Exercise 11-2 The Regal cycle Company manufactures three types of bicycles-a dirt bike a mountain bike, and a racing bike. Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Data on sales and expenses for the past quarter follow: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $300,000 $90,000 $150,000 $60,000 VC (Manuf. The financial (disadvantage) of discontinuing the racing bikes: Lost contribution margin ${27,000) Fixed costs that can be avoided: Advertising, traceable $6,000 Salary of the product-line manager $10,000 Financial (disadvantage) of discontinuing the Racing Bikes $(11,000) and S&A) 120,000 27,000 60,000 33,000 CM 180,000 63,000 90,000 27,000 Fixed Cost: Advertising Or traceable 30,000 10,000 14,000 6,000 Depreciation of Sales SO 6,000 9,000 8,000 SO special equipm. 23,000 Salaries of product-line mg. 35,000 Allocated VC CM SO 12,000 13,000 10,000 Common FC 60.000 18.000 30.000 12.000 Total FC 148.000 46.000 66,000 36,000 Advert (SO) Depreciation ($8,000) Salary (SO) Alloctd. CFC $12.000 NOI (loss) ($20,000) So this new NOI (loss) of ($20,000) compared to earlier ($9,000) loss gives us the difference of an additional ($11.000) loss it we drop Racing Bikes line. NOI (loss) $32,000 $17,000 $24,000 $19,000) Allocated on the basis of sales dollars. Exercise 11-3 Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 15,000 Units per Year 15,000 units Make Direct materials $14 $210,000 Buy $525,000 Direct labor 10 150,000 $210,000 $150,000 VMOH 3 45,000 Per Unit Differential Costs Make Buy Cost to buy $35 DM $14 Direct labor $10 VMOH $3 FMOH, tracbl. $2 FMOH, comm... Total costs $29 $35 Advant./(disadvantage) $(6) of buying the carburetors $45,000 $30,000 FMOH, traceable 6 90,000 135.000 $435,000 FMOH, allocated Total cost 2 $42 $525,000 $190,000) $630,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value) Or Make 15,000 units Buy $525,000 1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted? 3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 4. Given the new assumption in requirement should the outside supplier's offer be accepted? Per Unit Full Costs Make Buy Cost to buy $35 DM $14 Direct labor $10 VMOH $3 FMOH, tracbl. $6 $4 FMOH, comm, 89 $9 Total costs $42 $48 Advant./(disadvantage) $16) of buying the carburetors $210,000 $150,000 $45,000 $90,000 $135,000 $630,000 $60,000 $135.000 $720,000 $190,000) or simply, how much do we think we are saving by outsourcing this production? $7 (542 $35). But, we will have to continue FMOH $4:$9 costs above, so $13 in cost - $7 in savings - (56) Exercise 11-3 Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit Differential Costs 15,000 units Per Unit 15,000 Units per Year Make Buy Make Buy Cost to buy $35 $525,000 Direct materials $14 $210,000 DM $14 $210,000 Direct labor $10 $150,000 Direct labor 10 150,000 VMOH $3 $45,000 VMOH 3 45,000 FMOH, tracbl. $2 $30,000 FMOH, comm.. FMOH, traceable 6 90,000 OPP Cost $10 $150,000 Total costs $39 $35 $585,000 $525,000 FMOH, allocated 9 135,000 Advant./(disadvantage) $4 $60,000 Total cost $42 $630,000 of buying the carburetors *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale Or, value). Per Unit Full Costs 15,000 units Make Buy Make Buy 1. Assuming the company has no alternative use for the facilities that are now being used Cost to buy $35 $525,000 DM to produce the carburetors, what would be the financial advantage (disadvantage) of $14 $210,000 buying 15,000 carburetors from the outside supplier? Direct labor $10 $150,000 VMOH $3 $45,000 2. Should the outside supplier's offer be accepted? FMOH, tracbl. $6 $90,000 $60,000 FMOH, comm. $9 $9 $135,000 $135,000 3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed OPP Cost $10 $150.000 capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Given this new assumption, what would be the financial advantage Total costs $52 $48 $780,000 $720,000 (disadvantage of buying 15,000 carburetors from the outside supplier? Advant./(disadvantage) $4 $60,000 of buying the carburetors 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? Or, simply, we were losing $6 if we