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 Unit15,000 Units

Per YearDirect materials $14$210,000

Direct labor$10$150,000

Variable manufacturing overhead$345,000

Fixed manufacturing overhead, traceable6*90,000

Fixed manufacturing overhead, allocated9135,000

Total cost $42$630,000

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required:

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 financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

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:

Direct materials $84.00

Direct labor45.00

Manufacturing overhead20.00Unit

product cost $149.00

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.

Required:

1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

2. Should the company accept the special order?

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product Selling Price QuarterlyOutput

A $16per pound15,000pounds

B $8per pound20,000pounds

C $25per gallon4,000gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product AdditionalProcessing CostsSellingPrice

A $63,000 $20per pound

B $80,000 $13per pound

C $36,000 $32per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Benoit Company produces three productsA, B, and C. Data concerning the three products follow (per unit):

Product

A B C

Selling price $80$56$70

Variable expenses:

Direct materials24159

Other variable expenses242740

Total variable expenses484249

Contribution margin $32$14$21

Contribution margin ratio40%25%30%

The company estimates that it can sell 800 units of each product per month. The same raw material is used in each product. The material costs $3 per pound with a maximum of 5,000 pounds available each month.

Required:

1. Calculate the contribution margin per pound of the constraining resource for each product.

2. Which orders would you advise the company to accept first, those for A, B, or C? Which orders second? Third?

3. What is the maximum contribution margin that the company can earn per month if it makes optimal use of its 5,000 pounds of materials?