MANAGERIAL ACCOUNTING)
CHAPTER 7
EXERCISE 6
Exercise 7-6 Incremental Analysis and Opportunity Costs [LO 1,2] Finn's Seafood Restaurant has been approached by New England Investments, which wants to hold an employee recognition dinner next month. Lillian Sumner, a manager of the restaurant, agreed to a charge of $72 per person, for food, wine, and dessert, for 175 people. She estimates that the cost of unprepared food will be $36 per person and beverages will be $14 per person.
To be able to accommodate the group, Lillian will have to close the restaurant for dinner that night. Typically, she would have served 190 people with an average bill of $56 per person. On a typical night, the cost of unprepared food is $20 per person and beverages are $17 per person. No additional staff will need to be hired to accommodate the group from New England Investments.
REQUIRED
Calculate the incremental profit or loss associated with accepting the New England Investments group.
What was the opportunity cost of accepting the New England Investments group?
Should Lillian have considered any qualitative factors in her decision? Explain
SOLUTIONS
a.
New England Investment Group
Revenue (Total Bill = 72 * 175)
12,600
Deduct Food & Beverages (175 * 50)
(8750)
Net Profit From New England Investment Group
3,850
Lost Revenue
10,640
Deduct Food & Beverages ($37 * 190)
(7030)
Net Loss
3,610
Incremental Profit From New England Investment Group
240
Incremental Profit from New England Investment Group = Net Profit from New England Investment Group - Net loss.
b.
An opportunity is the forgone need or thing in order to acquire something. Finn's will pick up an extra $240 as compared to the previous daily business operations. Therefore, the New England Investment Group will have to forego the previous daily business operations in order to acquire an end goal of a net profit.
c.
Lillian ought to consider the subjective factor that her typical clients may feel like they are being dealt with as not as much as the gathering. In any case, if Lillian has great interchanges with her general clients, that will facilitate that probability. On the off chance that Lillian doesn't do that, she chances the likelihood of losing her customary clients.
EXERCISE 8
Exercise 7-8 Make-Or-Buy Decision [LO 1] The Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:
Cost per Unit
Variable Costs
Direct Material: 950
Direct Labor: 650
Variable Overhead: 300
Total Variable Costs: 1,900
Fixed Costs
Depreciation of Equipment 500
Depreciation of Building 200
Supervisory Salaries 300
Total Fixed Costs 1,000
Total Costs 2,900
The company has an offer from Duvall Valves to produce the part for $2,100 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down the production of valves, production workers and supervisors will be reassigned to other areas where, unfortunately, they are really not needed. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $55,000 per year.
REQUIRED
Should the company make or buy the valve?
SOLUTIONS
Costs of Manufacturing the Valve Versus Purchasing
Cost per Unit
Variable Costs
Direct Material
950
Direct Labor
650
Variable Overhead
300
Total Variable Costs
1,900
Order Quantity
100
Total Cost of Manufacturing Order
1,900,00
Cost of Purchasing Valve
Cost per Unit
2,100
Quantity
1,000
Cost Of Purchasing Valves
2,100,000
Deduct Production Building Lease
55,000
Cost of Purchasing Valves
2,045,000
Cost Difference
145,000
It will cost $145,000 more to purchase the valve than to manufacture them. The company should continue manufacturing the valves.
EXERCISE 13
Exercise 7-13 Dropping a Product Line [LO 1]. Computer Village sells computer equipment and home office furniture. Currently, the furniture product line takes up approximately 50 percent of the company's retail floor space. The president of Computer Village is trying to decide whether the company should continue offering furniture or concentrate on computer equipment. Below is a product line income statement for the company. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales
Computer Equipment Home Office Furniture Total
Sales $1,400,000 $1,100,000 $2,500,000
Less cost of good sold 900,000 800,000 $1,700,000
Contribution margin 500,000 300,000 $800,000
Less Direct Fixed Costs
Salaries 175,000 175,000 $350,000
Other 60,000 60,000 $120,000
Deduct Allocated Fixed Costs
Rent 13,440 10,560 $24,000
Insurance 3,360 2,640 $6,000
Cleaning 3,920 3,080 $7,000
President's Salary 72,800 57,200 $130,000
Other 6,720 5,280 $12,000
Net Income $164,760 $ (13,760) $151,000
SOLUTIONS
Furniture Line Contribution
Sales
1,100,000
Less cost of goods sold
800,000
Contribution margin
300,000
Less direct fixed costs
Salaries
175,000
Others
60,000
Total direct fixed costs
235,000
Net Contribution from Furniture
$65,000
Computer Equipment
13 % Increase
Sales
1,400,000
182,000
Less cost of goods sold
900,000
117,000
Contribution margin
500,000
65,000
Less direct fixed costs
Salaries
175,000
No increment
Others
60,000
No increment
Less allocated fixed costs
Rent
13,440
Insurance
3,360
Cleaning
3,920
President's Salary
72,800
Other
6,720
Net income
164,760
65,000
Increase Computer sales by 13%
65,000
Drop furniture line
65,000
The outcome is keeping the furniture line creates $65,000 and dropping the furniture line and expanding PC deals 13% likewise has an estimation of $65,00. It won't make any difference if the organization keeps or drops the furniture line, the outcome is the same.
