Exam 4: Fundamentals of Cost Analysis for Decision Making

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials \ 150,000 Direct labor 240,000 Variable maruffacturing overhead 90,000 Fixed marnufacturing overhead Total - Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Ortega for $34. If Ortega Industries purchases the component from the outside supplier, the effect on operating profits would be a:

Mobley Company makes three products in a single facility. Data concerning these products follow: The mixing machines are potentially the constraint in the production facility. A total of 6,300 minutes is available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all three products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

Brevard Industries produces two products. Information about the products is as follows: Product 1 Product 2 Units produced and sold 4,000 10,000 Selling price per unit \1 5 \1 3 Variable costs per unit 9 8 The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and $40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would be a:

The following information relates to a product produced by Baywatch Company: Direct materials \ 50 Direct labor 35 Variable overhead 30 Fixed overhead 40 Unit cost \ 155 Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year, Baywatch expects to produce only 800,000 units next year. The product normally sells for $180 each. A customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge on the units purchased. Required: a. Compute the effect on operating profits if Baywatch accepts the special order. b. If Baywatch accepts the special order, how much could normal sales drop before all of the differential profits disappear?

Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant manager is considering making the headlights now being purchased from an outside supplier for $11.00 each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Parton Company to manufacture the headlights should result in a net gain (loss) for each headlight of: (CMA adapted)

Juran Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: Direct materials \2 6.60 Direct labor 4.30 Variable manufacturing overhead 1.90 Fixed manufacturing overhead 11.10 Variable selling \& administrative expense 1.50 Fixed selling \& administrative expense \9 .10 The normal selling price of the product is $56.70 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.70 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $51.20 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers. What would be the minimum acceptable price per unit for the special order?

Tori Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 'as is', but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it 'as is' as scrap? (CIMA adapted)

AirStep Shoe Company has two retail stores, one in Gainesville and the other in Orlando. The Gainesville store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of $14,000. The company's two stores have total sales of $250,000, contribution margin of 32 percent, and a total segment margin of $31,000. The contribution margin for the Orlando store must have been:

The constraint at Trek Inc. is an expensive milling machine. The three products listed below use this constrained resource. 9p 8l 7n Selling price per unit \ 404.58 \ 478.74 \ 358.44 Variable cost per unit \ 308.88 \ 371.30 \ 285.36 Time on the constraint (minutes) 6.60 7.90 5.80 Required: a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work! b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

Alpha Inc. regularly uses material FLAV4 and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material FLAV4 is: (CIMA adapted)

Talent Industries manufactures 30,000 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials 300,000 Direct labor 480,000 Variable manuffacturing overhead 180,000 Fixed manufacturing overhead 240,000 Total \ 1,200,000 Required: a. Assume that the fixed manufacturing overhead reflects the cost of Talent's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Talent for $34. If Talent Industries purchases the component from the outside supplier, the effect on income would be a: b. Assume Talent Industries could avoid $80,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Talent purchases the component from the supplier instead of manufacturing it, the effect on income would be a:

A decision must involve at least two alternative courses of action.

Which of the following costs would continue to be incurred even if a segment is eliminated?

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials \ 150,000 Direct labor 240,000 Variable maruffacturing overhead 90,000 Fixed marnufacturing overhead Total - Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Ortega purchases the component from the supplier instead of manufacturing it, the effect on income would be a:

Rainier Inc. has 6,400 machine hours available each month. The following information on the company's three products is available: Product X Product Y Product Z Contribution margin per unit \ 20.00 \ 21.00 \ 17.50 Machine hours per unit 2 3 2 Sales demand in units 1,000 1,500 1,500 Required: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin?

The operations of Winston Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows: $\begin{array}{llr}&\text { Blink Division }&\text { Blur Division }&\text { Total }\\ \text { Sales} &\$280,000&\$168,000&\$448,000\\ \text { Variable costs } &98,000&77,000&175,000\\ \text { Contribution margin } &\$182,000&\$91,000&\$273,000\\ \text { Direct fixed costs} &84,000&70,000&154,000\\ \text { Segment margin} &\$98,000&\$21,000&\$119,000\\ \text { Allocated common costs} &42,000&31,500&73,500\\ \text { Operating income (loss) } &\$56,000&\$(10,500)&\$45,500\\\end{array}$ - Operating income for Winston Corporation, as a whole, if the Blur Division were dropped would be:

Macro Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity. The following information is available: Lightning Lightning 2.0 2.4 Direct materials \ 90 \ 110 Direct labor 60 90 Variable overhead 30 30 Fixed overhead 180 240 Total cost per unit \ 360 \ 470 Selling price 600 780 Units produced and sold 6,000 3,000 The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours. Required: 1. A nationwide discount chain has approached Macro with an offer to buy 2,000 Lightning 2.0 computers and 2,000 Lightning 2.4 computers if the unit prices are lowered to $350 and $450, respectively. a. If Macro accepts the offer, how many direct labor-hours will be required to produce the additional computers? b. How much will the profit increase (or decrease) if Macro accepts this proposal? All other prices will remain the same. 2. Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and $450, respectively. a. How many of each product should be manufactured and sold? Assume current demand will not be affected by the special order. Also assume that the company cannot increase its production capacity to meet the extra demand. b. How much will the profits change if this order is accepted instead?

Part XE3 is used in one of Sun Corporation's products. The company's Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year. Per Unit Direct materials \ 4.50 Direct labor 1.20 Variable overhead 2.70 Supervisor's salary 3.00 Depreciation of special equipment 2.30 Allocated general overhead 1.80 An outside supplier has offered to make the part and sell it to the company for $14.70 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 $5,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part XE3 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?

Warrior Inc. has 12,000 machine hours available each month. The following information on the company's four products is available: Product W Product X Product Y ProductZ Selling price per unit \ 20.00 \ 21.00 \ 17.50 \ 15.00 Variable cost per unit \ 10.00 \ 9.00 \ 7.50 \ 10.00 Machine hours per unit 2 3 4 1.5 If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

Which of the following statements about the theory of constraints is (are) true? (A) The theory of constraints focuses on determining the optimal product mix when two or more resources restrict the attainment of a goal or objective. (B) The theory of constraints focuses on maximizing the rate of throughput contribution while maximizing investment and other operating costs.