1

An outside supplier has offered to make the part and sell it to the company for $25.00 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 $21,300 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

A

	Make	Buy
Direct Material
Direct Labour
Variable overhead
Supervisor’s salary
Depreciation of special equipment
Allocated general overhead
Outside purchase price
Total coast

B

The total cost of the “make” alternative is

by

Therefore, the company should

The part

2

Outdoor Luggage Inc. makes high-end, hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below.

	Ski Guard			Golf Guard			Fishing Guard
Selling price per unit	$	260		$	370		$	205
Variable cost per unit	$	130		$	130		$	145
Plastic injection moulding machine processing time required per unit		4	min		6	min		9	min
Kgs of plastic pellets per unit		9	kg		16	kg		7	kg

Required:
1-a. The total time available on the plastic injection moulding machine is the constraint in the production process. What is the contribution margin per unit of the constrained resources for Ski Guard, Golf Guard and Fishing Guard?

	Ski Guard		Golf Guard		Fishing Guard
Selling price per unit
Variable cost per unit
Contribution margin per unit	$0		$0		$0
Plastic injection molding machine processing time required to produce one unit		minutes		minutes		minutes
Contribution margin per unit of the constrained resource	0	Per minute	0	Per minute	0	Per minute

1-b. Which product would be the most profitable use of this constraint?

multiple choice 1

• Golf Guard
• Fishing Guard
• Ski Guard

1-c. Which product would be the least profitable use of this constraint?

multiple choice 2

• Golf Guard
• Fishing Guard
• Ski Guard

2-a. A severe shortage of plastic pellets has required the company to cut back its production so much that the plastic injection moulding machine is no longer the bottleneck. Instead, the constraint is the total available kilograms of plastic pellets. What is the contribution margin per unit of the constrained resources for Ski Guard, Golf Guard and Fishing Guard?

	Ski Guard		Gold Guard		Fishing Guard
Selling price per unit
Variable cost per unit
Contribution margin per unit	$0		$0		$0
Kgs of plastic pellets required to produce one unit		kgs		kgs		kgs
Contribution margin per unit of the constrained resource	0	Per kg	0	Per kg	0	Per kg

2-b. Which product would be the most profitable use of this constraint?

multiple choice 3

• Golf Guard
• Fishing Guard
• Ski Guard

2-c. Which product would be the least profitable use of this constraint?

multiple choice 4

• Golf Guard
• Fishing Guard
• Ski Guard

3. Which product has the largest unit contribution margin?

multiple choice 5

• Golf Guard
• Fishing Guard
• Ski Guard

3

Williams Products Inc. manufactures and sells a number of items, including school knapsacks. The company has been experiencing losses on the knapsacks for some time, as shown by the contribution format income statement below:

WILLIAMS PRODUCTS INC.
Income Statement—School Knapsacks
For the Quarter Ended June 30
Sales				$	260,000
Variable expenses:
Variable manufacturing expenses	$	72,800
Sales commissions		28,600
Shipping		7,800
Total variable expenses					109,200
Contribution margin					150,800
Fixed expenses:
Salary of product-line manager		9,750
General factory overhead		51,550	*
Depreciation of equipment (no resale value)		19,000
Advertising—traceable		51,850
Insurance on inventories		4,200
Purchasing department		30,760	†
Total fixed expenses					167,110
Operating loss				$	(16,310	)

*Allocated on the basis of machine-hours.
^†Allocated on the basis of sales dollars.

Discontinuing the knapsacks would not affect sales of other product lines and would have no noticeable effect on the company’s total general factory overhead or total purchasing department expenses.

Required:
a. Compute the increase or decrease of net operating income if the Williams Products Inc line is continued or discontinued. (Input all amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net Losses which should be indicated by a minus sign.)

	Keep School Knapsack	Drop School Knapsack	Difference: Operating Income Increase or Decrease.
Sales
Variable expenses:
Variable manufacturing expenses
Sales commissions
Shipping
Total variable expenses	0		0
Contribution margin	0		0
Fixed expenses
Salary of production line manager
General factory overhead
Depreciation of equipment
Advertising-traceable
Insurance on investment
Purchasing department
Total fixed expenses	0	0	0
Operating loss	0	0	0

Answer rating: 100% (QA)

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