bought the product, but with $10 of Opportunity costs if we continue to make, we are in $4 positive if we buy You can also think of it as opportunity cost (potential benefitl) reducing your "buy" price for $10 if you outsource your production. Current price of making it is $29. Current price of buying it is $35, but with a $10 benefit it is $25, so $29-$25 = 54 total benefit. Exercise 11-4 Imperial Jewelers manufactures and sells a gold bracelet for $189.95. The company's accounting system says that the unit product cost for this bracelet is $149.00 as shown below: Per Unit Direct materials $84.00 Direct labor 45.00 Manufacturing overhead 20.00 Unit product cost $149.00 Total for 20 Bracelets $3,399.00 $169.95 Incremental revenue Incremental costs: Variable costs: Direct materials 1,680.00 Direct labor 900.00 $84.00 $45.00 $4.00 $2.00 $135.00 Variable manufacturing overhead Special filigree Total variable cost 80.00 40.00 2,700.00 Fixed costs: The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $169.95 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $250 and that would increase the direct materials cost per bracelet by $2.00. The special tool would have no other use once the special order is completed. To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $4.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party's order using its existing manufacturing capacity. What is the financial advantage (disadvantage of accepting the special order from the wedding party? Should the company accept the special order? Purchase of special tool $250.00 Total incremental cost $2.950.00 Financial advantage of accepting the special order $449.00 You can also divide $250 of the special tool cost into 20 bracelets and get $12.5/bracelet. Then you can add these $12.5 to the cost of $135/unit you already calculated above. This would give you total unit cost of $147.5 per bracelet. Your price of $169.95 - cost of $147.5 = Profit per bracelet of $22.45. Same as $449 total profit above divided by 20 bracelets. e here to search Exercise 11-2 The Regal cycle Company manufactures three types of bicycles-a dirt bike a mountain bike, and a racing bike. Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Data on sales and expenses for the past quarter follow: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $300,000 $90,000 $150,000 $60,000 VC (Manuf. The financial (disadvantage) of discontinuing the racing bikes: Lost contribution margin ${27,000) Fixed costs that can be avoided: Advertising, traceable $6,000 Salary of the product-line manager $10,000 Financial (disadvantage) of discontinuing the Racing Bikes $(11,000) and S&A) 120,000 27,000 60,000 33,000 CM 180,000 63,000 90,000 27,000 Fixed Cost: Advertising Or traceable 30,000 10,000 14,000 6,000 Depreciation of Sales SO 6,000 9,000 8,000 SO special equipm. 23,000 Salaries of product-line mg. 35,000 Allocated VC CM SO 12,000 13,000 10,000 Common FC 60.000 18.000 30.000 12.000 Total FC 148.000 46.000 66,000 36,000 Advert (SO) Depreciation ($8,000) Salary (SO) Alloctd. CFC $12.000 NOI (loss) ($20,000) So this new NOI (loss) of ($20,000) compared to earlier ($9,000) loss gives us the difference of an additional ($11.000) loss it we drop Racing Bikes line. NOI (loss) $32,000 $17,000 $24,000 $19,000) Allocated on the basis of sales dollars. Exercise 11-3 Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 15,000 Units per Year 15,000 units Make Direct materials $14 $210,000 Buy $525,000 Direct labor 10 150,000 $210,000 $150,000 VMOH 3 45,000 Per Unit Differential Costs Make Buy Cost to buy $35 DM $14 Direct labor $10 VMOH $3 FMOH, tracbl. $2 FMOH, comm... Total costs $29 $35 Advant./(disadvantage) $(6) of buying the carburetors $45,000 $30,000 FMOH, traceable 6 90,000 135.000 $435,000 FMOH, allocated Total cost 2 $42 $525,000 $190,000) $630,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value) Or Make 15,000 units Buy $525,000 1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted? 3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 4. Given the new assumption in requirement