiers and snowboarders that it had some control over the lift-ticket prices. Assume that Mount Snows' reputation has diminished and other resorts in the vicinity are charging only $70 per lift ticket. Mount Snows has become a price-taker and won't be able to charge more than its oompetitors. At the market price, Mount Snows managers believe they will still serve 725.000 skiers and snowboarders each season. Muirements 1. If Mount Snows can't reduce its costs, what prot will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the prot level? Show your analysis. Complete the following table to calculate Mount Snows' projected income and excess prot or shortfall. (Use parentheses or a mlnus sign to show a profit shortfall.) Revenue at market price Less: Total costs Requirements Operating income Compared '0 the desired operating income f . If Mount Snows can't reduce its costs, what prot will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the prot level? Show your analysis. Assume that Mount Snows has found ways to cut its xed costs to $30.5 million. What is Expected excess prot (prot shortfall) its new target variable cost per skier/snowboarder? Compare this to the current variable cost per skier/snowboarder. Comment on your results. Gila Fashion store operates three departments: Men's, Women's, and Accessories. Gila Fashion allocates all xed expenses (unavoidable building depreciation and utilities) based on each department's floor spaoe. Departmental operating income data for the third quarter of the current year are as follows: a (click the Icon to View the data.) The store will remain in the same building regardless of whether any of the departments are dropped, Should Gila Fashion drop any of the departments? Give your reason. The Men's Department is . While the Women's and Accessories Departments appear to be V , even these departments have a the Accessories Department is contributing 3 toward covering V . Operating income data Department Men's Women's Accessories Total $ 95,000 $ 54,000 $ 104,000 $ Sales revenue .............. 253,000 58,000 36,000 84,000 17,000 23,000 26,000 Variable expenses Fixed expenses ......... 1 78,000 66,000 Total expenses ............. 75'000 59'000 110900 244,000 $ 20,000 $ (5,000) $ (6,000) $ Operating income (loss) . . . . . 9,000 . The Women's Department is contributing $ and Gaston Fashion store operates three departments: Men's, Women's, and Accessories. Gaston Fashion allocates all xed expenses (unavoidable building depreciation and utilities) based on the each department's oor space. If Gaston Fashion drops one of the current departments, it plans to replace the dropped department with a Shoe Department. The company expects the Shoe Department to produce $84,000 in sales and $58,000 of variable costs. Because the shoe business would be new to Gaston Fashion, the company would have to incur an additional $5,000 of xed costs (advertising. new shoe display racks, and so forth) per quarter related to the department. Departmental operating income data for the third quarter of the current year are as follows: E (Click the icon to View the data.) The store will remain in the same building regardless of the decision. What should Gaston Fashion do now? Calculate the expected increase (decrease) in operating income by replacing a department with a Shoe Department. (Use parentheses or a minus sign to enter a decrease In operating Income.) Gaston Fashlon Analysts of Replaclng a Department wlth 0 Shoe Department Operating income data Expected Increase In revenues Expected increase in expenses: Department Variable expenses Men's Women's Accessorles Total 100,000 $ 57,000 $ 106,000 $ 263,000 Fixed expenses Sales revenue Increase In total expenses Variable expenses 180,000 27,000 32,000 19,000 78,000 Expected increase (decrease) in operating income Fixed expenses ............. Total expenses ............. 86.000 65,000 107,000 258,000 $ 14,000 $ (8,000) $ (1,000) $ 5,000 Operating income (loss) . . . . . StoreAway produces plastic storage bins for household storage needs. The company makes two sizes of bins: Large (200 L) and Regular (140 L). Demand for the product is so high that StoreAway can sell as many of each size as it can produce The company uses the same machinery to produce both sizes The madrinery can only be run for only 2,900 hours per period StoreAway can produce 11 Large bins or 15 Regular bins every hourt Fixed expenses amount to $110,000 per period. Sales prices and variable costs are as follows: a (Click the icon to View the costs.) 1. Which product should StoreAway emphasize? Why? 2. To maximize prots, how many of each size bin should StoreAway produce? 3. Given this product mix, what will the company's operating income be? 1. Which product should StoreAway emphasize? Wh Complete the product mix analysis to determine which product StoreAway should emphasize. StoreAway Product Mix Analysls Regular Large Regular Sales price per unit ......... $ 8.20 $ 10.20 Sale: price per unit Less: Variable cost per unit Contribution margin per unit Variable cost per unit ....... $ 3.20 $ 4.80 Contribution margin per machine hour Units per machine hour Pack It produces plastic storage bins for household storage needs. The company makes two sizes of bins: Large (200 L) and Regular (140 L). Demand for the product used to be so high that Pack it could sell as many of each size as it could produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,200 hours per period, Pack It can produce 14 Large bins or 18 Regular bins every hour. Fixed expenses amount to $105,000 per period. a (Click the icon to view the product mix analysis.) 