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Chapter 13 - .515 e 3 A Climate—Control lnc manufactures...

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Unformatted text preview: .515 e 3 A Climate—Control, lnc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a ther- mostat to Climate-Control for $20 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: 7'D1rectmaterIals. . . .- ..... . ...... ... . . .'...~ ' . , 6 _-.D1rectiabor ..... ........ -”8 Variable manufacturmg Overhead . . . . . . ...... . .' . . . '. -1 Fixed manufacturlng Overhead traceable ..... '. .- ........ ' . ' 5‘- _? Fixed manufacturing oilerhea'd, common, but allocated . . -. . -. . . . ' ‘ 1'0 _ Total cost ........... ._. f . ‘.'._'. . ._ - . ._ .- . -. ... .7330 ..s4so,o_oq- ‘40% SUp'erVisory salaries_;'60_°/5 deprecialien‘otépeeiat equipment-inoresale Value). 'I" Required. - 1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier’s offer be accepted? Show all computations. . 2. ‘Suppose that if the thermostats were purchased, Climate Control Inc, could use the freed capac- ' I ' ity to launch a new product. The segment margin of the new product_ would be $65, 000 per year _ _ Should Cli-mate Control, Inc., accept the offer to buy the thermostats from the outside supplier I; _ for $20 each? Show computatidns. - I - I 1. Per Unit Dif- ferentia/ Cost 15,000 units Make Buy Make Buy Cost of purchasing ....................... $20 $300,000 Direct materials ..... $ 6 $ 90,000 Direct labor ....................... 8 120,000 Variable manufacturing overhead. 1 15,000 Fixed manufacturing overhead, traceable ................................. 2 30,000 Fixed manufacturing overhead, common ................................... _0 _0 0 0 Total costs ................................... gay: 5;; M M Difference 1n favor of continuing to make the parts ..................... g; M 1Only the supervisory salaries can be avoided if the parts are pur- chased. The remaining book value _of the special equipment is a sunk cost; hence, the $3 per unit depreciation expense is not relevant to this decision. Based on these data, the company should reject the offer and should continue to produce the parts internally. 2. Make Buy Cost of purchasing (part 1) ......................... $300,000 Cost of making (part 1) ............................... $255,000 Opportunity cost—segment margin forgone on a potential new product line ................. 6_5,___ 000 Total cost ................ - ................................... M M Difference in favor of purchasing from the outside supplier ....................................... M Thus, the company should accept the offer and purchase the parts from the outside supplier. Era-614 Banner Company produces three products: A, B, and C. The selling price, variable costs, and contribu- tion margin for one unit of each product follow: Selling-price .._...1. ...; .' ..... . w ,E) [email protected] variable COsts: _ ' . _ ‘ :Direct'. materials . . . -. -. . . ..... 27 . _ , 14 ‘_ 40 ,' Directlabdr.‘._.._. . . . . .._. . .' ..... .12 32. 16 _- variable manufacturing overhead . .1... . . . _3 .._8” . _4- Tota'l’variable cost .._:._'. i2; ._533 . :10. _ [Eontribulion margin . ._ . . . . . . £8. Q ._' a Contribution. margin ratio. . . . . . . . EPA. 10% ' 25% Due to a strike in the plant of one of its competitors, demand for the company’s products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate oh. next week in filling its backlog of orders. The direct labor rate is $8 per hour, and only 3,000 hours of labor time are available each week. Required: . ' 1. Compute the amount of contribution. margin that will be obtained per hour of labor time spent on each product. 2. Which orders would you recommend that the company work on next week—the orders for prod- uct A, product B, or product C? Show computations. . . - 3. By paying overtime wages, more than 3,000 hours of direct labor time can be madeavailable next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? Explain. 1 _ A B C If all the demand for product A has been satisfied, Banner Company ' . . . . . would then use any additional direct labor-hours to manufacture product 8; gfigtcrtitrifrncrgsatrgmr Eirltumt ................................. :3 :3: gig C. In that case, the company shduld be willing to pay up to $18 per (3) Direct labor rate gear hOUr """"""""""""" . """"""" 8 8 8 hour (the $8 usual wage plus the $10 contribution margin per hour for (4) Direct labor-hours required per unit (2) + (3) ........ 