Exam 3 - Practice Problems.pdf

The company has no step costs all fixed costs in the

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The company has no step costs. All fixed costs in the Other Overhead category represent unavoidable fixed costs that are already being incurred and that would either be allocated to production of the components, or to some other product if components are not made.
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Exam 3 – Practice Problems Page 68 Required: 1. Sunbeam Products will require 14,000 components this year. Should Sunbeam Products buy these components from Tiger or make them internally? (show your computations) 2. Regardless of your analysis in part (1), assume that Sunbeam Products has decided to make the components internally. One-year contracts have been signed for the additional space and for the equipment, and these contracts cannot be canceled . Assume that Tiger Electronics now comes back with a counter offer for providing the components. What is the highest price that Tiger Electronics can charge and still induce Sunbeam Products to buy the components rather than produce them internally?
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Exam 3 – Practice Problems Page 69 Solution 1. Sunbeam Products will require 14,000 components this year. Should Sunbeam Products buy these components from Tiger or make them internally? (show your computations) Cost to buy = 14,000 units x $30 = $420,000 Cost to make = 14,000 units x ($15 DM + $10 DL + $3 VOH [computed using the high-low method]) + $42,000 for new space + $35,000 for equipment = $469,000 (or $33.50 per unit) Sunbeam should buy the switches 2. Regardless of your analysis in part (1), assume that Sunbeam Products has decided to make the cmponents internally. One-year contracts have been signed for the additional space and for the equipment, and these contracts cannot be canceled . Assume that Tiger Electronics now comes back with a counter offer for providing the components. What is the highest price that Tiger Electronics can charge and still induce Sunbeam Products to buy the components rather than produce them internally? Since contracts can’t be cancelled, the fixed costs are unavoidable and aren’t relevant for this question. Only the variable costs are relevant: $15 DM + $10 DL + $3 VOH = $28 maximum price
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Exam 3 – Practice Problems Page 70 PROBLEM: LCB, Inc. is preparing a bid to produce engines. The company has experienced the following costs: Total Cumulative Costs Cumulative Units Produced Materials Labor 10 20 40 $ 60,000 120,000 240,000 $120,000 192,000 307,200 At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs, LCB knows that the production of 40 engines will incur $100,000 of fixed overhead costs. The bid request is for an additional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost for each order. LCB, Inc.’s rate of learning on the 3-year engine contract is A. 64% B. 100% C. 80% D. 62.5%
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Exam 3 – Practice Problems Page 71 SOLUTION (A) is incorrect because 64% equals $307,200 divided by $480,000 (4 × $120,000).
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