Question One

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:

Direct materials$95,000

Direct labour43,000

Overhead85,000

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 labour also needed, will cost $8,500 per quarter.

Required:

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

5 Marks

2.Should the division process Delta further or sell it at split-off? What is the effect of the decision on quarterly operating profit?

5 Marks

Question Two

PRODUCT MIX DECISION, SINGLE CONSTRAINT

Norton Company produces two products (Juno and Hera) that use the same material input. Juno uses two kilograms of the material for every unit produced, and Hera uses five kilograms. Currently, Norton has 16,000 kilograms of the material in inventory. All of the material is imported. For the coming year, Norton plans to import an additional 8,000 kilograms to produce 2,000 units of Juno and 4,000 units of Hera. The unit contribution margin is $30 for Juno and $60 for Hera.

Norton Company has received word that the source of the material has been shut down by embargo. Consequently, the company will not be able to import the 8,000 kilograms it planned to use in the coming year's production. There is no other source of the material.

Required:

1.Compute the total contribution margin that the company would earn if it could manufacture 2,000 units of Juno and 4,000 units of Hera.

5 Marks

2.Determine the optimal usage of the company's inventory of 16,000 kilograms of the material. Compute the total contribution margin for the product mix that you recommend.

5 Marks

Problem Three

MAKE OR BUY, QUALITATIVE CONSIDERATIONS

Howarth Dentistry Services operates in a large metropolitan area. Currently, Howarth has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows:

PorcelainGold

Raw materials $ 125$160

Direct Labour3535

Variable overhead1212

Fixed overhead2626

Total$198$233

Fixed overhead is detailed as follows:

Salary (supervisor)$32,000

Depreciation6,000

Rent (lab facility)34,000

Overhead is applied on the basis of direct labour hours. These rates were computed by using 6,200 direct labour hours.

A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is $190 for porcelain crowns and $205 for gold crowns; however, the offer is conditional on supplying both types of crownsit will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Hetrick's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Hetrick uses 2,400 porcelain crowns and 650 gold crowns per year.

Required:

1.Should Howarth continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing?

5 Marks

2.What qualitative factors should Howarth consider in making this decision?

5 Marks

3.Suppose that the lab facility is owned rather than rented and that the $34,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1?

5 Marks

4.Refer to the original data. Assume that the volume of crowns used is 4,200 porcelain and 650 gold. Should Howarth make or buy the crowns? Explain the outcome.

5 Marks