1.5 4.0 _2.0 prom.“ C? t° mam‘facmre "we ”“1““ C" . _ Contribution margin per direct labor—hour (1) + (4) $12 $ 9 $10 Likewise, if all the demand for- both products A and C has been satisfied, _ additional labor hours would be used to make product B. In that case, 2. The company should concentrate its labor time on producing product A: mgrgoggggztsgomd be Willing to PaY UP to $17 per hour to manufacture A 3 C ' Contribution margin per direct labor-hour... $12 $9 $10 Direct labor-hours available ....................... x 3 000 x 3 000 x 3 000 Total contribution margin .......................... M m m Although product A has the lowest contribution margin per unit and the second lowest contribution margin ratio, it has the highest contribution margin per direct labor-hour. Since labor time seems to be the com- pany's constraint, this measure should guide management in its produc- tion decisions. 3. The amount Banner Company should be willing to pay in overtime wages for additional direct-labor time depends on how the time would be used. If there are unfilled'orders for all of the products, Banner would presumably Use the additional time to make more of product A. Each hour of direct labor time generates $12 of contribution margin over and above the usual direct labor cost. Therefore, Banner should be will- ing to pay up to $20 per hour (the $8 usual wage plus the contribution margin per hour of $12) for additional labor time, but would of course prefer to pay far less. The upper limit of $20 per direct labor hour sig- nals to managers how valuable additional labor hours are to the com— pany. a; [5' l: [1} Solex Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $100,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. These sales values are as follows: product X, $50,000; product Y, $90,000; and product Z, $60,000. Each product may be sold at the split-off point or processed further. Additional processing re- quires no special facilities. The additional processing costs and the sales value after further processing for each product (on an annual basis) are shown below: $80,000 $235000 " . $40,000 $150,000 $12,000- $75,000 Required: _ ' . . 1d Which product or products should be sold at the split—off pomt, and Wthh product or products shou be processed further? Show computations. . . ProductX Product Y Produth Sales value after further processing... $80,000 $150,000 $75,000 Sales value at split-off point .............. 50 000 90,000 60 000 Incremental revenue ............. -. .......... 30,000 60,000 15,000 Cost of further processing ................. 35 000 40,000 12,000 Incremental profit (loss) ................... M) A5090 Products Y and 2 should be processed further, but not Product X. Dexter Products, Inc., manufactures and sells a number of items, including an overnight case. The company has been experiencing losses on the overnight case for some time, as shown on the following contribution format income statement: . ShippIng__ __ Total variableeXpen‘seS - . . _. :C'ontrlbutionJmargin , rFlXQdeXI-‘aense'sz’r . . _ 21, OOQ ' Salary Q‘i product- line manager: . . ._ .- V ‘ General factory overhead ' - I - " -_. _ . 104 ,000"... 5 " , .;Depreciatipn of equipment (n .ir'esale valué)_.. ._. 136,000. '5 AdvertISIng—traceable . ._. .- . . .... .;- ' 110,000 ln‘sUrance on inV'en’rories ._. ..I Purchasing department Total fixed expenSeS , . . - I - Netope'ralingloss- . ,._ _. . . . .I .1 .I , .._..._._ 'i , ‘Alloealed on the. basis e'f- mach - _ . *AllOcated on the bas’iS oi Sales dollars Discontinuing the overnight cases 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: Would you recommend that the company discontinue the manufacture and sale of overnight cases? Support your answer with appropriate computations. No, the overnight cases shbuld not be discontinued. The computations are: Contribution margin lost if the cases are dis— continued .................................................... _ $(260,000) Less fixed costs that can be avoided if. the cases are discontinued: Salary of the product line manager. 