0 (Click the icon to view the operating income from the optimal product mix.) Assume now that demand for Regular bins is limited to 28,800 units and demand for Large bins is limited to 27,000 units. 1. How many of each size bin should Pack It make now'? 2. Given this product mix, what will be the company's operating income? Data tabIe 3. Explain why the operating income is less than it was when Pack It was producing its optimal product mix. Pack It Product Mlx Analysts 1. How many of each size bin should Pack It make? This is a product mix decision. First, determine which bin size Pack It should emphasize. Sales price per unit Pack It should emphasize the production of V size bins since they are V the V size bins. . _ Less: Variable cost per unit Contribution margin per unit Units per machine hour Contribution margin per machine hour Suppose Salvatore's Restaurant is considering whether to bake bread for its restaurant in-house or buy the bread from a local bakery. The chef estimates that variable costs of making each loaf include $0.50 of ingredients, $0.22 of variable overhead (electricity to run the oven), and $0.75 of direct labour for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labour assigns $0.99 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge Salvatore's $1.72 per loaf. 1. What is the unit cost of making the bread in-house (use absorption costing)? 2. Should Salvatore's bake the bread in-house or buy from the local bakery? Why? 3. In addition to the financial analysis, what else should Salvatore's consider when making this decision? 1. What is the unit cost of making the bread in-house (use absorption costing)? Salvatore's Restaurant Outsourcing Decision (Absorption Costing) Variable cost per unit Full (absorption) cost per unitAutos 'R Us has an inventory of 475 obsolete remote-entry keys that are carried in inventory at a manufacturing cost of $75,525. Production supervisor Nellie Buss must decide to do one of the following: - Process the inventory further at a cost of $18,000, with the expectation of selling it for $37,000 - Scrap the inventory for a sale price of $7,500 What should Buss do? Present gures to support your decision. Prepare the Sell or Process Further analysis. (If a box is not used in the table, leave the box empty; do not enter a zero.) Autos 'R Us Sell or Process Further Analysis Difference Expected additional revenues Expected additional costs Expected additional net revenues (cosh) Organicplus processes organic milk into plain yogourt. Organicplus sells plain yogourt to hospitals, nursing homes, and restaurants in bulk, 4-L containers. Each batch, processed at a cost of $840, yields 2.000 L (500 4L) containers of plain yogourt. Organicplus sells the 4-L tubs for $5.00 each and spends $0.18 for each plastic tub Organicplus has recently begun to reconsider its strategy to sell individual-size portions of fruited organic yogourt at local food stores. Organicplus could further process each batch of plain yogourt into 10,526 individual portions (190 mL each) of fruited yogourt. A recent market analysis indicates that demand for the product exists. Each individual portion would sell for $0.50. Packaging would cost $0.05 per portion, and fruit would cost $0.15 per portion. Fixed costs would not change. Should Organicplus continue to sell only the 4-L tubs of plain yogourt (sell as-is) or convert the plain yogourt into individual-sized portions of fruited yogourt (process further)? Why? Calculate the net benet per batch under each alternative. (If a box is not used in the table, leave the box empty; do not enter a zero. Round the net benet per batch to the nearest whole dollar.) Sell as 4-L size Sell as individual containers portions Less: Net benet per unit ' Net benet per batch Top managers of Canada Video are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to help make this decision. (Click the icon to view the analysis.) Total fixed costs will not change if the company stops selling DVDs. Requirements Requirement 1. Prepare an incremental analysis to show whether Canada Video should drop the DVD product line. Will dropping DVDs add to operating income? Explain. (Use parentheses or a minus sign to enter a decrease in operating income.) Canada Video X Analysis Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: Blu-ray Variable expenses Total Discs DVDs Fixed expenses Sales rev $ 426,000 $ 309,000 $ 117,000 Variable expenses. 239,000 159,000 80,000 Total expected decrease in expenses Expected increase (decrease) in operating income Contribution margin 187,000 150,000 37,000 Fixed expenses: X Requirements Manufacturing . . . . . . . . . . . . . 121,000 70,000 51,000 Marketing and administrative 80,000 53,000 27,000 Total fixed expenses 201,000 123,000 78,000 1. Prepare an incremental analysis to show whether Canada Video should drop the DVD product line. Will dropping DVDs add to operating income? Explain. $ (14,000) $ 27,000 $ (41,000) Operating income (loss) . . . . . . . . . . 2. Assume that Canada Video can avoid $27,000 of fixed expenses by dropping the DVD product line. (These costs are direct fixed costs of the DVD product line.) Prepare an incremental analysis to show whether Canada Video should stop selling DVDs 3. Now, assume that all $78,000 of fixed costs assigned to DVDs are direct fixed costs and can be avoided if the company stops selling DVDs. However, marketing has concluded that Blu-ray disc sales would be adversely Print Done affected by discontinuing the DVD line. (Retailers want to buy both from the same supplier.) Blu-ray disc Check answer production and sales would decline 10%. What should the company do