EXERCISE 17
Exercise 7-17 Allocating Joint Costs [LO 2]. The American Produce Company purchased a truckload of cantaloupes (weighing 4,000 pounds) for $900.American Produce separated the cantaloupes into two grades: superior and economy. The superior-grade cantaloupes had a total weight of 3,200 pounds, and the economy-grade cantaloupes totaled 800 pounds. American
Produce sells the superior-grade cantaloupes at $0.50 per pound, and the economy-grade ones at $0.20 per pound.
REQUIRED
Allocate the $900 cost of the truckload to the superior-grade and economy-grade cantaloupes using the physical quantity method and the relative sales value method.
SOLUTIONS
Physical Quantity Method
Cost of Cantaloupes
900
Weight of Cantaloupes
4,000
Superior-Grades
3,200
0.8
Economy-grades
800
0.2
Allocated Costs
Superior-Grade Cantaloupes
720
Economy-Grade Cantaloupes
180
Relative Sales Value Method
Sales of superior-grade cantaloupes
1,600
Sales of Economy-grade Cantaloupes
160
Total sales value
1,760
Allocation of Total cost
Superior grade cantaloupes
818.18
Economy grade cantaloupes
81.82
PROBLEM 2
Problem 7-2 Incremental Analysis of Outsourcing Decision [LO 1,2] Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $300,000per year. Highline states that its bid will cover all services and planting materials required to "keep Oakland's grounds in a condition comparable to prior years." Oakland's cost for grounds maintenance in the preceding year were $309,000, as follows:
Salary of Three Full-time Gardeners 195,000
Plant Materials: 80,000
Fertilizer 80,000
Fuel: 12,000
Depreciation of Tractor, Mowers, and Other Misc. Equip: 12,000
Total: 309,000
REQUIRED
IF Oakland college outsources maintenance, it will be able to sell equipment for $30,000 and the three gardener will be laid off.
a.) Analyze the one-year financial impact of outsourcing grounds maintenance.
b.) How will savings in the second year differ from those in year one?
c.) Discuss qualitative factors that should be considered in the decision.
SOLUTION
a.
Year One Financial Impact
Cost to outsource
300,000
Less sale of equipment
30,000
Groundkeepers Salaries
195,000
Net cost to outsource
75,00
Current maintenance cost
297,000
(Cost-equipment depreciation)
Net difference
222,00
b
Savings in Second-year
Current cost of maintenance
297,000
(Cost-equipment of maintenance)
Cost to outsource
300,000
Groundkeepers salaries
195,000
Net outsourcing cost
105,000
Net savings
192,000
The second-year loses the offer of the gear; however, the school still doesn't need to pay the settled cost of the maintenance people's compensations. The school will continue sparing every year, except more in the main year than the next years.
c.
The major subjective factor Oakland needs to take a gander at is the impact on the spirit of different representatives it would have if they somehow happened to give their whole support a chance to group go. Other auxiliary elements would be the loss of direct control over the upkeep teams and a conceivable loss of nature of work because of that loss of control.
PROBLEM 14
Problem 7-14 Joint Costs and Additional Processing [LO 2] Good Earth Products produces orange juice and candied orange peels. A 1,000-pound batch of oranges, costing $500, is transformed using the labor of $50 into 100 pounds of orange peels and 300 pints of juice. The company has determined that the sales value of 100 pounds of peels at the split-off point is $350, and the value of a pint of juice (not pasteurized or bottled) is $0.40. Beyond the split-off point, the cost of sugar-coating and packaging the 100 pounds of peels is $60. The cost of pasteurizing and packaging the 300 pints of juice is $250. A 100-pound box of candied peels is sold to commercial baking companies for $600. Each pint of juice is sold for $1.75.