3; 21,000 Advertising ...................................... 110,000 Insurance on inventories ..................... __9.M '140 000 Net disadvantage of dropping the cases ........... mm The same solution can be obtained by preparing comparative income statements. Difi‘erence.’ Net Operating Keep Drop Income Overnight Overnight Increase or Cases Cases (Decrease) Sales ............................................ $450,000 $ 0 $450,000) Variable expenses: Variable manufacturing expenses 130,000 0 130,000 Sales commissions ...................... 48,000 0 48,000 Shipping .................................... 12,000 . 0 12 000 Total variable expenses ................. 190,000 0 190 000 Contribution margin ...................... 260m 0 1260,000) FIxed expenses: - Salary of line manager ....... ‘ ......... 21,000 0 21,000 General factory overhead ............ 104,000 104,000 0 Depreciation of equipment .......... 36,000 36,000 0 Advertising—traceable ................ 110,000 _ 0 110,000 . Insurance on inventories ............. 9,000 0 9,000 Purchasing department ............... 50,000 50,000 0 Total fixed expenses ............. - ......... 3_,_30 000 1_9,__0 000 1_4,_0 000 Net operating loss ............ ' ............. $110,009) M999) $4M) r. i: (3, I 3 Pi Glade Company produces a single product. The costs of producing and selling a single unit of this product at the company’s current activity level of 8,000 units per month are: .Dirébi'n'j'aieriaijs . . _. . ;. . . ; . .. ...... _. . .- ; .i. _. ._ $2.50 .Direotlabdr ._.. . . . . . .’ ..; ..... ,2 1 $3.00: 'V'a'riable.‘manufaCturing QVe. head ... .- ._ . . .-~. _ , $0.50. '-'.lee"dmanufacturanCl/erhead .‘ . . . . . . . ."f $4.25 Variable‘selling.andy'admini'stratiVé expenses . $1.509 Fixedselling and'administ'ra-tive.expenses . .' ._ . . $2.00” The normal selling price is $15 per unit. The company’s capacity is 10,000 units per month. An order has been received from a potential customer overseas for 2,000 units at a price of $12.00 per unit. This order would not affect regular sales. Required: 1. If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company’s total fixed costs.) 2. , Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain. _ 1. Monthly profits would be increased by $9,000: 705/ for Per Unit 2,000 Unis Incremental revenue ....................................... $12.00 $24,000 Incremental costs: Variable costs: . ' Direct materials ......................................... 2.50 5,000 Direct labor .............................. 3.00 6,000 Variable manufacturing overhead ................ 0.50 1,000 Variable selling and administrative ..... - 1.50 3,000 Total variable cost ........................................ 5450 15,000 Fixed costs: . - None affected by the' special order .............. 0 Total incremental cost ..................................... 15,000 Incremental net operating income .................... nggg 2. The relevant cost is $1.50 (the variable selling and administrative costs). All other variable costs are sunk, since the units have already been pro— duced. The fixed costs would not be relevant, since they would not be affected by the sale of leftover units. Ely/Ltd Boyle’s Home Center, a retailing company, has two departments, Bath and Kitchen. The company’s most recent monthly contribution format income statement follows: Sales ... .. ; Variable expenses.‘ Contribution margin . . _.' l; . .' .. , Fixed- expenses . .f. ...... . . ' ' Net operating income (loss) . . . . . _ A study indicates that $370,000 of the fixed expenses being charged to the Bath Department are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 10% decrease in the sales of the Kitchen Department. Required: If the Bath Department is dropped, what will be the effect on the net operating income of the company as a whole? Contribution margin lost if the Bath Department is dropped: Lost from the Bath Department ...................................... $700,000 Lost from the Kitchen Department (10% x $2,400,000) .. 240,000 Total lost contribution margin ........................................... 940,000 ' Less avoidable fixed costs ($900,000 - $370,000) .............. 530,000 Decrease in overall net operating income ........................... M ...
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