13 Chapter Practice Problems
1.
ABC Company sells and delivers office furniture in the Rocky Mountain area. The costs associated
with the acquisition and annual operation of a delivery truck are given below:
Insurance
Licenses
Vehicle taxes
Garage rent for parking (per truck)
Depreciation ($9,000 5 years)
Gasoline, oil, tires, and repairs
REQUIRED:
$1,600
$250
$150
$1,200
$1,800
$0.07 per mile
A delivery truck was purchased in 2009. At the beginning of 2010,
ABC Company is unsure whether to use the truck or leave it parked
in the garage and have all hauling done commercially. What costs
from the above list are relevant to this decision? Assume state law
requires the payment of vehicle taxes even if the vehicle isnt used.
(b)
2.
(a)
Assume the company decided to use the truck during 2010. Near the
end of the year, an order is received from a customer over 1,000 miles
away. What costs from the above list are relevant in the decision
between using the truck to make the delivery and having the delivery
done commercially?
Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. The
cost per unit for part R-3 is shown below:
Per Unit Cost
Direct materials ..
Direct labor .
Variable overhead ...
Fixed overhead ...
Total cost per part ..
$ 4.80
7.00
3.20
10.00
$25.00
An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for
$23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture
part R-3 could be rented to another company for $150,000 per year. However, Royal Company
has determined that $6 of the fixed overhead being applied to part R-3 would continue to be
incurred even if part R-3 were purchased from the outside supplier.
REQUIRED:
Calculate the effect on Royal Companys net income if they accept the
outside suppliers offer
3.
Boyles Home Center, a retailing company, has two departments, Bath and Kitchen. The companys
most recent income statement appears below:
Total Company
Sales
Variable costs
Contribution margin
Fixed costs
Net income <loss>
Bath Department
Kitchen Department
$5,000,000
1,900,000
3,100,000
2,700,000
400,000
$1,000,000
300,000
700,000
900,000
<200,000>
$4,000,000
1,600,000
2,400,000
1,800,000
600,000
A study indicates that $370,000 of the fixed costs being charged to the Bath Department are sunk
costs or allocated costs that will continue even if the Bath Department is dropped.
REQUIRED:
4.
Foreway Manufacturing Company makes and sells several models of locks. The cost records for
model B-603 shows that manufacturing costs total $21.62 per lock. An analysis of this amount
indicates that $11.90 of the total cost is a variable cost with the remainder being fixed overhead
that is allocated to this lock. The normal selling price of this model is $29 per lock. A chain
store has offered to buy 14,000 B-603 locks from Foreway at a price of $15.75 each to sell in a
market that would not compete with Foreways regular business. Foreway has the capacity to
produce 120,000 B-603 locks each year. Foreway is currently selling 113,000 of these locks to
regular customers.
REQUIRED:
5.
Calculate the effect on Boyles net income if the Bath Department is dropped
Calculate the effect on Foreways net income if the special order is accepted
Mizzou Mining Company mines an iron ore called Alpha. During December, 400,000 tons of Alpha
were mined and processed at a cost of $742,500. As the Alpha ore is mined, it is processed into
Delta and Pi, where 60% of the Alpha output becomes Delta and 40% becomes Pi. Each product
can be sold at the split-off point or processed into the refined products Super Delta and Precision
Pi. Selling prices for these products are:
Delta
Selling price .................
Super Delta
Pi
Precision Pi
$7 per ton
$15 per ton
$12 per ton
$24 per ton
Processing costs to refine Delta into Super Delta are $2,400,000; processing costs to refine Pi into
Precision Pi total $1,600,000.
REQUIRED:
(a)
Should Delta and Pi be sold at the split-off point or refined into Super
Delta and Precision Pi
(b)
Calculate the minimum selling price per ton for Pi if it is to be sold
at the split-off point instead of being processed into Precision Pi
6.
