Question 1

Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number.

4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

Buy. $_____?______

Question 2:

Structuring a Special-Order Problem

The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $4.20 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows:

Fixed overhead will not be affected by whether or not the special order is accepted.

Required:

By how much will operating income increase or decrease if the order is accepted?What is the total contribution to income from processing the logs into lumber?

$____?____

• Should Jack's continue to sell the logs or process them further into lumber?
• Should continue to sell logs
• Should process to lumber

Question 4:

Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint

Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 30 minutes of machine time.

Assume that a maximum of 51,160 units of each sweatshirt can be sold.

Required:

If required, round your answers to the nearest whole number.

1. What is the contribution margin per hour of machine time for each type of sweatshirt?

Contribution Margin
Swoop $___?___
Rufus $___?___

• What is the optimal mix of sweatshirt?

	Optimal Mix
Swoop ___?___units
Rufus ___?___units What is the total contribution margin earned for the optimal mix? $___?___

Question 5:

Special Order

Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $10.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 92,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $14 per unit. Unit cost information is as follows:

Direct materials	$3.10
Direct labor	2.50
Variable overhead	1.15
Fixed overhead	1.80
Total	$8.55

Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20.

Required:

By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value.

Increase?/decrease? by $______?____

Question 6:

Keep or Buy, Sunk Costs

Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor:

Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following:

In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am.

Required:

1. Conceptual Connection: In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern?

_____________?

2. Conceptual Connection: Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am?

a) she should sell the grand am and buy the neon

b) she should restore the grand am

Question 7:

Sell or Process Further, Basic Analysis

Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow:

The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000.

Management is considering processing Delta beyond the split-off point, which would increase the sales value of Delta to $75,000. However, to process Delta further means that the company must rent some special equipment that costs $15,400 per quarter. Additional materials and labor also needed will cost $8,500 per quarter.

Required:

1. What is the operating profit earned by the four products for one quarter?

$ ______?____

2. Conceptual Connection: Should the division process Delta further or sell it at split-off?

a) the company should process delta further

b) the company should sell at split off

What is the effect of the decision on quarterly operating profit?

Gross profit would (a) increase (b) decrease by $____?______

Question 8:

Target Costing

H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market. The toaster will have four slots that adjust in thickness to accommodate both slim slices of bread and oversized bagels. The target price is $70. Banks requires that new products be priced such that 22% of the price is profit.

Required:

If required, round your answers to two decimal places.

1. Calculate the amount of desired profit per unit of the new toaster.

$__?______

2. Calculate the target cost per unit of the new toaster.

$ ___?____

Question 9:

Cost-Based Pricing Decision

Jeremy Costa, owner of Costa Cabinets Inc., is preparing a bid on a job that requires $1,800 of direct materials, $1,800 of direct labor, and $1,350 of overhead. Jeremy normally applies a standard markup based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of other factors (e.g., competitive pressure). Last year?s income statement is as follows:

Sales	$149,500
Cost of goods sold	107,640
	Gross margin	$41,860
Selling and administrative expenses	46,300
	Operating income	$-4,440

Required:

1. Calculate the markup that Jeremy will use.

_______%

2. What is Jeremy's initial bid price?

$____?____

Question 1 Structuring a Make-or-Buy Problem Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following: Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number. 4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.) Buy. $_____?______ Question 2: Structuring a Special-Order Problem The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $4.20 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows: Fixed overhead will not be affected by whether or not the special order is accepted. Required: 1. By how much will operating income increase or decrease if the order is accepted? Decrease by $ ____?_____ Question 3: Structuring the Sell-or-Process-Further Decision Jack's Lumber Yard receives 8,000 large trees each period that it subsequently processes into rough logs by stripping off the tree bark and leaves. Jack's then must decide whether to sell its rough logs (for use in log cabin construction) at split-off or to process them further into refined lumber (for use in regular construction framing). Jack's normally sells logs for a perunit price of $485. Alternately, each log can be processed further into 800 feet of lumber at an additional cost of $0.05 per board foot. Also, lumber can be sold for $0.75 per board foot. (Note: One tree is equal to one rough log.) Required: 1. What is the total contribution to income from selling the logs for log cabin construction? $___?_____ 2. What is the total contribution to income from processing the logs into lumber? $____?____ 3. Should Jack's continue to sell the logs or process them further into lumber? a) Should continue to sell logs b) Should process to lumber Question 4: Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 30 minutes of machine time. Assume that a maximum of 51,160 units of each sweatshirt can be sold. Required: If required, round your answers to the nearest whole number. 1. What is the contribution margin per hour of machine time for each type of sweatshirt? Contribution Margin Swoop $___?___ Rufus $___?___ 2. What is the optimal mix of sweatshirt? Optimal Mix Swoop ___?___units Rufus ___?___units 3. What is the total contribution margin earned for the optimal mix? $___?___ Question 5: Special Order Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $10.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 92,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $14 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.50 Variable overhead 1.15 Fixed overhead 1.80 Total $8.55 Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20. Required: By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value. Increase?/decrease? by $______?____ Question 6: Keep or Buy, Sunk Costs Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor: Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following: In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am. Required: 1. Conceptual Connection: In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern? _____________? 2. Conceptual Connection: Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am? a) she should sell the grand am and buy the neon b) she should restore the grand am Question 7: Sell or Process Further, Basic Analysis Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow: The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000. Management is considering processing Delta beyond the split-off point, which would increase the sales value of Delta to $75,000. However, to process Delta further means that the company must rent some special equipment that costs $15,400 per quarter. Additional materials and labor also needed will cost $8,500 per quarter. Required: 1. What is the operating profit earned by the four products for one quarter? $ ______?____ 2. Conceptual Connection: Should the division process Delta further or sell it at split-off? a) the company should process delta further b) the company should sell at split off What is the effect of the decision on quarterly operating profit? Gross profit would (a) increase (b) decrease by $____?______ Question 8: Target Costing H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market. The toaster will have four slots that adjust in thickness to accommodate both slim slices of bread and oversized bagels. The target price is $70. Banks requires that new products be priced such that 22% of the price is profit. Required: If required, round your answers to two decimal places. 1. Calculate the amount of desired profit per unit of the new toaster. $__?______ 2. Calculate the target cost per unit of the new toaster. $ ___?____ Question 9: Cost-Based Pricing Decision Jeremy Costa, owner of Costa Cabinets Inc., is preparing a bid on a job that requires $1,800 of direct materials, $1,800 of direct labor, and $1,350 of overhead. Jeremy normally applies a standard markup based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of other factors (e.g., competitive pressure). Last year's income statement is as follows: Sales $149,500 Cost of goods sold 107,640 Gross margin $41,860 Selling and administrative expenses Operating income 46,300 $-4,440 Required: 1. Calculate the markup that Jeremy will use. _______% 2. What is Jeremy's initial bid price? $____?____