should the outside supplier's offer be accepted? Per Unit Full Costs Make Buy Cost to buy $35 DM $14 Direct labor $10 VMOH $3 FMOH, tracbl. $6 $4 FMOH, comm, 89 $9 Total costs $42 $48 Advant./(disadvantage) $16) of buying the carburetors $210,000 $150,000 $45,000 $90,000 $135,000 $630,000 $60,000 $135.000 $720,000 $190,000) or simply, how much do we think we are saving by outsourcing this production? $7 (542 $35). But, we will have to continue FMOH $4:$9 costs above, so $13 in cost - $7 in savings - (56) Exercise 11-3 Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit Differential Costs 15,000 units Per Unit 15,000 Units per Year Make Buy Make Buy Cost to buy $35 $525,000 Direct materials $14 $210,000 DM $14 $210,000 Direct labor $10 $150,000 Direct labor 10 150,000 VMOH $3 $45,000 VMOH 3 45,000 FMOH, tracbl. $2 $30,000 FMOH, comm.. FMOH, traceable 6 90,000 OPP Cost $10 $150,000 Total costs $39 $35 $585,000 $525,000 FMOH, allocated 9 135,000 Advant./(disadvantage) $4 $60,000 Total cost $42 $630,000 of buying the carburetors *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale Or, value). Per Unit Full Costs 15,000 units Make Buy Make Buy 1. Assuming the company has no alternative use for the facilities that are now being used Cost to buy $35 $525,000 DM to produce the carburetors, what would be the financial advantage (disadvantage) of $14 $210,000 buying 15,000 carburetors from the outside supplier? Direct labor $10 $150,000 VMOH $3 $45,000 2. Should the outside supplier's offer be accepted? FMOH, tracbl. $6 $90,000 $60,000 FMOH, comm. $9 $9 $135,000 $135,000 3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed OPP Cost $10 $150.000 capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Given this new assumption, what would be the financial advantage Total costs $52 $48 $780,000 $720,000 (disadvantage of buying 15,000 carburetors from the outside supplier? Advant./(disadvantage) $4 $60,000 of buying the carburetors 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? Or, simply, we were losing $6 if we bought the product, but with $10 of Opportunity costs if we continue to make, we are in $4 positive if we buy You can also think of it as opportunity cost (potential benefitl) reducing your "buy" price for $10 if you outsource your production. Current price of making it is $29. Current price of buying it is $35, but with a $10 benefit it is $25, so $29-$25 = 54 total benefit. Exercise 11-4 Imperial Jewelers manufactures and sells a gold bracelet for $189.95. The company's accounting system says that the unit product cost for this bracelet is $149.00 as shown below: Per Unit Direct materials $84.00 Direct labor 45.00 Manufacturing overhead 20.00 Unit product cost $149.00 Total for 20 Bracelets $3,399.00 $169.95 Incremental revenue Incremental costs: Variable costs: Direct materials 1,680.00 Direct labor 900.00 $84.00 $45.00 $4.00 $2.00 $135.00 Variable manufacturing overhead Special filigree Total variable cost 80.00 40.00 2,700.00 Fixed costs: The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $169.95 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $250 and that would increase the direct materials cost per bracelet by $2.00. The special tool would have no other use once the special order is completed. To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $4.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party's order using its existing manufacturing capacity. What is the financial advantage (disadvantage of accepting the special order from the wedding party? Should the company accept the special order? Purchase of special tool $250.00 Total incremental cost $2.950.00 Financial advantage of accepting the special order $449.00 You can also divide $250 of the special tool cost into 20 bracelets and get $12.5/bracelet. Then you can add these $12.5 to the cost of $135/unit you already calculated above. This would give you total unit cost of $147.5 per bracelet. Your price of $169.95 - cost of $147.5 = Profit per bracelet of $22.45. Same as $449 total profit above divided by 20 bracelets. e here to search