REQUIRED
a.) Allocate joint costs using the relative sales values at the split-off point, and calculate the profit per 100-pound box of sugar-coated peels and the profit per pint of juice. Round to the nearest dollar.
b.) What is the incremental benefit (cost) to the company of sugar-coating the peels rather than selling them in their condition at the split-off point?
c.) What is the incremental benefit (cost) to the company of pasteurizing and packaging a pint of juice rather than selling the juice at the split-off point?
SOLUTIONS
a.
Joints costs
100-pounds of oranges
500
Labor
50
550
Orange peels
Juice
Total
Production
100
300
Sales value at split-off
350
120
470
% based sales
74.7%
25.53%
Joint costs allocated
410
140
550
profit
60
20
Profit per 100-pound box of peels
(60)
Profit per pint of juice
(0.07)
b
100-pound box of peels
Sales values after coating
600
Value a split-off
350
Incremental revenue
250
Costs for coating
60
Net incremental benefit of coating
190
c
Pint of juice
Sales Value after pasteurization
525
Value A split-off
100
Incremental revenue
405
Costs For Pasteurization
250
Net Incremental benefit of coating
155
Incremental benefit per pint of juice
0.25
CHAPTER 8
EXERCISE 4
Exercise 8-4: Profit Maximizing Price [l0 1] The editor of Spunk magazine is considering three alternative prices for her new monthly periodical. Her estimate of price and quantity demanded are:
Price Quantity Demanded
$7.95 25,000
$6.95 31,00
$5.95 37,000
Monthly costs of producing and delivering the magazine include $93,800 of fixed costs and variable costs of $2.10per issue.
REQUIRED
Which price will yield the largest monthly profit?
SOLUTION
Price
Variable cost
Fixed costs
Quantity
Profit
$7.95
$2.20
$95,000
$25,000
$48,750
$6.95
$2.20
$95,000
$31,000
$52,250
$5.95
$2.20
$95,00
$37,000
$43,750
Selling at $6.95 per issue will provide the highest profit
EXERCISE 6
Exercise 8-6: Analyzing a Special Order [l0 1] Power Drive produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was:
Direct Material $ 725,000
Direct Labor 475,000
Variable Overhead 225,000
Fixed Overhead: 1,500,000
Total Cost: $ 2,925,00
At the start of the current year, the company received an order for 3,000 drives from a computer company in China. Management Power Drive has mixed feelings about the order. On one hand, they welcome the order because they currently have excess capacity. Also, this is the company's first international order. On the other hand, the company in China is willing to pay only $125 per unit.
REQUIRED
What will be the effect on profit of accepting the order?
SOLUTION
Because there is excess capacity, the calculations will only use the variable costs as only they are relevant in this case. Fixed costs are not relevant because they won't change due to the order.
Variable Cost per unit
Direct Material per Unit
29
Direct Labor per Unit
19
Variable OH per Unit
19
Total Variable Cost per Unit
57
Offer From China per Unit
125
Profit per unit
69
Profit on 3,00 units
$204,000
If they accept the order from China, the company's profit margin will increase by $204,000
EXERCISE 9
Exercise 8-9: Cost-Plus Pricing [LO 2] World View is considering production of a lighted world globe that the company would price at a markup of 25 percent above full cost. Management estimates that the variable cost of the globe will be $80 per unit and fixed costs per year will be $240,000.
REQUIRED
a.) Assuming sales of 1,200 units, what is the full cost of a globe, and what is the price with a 25 percent markup?
b.) Assume that the quantity demanded at the price calculated in part a is only 600 units. What is the full cost of the globe, and what is the price with a 25 percent markup?
c.) Is the company likely to sell 600 units at the price calculated in part b?
SOLUTIONS
a.
Fixed Cost per unit
$200
Variable cost per unit
80
Total cost
280
25% markup on cost
70
Asking price
$350
b.
Fixed Cost per unit
$400
Variable cost per unit
80
Total cost
480
25% markup on cost
210
Asking price
$600
c.
At $600 per unit, the organization will have an income of $360,000 and at 1,200 units, the organization will have an income of $420,000. A distinction of $60,000. The organization resembles to offer more units at a lower cost rather than fewer units at higher benefit.
EXERCISE 14
Exercise 8-14: Target Costing [LO2] The product design team at New Time Products is in the process of designing a new clock using target costing. Product features in comparison to competing products suggest a price of $35 per unit. The company requires a profit of 30 percent of the selling price.