Long Company makes three types of plastic garbage containers. Each of the three types of cans
requires the use of a specialized machine that has total operating capacity of 204,000 hours per
year. Information on each of the three products appears below:
Basic
Selling price per unit
Variable costs per unit
Machine hours required per unit
Standard
Deluxe
$12
$6
0.15
$17
$8
0.25
$27
$12
0.75
The marketing manager has determined that the company can sell all that it can produce of each
of the three products.
REQUIRED:
Calculate the number of each type of product that should be produced
in order to maximize total contribution margin and determine the total
contribution margin for this product mix
(b)
7.
(a)
Assume that Long Company can sell no more than 800,000 units of
each type of product. Calculate the number of each type of product
that should be produced in order to maximize total contribution margin
and determine the total contribution margin for this product mix.
Banner Jewelers is considering a special order for 10 handcrafted gold bracelets to be given as gifts to
members of a wedding party. The normal selling price of a gold bracelet is $389.95 and the costs to
produce one gold bracelet are shown below:
Per Unit Cost
Direct materials ..
Direct labor .
Variable overhead ...
Fixed overhead ...
Total cost per unit ..
$143.00
86.00
7.00
28.00
$264.00
The customer who is interested in the special bracelet order would like special filigree applied to the
bracelet. This filigree would require additional direct materials costing $6 per bracelet and would
also require the acquisition of a special tool costing $465 that would have no other use once the
special order is completed. The customer who is interested in the special order has offered to pay
$349.95 for each of the ten bracelets. Banner Jewelers has the capacity to produce 25 bracelets each
month.
REQUIRED:
(a)
Assume Banner Jewelers is currently selling 12 bracelets to regular
customers. Calculate the effect on the companys net income if the
special order is accepted.
(b)
Assume Banner Jewelers is currently selling 22 bracelets to regular
customers. Calculate the effect on the companys net income if the
special order is accepted.
8.
Solex Company manufactures three products from a common input in a joint production process.
Joint processing costs up to the split-off point total $90,000 per year and are allocated the to three
products equally. The total sales value of each product at the split-off point appears below:
Product
Sales value at the split-off point
Product X
Product Y
Product Z
$50,000
$90,000
$60,000
Each product may be sold at the split-off point or processed further. The total additional processing
costs and the total sales value after further processing for each product are:
Product
Additional processing costs
Sales value after further processing
$35,000
$40,000
$12,000
$80,000
$150,000
$75,000
Product X
Product Y
Product Z
REQUIRED:
9.
Assume Solex Company makes all of the correct sell-or-process further
decisions. Calculate the net income the company would report
Taylor Company produces two industrial cleansers called Pocolimpio and Maslimpio. Both cleansers
use the same liquid chemical input Pocolimpio uses two quarts of the chemical for every unit that is
produced while Maslimpio uses five quarts of the chemical for every unit that is produced. Taylor
Company currently has 6,000 quarts of the chemical in its inventory. The chemical is imported from
a foreign country, however, due to an embargo the company will not be able to import any of the
chemical for the coming year and there is no other source of the material. In addition to the limited
amount of raw materials, Taylor Company only has 6,000 direct labor hours available for the coming
year. Pocolimpio requires three direct labor hours for every unit produced while Maslimpio uses two
direct labor hours for every unit produced. Cost and revenue information for each product appears
below:
Pocolimpio
Selling price per unit
Variable costs per unit:
Direct materials
Direct labor
Variable overhead
Contribution margin per unit
Maslimpio
$81
$139
<20>
<21>
<10>
$30
<50>
<14>
<15>
$ 60
REQUIRED:
(a)
Formulate the product mix problem as a linear program
(b)
Determine the four possible solutions to the linear program
(c)
Determine the optimal product mix of Pocolimpio and Maslimpio
10.
