Question

1. The Fluffy Company manufactures slippers and sells them at $ 13 a pair. Variable manufacturing cost is $ 4.75 a pair, and allocated fixed manufacturing cost is $ 3.00 a pair. Fluffy has enough idle capacity avail-able to accept a one- time- only special order of 25,000 pairs of slippers at $ 7.75 a pair. Fluffy will not incur any marketing costs as a result of the special order. What would the effect on operating income be if Fluffy could accept the special order without affecting normal sales: (a) $ 0, (b) $ 75,000 increase, (c) $ 118,750 increase, or (d) $ 193,750 increase? Show your calculations.
2. The Chicago Company manufactures Part No. 498 for use in its production line. The manufacturing cost per unit for 35,000 units of Part No. 498 is:
Direct materials................ $ 8
Direct manufacturing labor............. 35
Variable manufacturing overhead.......... 15
Fixed manufacturing overhead allocated ....... 20
Total manufacturing cost per unit ......... $ 78

The Bench Company has offered to sell 35,000 units of Part No. 498 to Chicago for $ 74 per unit. Chicago will make the decision to buy the part from Bench if there is an overall savings of at least $ 30,000 for Chicago. If Chicago accepts Bench’s offer, $ 5 per unit of the fixed overhead allocated would be eliminated. Furthermore, Chicago has determined that it could use the released facilities to save relevant costs in the manufacture of Part No. 575. For Chicago to achieve an overall savings of $ 30,000, the amount of relevant costs that would have to be saved by using the released facilities in the manufacture of Part No. 575 would be which of the following: (a) $ 140,000, (b) $ 415,000, (c) $ 65,000, or (d) $ 525,000? Show your calculations. What other factors might Chicago consider before outsourcing to Bench?



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  • CreatedJanuary 15, 2015
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