REQUIRED
a.) What is the target cost per clock?
b.) Suppose it appears that the clocks cannot be manufactured for the target cost. What are some of the options that the company should consider?
SOLUTIONS
a.
Target asking price
$35
Target costs
$24.50
Target profit(30%)
$10.50
The target cost per clock is $24.50.
b.
In request to lessen the expenses of assembling the clock, the organization can consider various things. To begin with, outsourcing the assembling of the clock to a producer who has to bring down general costs, looking to discover bring down material expenses, and breaking down where any bottlenecks in the assembling procedure are and redressing them, accordingly enhancing the productivity of the procedure
EXERCISE 18
Exercise 8-18: Activity-Based Pricing [LO 3] Refer to the information in exercise 8-17. For the coming year, The Triumph Corporation has told Julius Company that it will be switched to an activity-based pricing system or it will be dropped as a customer. In addition to regular prices, Julius will be required to pay:
Order Processing (per order) $11
Additional Handling Costs If Order Marked Rush (per order) $20
Technical Support Calls (per call) $21
From 8-17:
Sales $22,000
Number of Orders 170
Percent of Orders Marked Rush 80%
Calls to Technical Support 90
Order Processing $9
Additional Costs If Order Marked Rush (per order) $11
Technical Support Calls (per call) $13
Relationship Management Costs (per customer, per year) $1,800
REQUIRED
a.) Calculate the profitability of the Julius Company account if the activity is the same as in the prior year.
b.) Is it realistic to expect Julius' activity to be the same this year as the previous year if activity-based pricing is instituted? How might Julius Company react to the new pricing scheme? How might its order behavior change as a result of the new fees?
SOLUTIONS
a.
Current Year
Sales
$22,000
$22,000
Revenue from extras
Order processing
1,870
Rush orders
2,720
Technical calls
1,170
Technical Revenue
$27,760
$22,000
Total costs
Cost of goods sold
$17,600
$17,600
Order processing costs
1,530
1,530
Rush orders costs
1,870
1,870
Technical calls costs
1,170
1,170
Relationship management cost
1,800
1,800
Total costs
$23,970
$23,970
Total profit on Julius company
$3,790
$(1,970)
b.
It is not likely that Julius will have an indistinguishable movement from they did the year earlier because action based evaluating tends to drive those exercises down. Julius will start checking their exercises and keep them to a base. Notwithstanding, this will likewise work to Triumph's support as the fewer exercises from Julius will likewise mean the less expenses caused. In the event that the movement continues as before as a year ago, Triumph will really make a benefit as opposed to losing cash as they did precede that.
PROBLEM 11
Problem 8-11: Analyzing Customer Profitability [LO 3] Lauden Conference Solutions specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 35 percent. On a recent job for Orvieto Industries, the company set its price as follows:
Production Costs Including Podiums, Seating, Lighting, Etc. $ 175,000
Installer Salaries 25,000
Total Costs: 200,000
Markup at 35% 70,000
Bid Price $ 270,000
The job turned out to be a big hassle. Orvieto requested 25 change orders, although the dollar value of the products it requested changed very little. The company also returned 33 items that had extremely minor flaws (scratches that were barely visible and would be expected in normal shipping). Orvieto also requested seven meetings with designers taking 40 hours before its plan was finalized. Normally, only two or three meetings are necessary. Alison Jackson, controller for Lauden, decided to conduct a customer profitability analysis to determine the profitability of Orvieto. She grouped support costs into three categories with the following drivers.
Driver Annual Value of Driver Annual Cost
Change orders 850 change orders $212,500
Number of returns 1,000 product returns 70,000
Design meeting hours 1,300 meeting hours 78,000
REQUIRED
a.) Calculate the indirect service costs related to the job performed for Orvieto Industries.
b.) Assuming that Orvieto Industries causes a disproportionate amount of indirect service costs, how should Lauden deal with this situation?
SOLUTIONS
a.
Driver
Quantity
Unit
Annual cost
Cost per Unit
Change orders
850
Change orders
$212,500
$250
Number of returns
1,000
Product Returns
$70,000
$70
Design meeting hours
1,300
Meeting hours
$78,000
$60
Driver
Cost per Unit
N number of units
Total cost
Change orders
$250
25
$6,250
Number of returns
$70
33
$2,310
Design meeting hours
$60
40
$2,400
Total Indirect Service Costs
$10,960
b.
If Orvieto Industries is using services at a disproportionate rate, Lauden could charge Orvieto an activity-based rate. Because of this Orvieto may use less of the services thus clearing up time for Lauden's other customers.
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