Jackson County Senior Services is an organization devoted to providing essential services to seniors
who live in their own homes within the Jackson County area. The company provides three services
to seniors home nursing, meals on wheels, and housekeeping. Data on revenues and expenses for
the past year appears below:
Total Company
Revenues
Variable costs
Contribution margin
Fixed costs:
Depreciation
Liability insurance
Salaries of program
administrators
Allocated overhead
Net income <loss>
$900,000
490,000
410,000
Meals on Wheels
Home Nursing
$260,000
120,000
140,000
$400,000
210,000
190,000
68,000
42,000
8,000
20,000
40,000
7,000
115,000
180,000
$ 5,000
40,000
52,000
$ 20,000
38,000
80,000
$ 25,000
Housekeeping
$240,000
160,000
80,000
20,000
15,000
37,000
48,000
$ <40,000>
The CEO of Jackson County Senior Services is concerned about the loss shown by the housekeeping
service and is considering eliminating that service. If that service were to be dropped, the liability
insurance for that service could be cancelled.
REQUIRED:
11.
Calculate the effect on the companys net income if Jackson County Senior
Services decides to discontinue offering the housekeeping service
Cardin Company produces two types of gears: Model #12 and Model #15. Market conditions limit
the number of each gear that can be sold. For Model #12, no more than 15,000 units can be sold,
and for Model #15, no more than 40,000 units can be sold. Each gear must be notched by a special
machine. Cardin owns eight machines that together provide 40,000 hours of machine time per year.
Each unit of Model #12 requires two hours of machine time and each unit of Model #15 requires
hour of machine time.
Last year, Cardin produced and sold 12,000 units of Model #12 and 32,000 units of Model #15.
Revenue and cost information from last year appears below:
Model #12
Selling price per unit
Variable costs per unit
Fixed costs per unit
Model #15
$50
20
6
$25
10
5
Management is trying to decide on the quantities of each product to be produced in the coming year.
Assume there is no expected change in the selling price or cost information from last year for either
of the products.
REQUIRED:
(a)
Determine the optimal product mix of Model #12 and Model #15
(b)
Determine Cardin Companys expected net income for the coming
year using the product mix calculated in requirement (a)
12.
Climate-Control, Inc. manufactures a variety of heating and air-conditioning units. The company
currently manufactures 15,000 thermostats each year for use in these heating and air-conditioning
units. The costs of producing this thermostat internally are shown below:
Direct materials ..
Direct labor .
Variable overhead ...
Allocated fixed overhead
Supervisory salaries
Depreciation of special equipment
having no resale value
Total cost ...
Per Unit Cost
$ 6.00
8.00
1.00
9.00
2.00
Cost of 15,000
Units Produced
$ 90,000
120,000
15,000
135,000
30,000
4.00
$30.00
60,000
$450,000
Climate-Control has just received an offer from an outside supplier who has offered to sell the
15,000 thermostats to Climate-Control for $20 per unit. Climate-Control has determined that
if they accept the outside suppliers offer, they could use the freed capacity to launch a new
product that would generate $75,000 of operating income each year.
REQUIRED:
Calculate the effect on Climate-Controls net income if they accept
the outside suppliers offer
(b)
13.
(a)
Calculate the selling price per unit charged by the outside supplier
that would make Climate-Control economically indifferent between
producing the thermostats internally and buying the thermostats from
the outside supplier
XYZ Company sells two popular brands of cookies Dellas Delight and Bonnys Bourbon. Dellas
Delight goes through the mixing and the baking departments and Bonnys Bourbon, a filled cookie,
goes through the mixing, filling, and baking departments. Sandy Beach, vice president of sales,
believes that XYZ Company can sell all of its daily production of Dellas Delight and Bonnys
Bourbon. Both cookies are made in batches of 3,000. In each department, the time required per
batch and the total time available each day are as follows:
Department Minutes
Dellas Delight
Bonnys Bourbon
Total minutes available per day
Mixing
30
15
660
Filling
0
15
270
Baking
10
15
300
Dellas Delight earns a contribution margin per batch of $300 and Bonnys Bourbon generates a
contribution margin per batch of $250.
REQUIRED:
(a)
Formulate the product mix problem as a linear program
(b)
Determine all possible solutions to the linear program
(c)
Determine the optimal product mix of the two cookies