TENNESSEE CORPORATION

.. has the following unit costs of manufacturing and marketing a chair at an expected output level of 20,000 chairs per month (240,000 chairs per year):

CONSIDER EACH PART INDEPENDENTLY

REQUIRED:

1. For an inventory of 10,000 chairs, what amount would be presented on the balance sheet as per GAAP?

2. If they used variable costing for internal purposes, an inventory of 10,000 chairs would be valued at how much?

3. For the upcoming year, the company is thinking of reducing its selling price by $ .20 per unit, which will increase unit sales 10%. Is this a good idea? Why or why not?

4. In a particular month, the company is thinking of accepting a contract with an old friend for 5,000 chairs. This deal calls for the reimbursement of all manufacturing costs plus a fixed fee of $1,000. Since this is a friend of the company, there will be no variable marketing expenses on this order. You are asked to compare the following two alternatives:

Which alternative should the company do: Alternative A or Alternative B, and by HOW MUCH?

5. Assume the same data with respect to the contract as in requirement 2) above, except that the two alternatives to be compared are as follows:

Now which alternative should the company do: Alternative A or Alternative B? WHY?

6. In a particular month, the company wants to enter an international market in which price competition is keen. The company seeks a special order for 10,000 units at the minimum acceptable price. It expects that shipping costs for this order will amount to only $.75 per unit, and the fixed costs of obtaining the contract will be $4,000. The company will incur no variable marketing costs in connection with this order other than the shipping. Regular business is unaffected by this special order. What is the minimum price that the company must charge?

7. The company has an inventory of 1,000 chairs that must be sold immediately at reduced prices, otherwise the inventory will become worthless and thrown away. What is the minimum price that the company must charge for these chairs?

8. A proposal is received from an outside supplier who will make and ship the chairs directly to the companys customers. Fixed marketing costs will be unaffected, but its variable marketing costs will be slashed by 20%. The companys plant will be idle, but its fixed manufacturing overhead will continue at 50% of the present levels. What is the maximum price that the company would be willing to pay the outside supplier without decreasing operating income?

Manufacturin Direct materials Direct labor Variable overhead Fixed manufacturing overhead $1.00 1.20 0.80 0.50 Marketing Variable (shipping) Fixed 1.50 0.90 Normal selling price $6.00