Exam 4: Fundamentals of Cost Analysis for Decision Making

When there is a production constraint, a company should emphasize the products with:

The Parton Company has gathered the following information for a unit of its most popular product: Direct materials \ 20 Direct labor 15 Overhead (60\% variable) 20 Cost to manufacture \ The above cost information is based on 10,000 units. Parton currently sells 8,500 units for $62 per unit. A distributor has offered to buy 1,000 units at a price of $50 per unit. This special order would not disturb regular sales. Required: a. Calculate Parton's change in operating profits if the special order is accepted. b. How many units of regular sales could be lost before this contract is not profitable?

The Young Company has gathered the following information for a unit of its most popular product: Direct materials \ 12 Direct labor 6 Overhead (40\% variable) Cost to marnufacture 28 Desired markup (50\%) Target selling price The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit. - This special order would not disturb regular sales. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. If the special order is accepted, Young's operating profits will increase by:

If there is excess capacity, the minimum acceptable price for a special order must cover:

The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and revenues are as follows: Oxy Sonic Clearner Clearner Sales Price \ 75 \ 44 Variable cost per unit 40 21 Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine hours is a scarce resource. During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic requires 2.5 machine hours per unit. - How many units of Oxy and Sonic should Garrison produce? Oxy Clearier Sonic Clearner A. 10,000 0 B. 0 6,000 C. 8,750 6,000 D. 10,000 6,000

Item I51 is used in one of Policy Corporation's products. The company makes 18,000 units of this item each year. The company's Accounting Department reports the following costs of producing Item 151 at this level of activity: Per Unit Direct materials \ 1.20 Direct labor \ 2.20 Variable manufacturing overhead \ 3.30 Supervisor's salary \ 1.00 Depreciation of special equipment \ 2.70 Allocated general overhead \ 8.50 An outside supplier has offered to produce Item 151 and sell it to the company for $15.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy Item I51 from the outside supplier rather than to continue making the Item, what would be the annual impact on the company's overall net operating income?

The Lamar Company manufactures wiring tools. The company is currently producing well below its full capacity. The Boston Company has approached Lamar with an offer to buy 10,000 tools at $1.75 each. Lamar sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits?

Liu Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows: Direct materials \ 8.80 Direct labor 5.80 Variable manufacturing overhead 1.60 Fixed manufacturing overhead 3.60 Unit product cost \ 19.80 Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the components were bought from the outside supplier. In addition, making one component uses 1 minute on the machine that is the company's current constraint. If the components were bought, this machine time would be freed up for use on another product that requires 2 minutes on the constraining machine and that has a contribution margin of $5.20 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? (CIMA adapted)

Florida Enterprises produces high quality blankets sold to hotels and resorts. Blankets must be well made because of frequent washings. Currently, Florida sells 10,000 blankets at $60 each with the capacity to produce 12,000 blankets. Florida is considering a special order from a hotel chain in Mexico for 1,000 blankets at a price of $45. Currently, Florida has the following costs: Unit Costs \ 250,000 Product Level Costs \ 40,000 Facility Costs \ 125,00 If Florida accepts the special order, it will incur an additional $2 per blanket in foreign currency transaction costs. No other product or facility costs will change. Required: a. Determine the impact of the special order on Florida. Prepare your analysis in good form. b. What other factors should Florida consider in taking the special order?

The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000. Direct materials \ 60,000 Direct labor 165,000 Marmufacturing overhead 375,000 Total \ 600,000 Manufacturing overhead is 36% variable. The Xu Company has offered to supply all 15,000 units of Part QT34 per year for $35 per unit. If Fortune accepts the offer, $8 per unit of the fixed overhead would be avoided. In addition, some of Fortune's leased facilities could be vacated, reducing lease payments by $90,000 per year. Required: a. By how much would Fortune's operating profits change if 15,000 of Part QT34 are purchased from Xu? b. At what price would Fortune be indifferent to Xu's offer?

If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make.

The Young Company has gathered the following information for a unit of its most popular product: Direct materials \ 12 Direct labor 6 Overhead (40\% variable) Cost to marnufacture 28 Desired markup (50\%) Target selling price The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit. - The distributor claims this special order would not disturb regular sales at $42. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable?

The reason opportunity costs are not included in the accounting system is because they involve estimates.

Bacon Company makes four products in a single facility. These products have the following unit product costs: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Products }$ A B C D Direct materials \ 14.30 \ 10.20 \ 11.00 \ 10.60 Direct labor 19.40 27.40 33.60 40.40 Variable manufacturing 4.30 2.70 2.60 3.20 overhead Fixed manufacturing 26.50 34.80 26.60 37.20 overhead Unit product cost \ 64.50 \ 75.10 \ 73.80 \ 91.40 Additional data concerning these products are listed below. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Products }$ A B C D Grinding minutes per unit 3.80 5.30 4.30 3.40 Selling price per unit \ 76.10 \ 93.50 \ 87.40 \ 104.20 Variable selling cost per \ 2.20 \ 1.20 \ 3.30 \ 1.60 unit Monthly demand in units 2,000 4,000 3,000 2,000 The grinding machines are the constraint in the production facility. A total of 53,600 minutes is available per month on these machines. Direct labor is a variable cost in this company. - Which product makes the LEAST profitable use of the grinding machines?

The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000. Direct materials \ 20,000 Direct labor 55,000 Variable overhead 45,000 Fixed overhead Total The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year. -At what price would Camel be indifferent to Yukon's offer?

The Ramos Company manufactures two products: Treadmills and Elliptical Trainers. The costs and revenues are as follows: Elliptical Treadrnill Trainer Sales price per unit \ 300 \ 175 Variable cost per urit 160 85 Total demand for the Treadmill product is 7,000 units and for the Elliptical Trainer product is 5,000 units. Machine time is a scarce resource. During the year, 48,000 machine hours are available. A Treadmill requires 6 machine hours per unit, while an Elliptical Trainer requires 2.5 machine hours per unit. Required: a. How many units of Treadmills and Elliptical Trainers should Ramos produce? b. What will be the maximum possible contribution margin?

The theory of constraints focuses on minimizing all of the following except:

Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity?

The following information relates to the Jasmine Company for the upcoming year:Sales Amount Per Unit Sales \ 8,000,000 \ 20.00 Cost of goods sold Gross margin 1,600,000 4.00 Operating expenses Operating profits The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jasmine. -Fortunately, there will be no additional operating expenses associated with the order; however, Jasmine is operating at full capacity. How much will operating profits increase if Jasmine accepts the special order?

Muzik Corporation uses part X43 in one of its products. The company's Accounting Department reports the following costs of producing the 16,000 units of the part that are needed every year. Per Unit Direct materials \ 2.90 Direct labor 3.90 Variable overhead 6.70 Supervisor's salary 7.20 Depreciation of special equipment 8.30 Allocated general overhead \5 .40 An outside supplier has offered to make the part and sell it to the company for $28.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $22,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part X43 could be used to make more of one of the company's other products, generating an additional segment margin of $22,000 per year for that product. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part X43 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?