ACC560 Week 5
Homework
Instructions
(a) Prepare a per unit analysis of the differential costs. Briefly explain whether Riggs should make or buy the sails.
(b) If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,000 per year, would your answer to part (a) change? Briefly explain.
(c) Identify three qualitative factors that should be considered by Riggs in this make-or-buy decision. (CGA adapted)
CDG costs 70,000* 52,500 52,500 105,000**
TCP costs 0 50,000 50,000 100,000
Total costs 70,000 102,500 102,500 205,000
Weekly gross profit $134,000 $ 65,500 $ 65,500 $131,000
*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.
(3) Compare the resulting net incomes and comment on management’s decision.
(b) Using incremental analysis, determine if the table cleaner should be processed further.
(CMA adapted)
(2) Gross Profit $186,000
Variable overhead $ 50
Fixed overhead $950,000
Variable selling and administrative expenses $ 40
Fixed selling and administrative expenses $500,000
(c) Calculate the markup percentage on the total cost per session.
(d) Calculate the target price per session.
Total loss to company $160,000
E7-3 Moonbeam Company
E7-7 Riggs Company
E7-11 Chen Minerals
processes
P7-3A Thompson Industrial
Products Inc
E8-2 Eckert
Company
E8-6 Alma’s Recording
Studio
E8-9 Rey Custom Electronics
P8-5A Gutierrez
Company
E7-3 Moonbeam Company manufactures
toasters. For the first 8 months of 2017, the company reported the following operating results
while operating at 75% of plant capacity:
Sales (350,000 units) $4,375,000
Cost of goods sold 2,600,000
Gross profit 1,775,000
Operating expenses 840,000
Net income $
935,000
Cost of goods sold was 70% variable and 30% fixed; operating
expenses were 80% variable and 20% fixed.
In September, Moonbeam Company receives a special order for
15,000 toasters at $7.60 each from Luna Company of Ciudad Juarez. Acceptance of
the order would result in an additional $3,000 of shipping costs but no
increase in fixed operating expenses.
Instructions
(a) Prepare an incremental analysis for the special order.
(b) Should Moonbeam Company accept the special order? Why or why
not?(a) Prepare an incremental analysis for the special order.
E7-7 Riggs Company
purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which
is about 80% of full capacity. Riggs purchases sails at $250 each, but the
company is considering using the excess capacity to manufacture the sails
instead. The manufacturing cost per sail would be $100 for direct materials,
$80 for direct labor, and $90 for overhead. The $90 overhead is based on $78,000
of annual fixed overhead that is allocated using normal capacity.
The president of Gibbs has come to you for advice. “It would
cost me $270 to make the sails,” she says, “but only $250 to buy them. Should I
continue buying them, or have I missed something?”Instructions
(a) Prepare a per unit analysis of the differential costs. Briefly explain whether Riggs should make or buy the sails.
(b) If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,000 per year, would your answer to part (a) change? Briefly explain.
(c) Identify three qualitative factors that should be considered by Riggs in this make-or-buy decision. (CGA adapted)
E7-11 Chen Minerals
processes materials extracted from mines. The most common raw material that it processes results in three joint
products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or
each can be processed further and sold for a higher price. The company incurs
joint costs of $180,000 to process one batch of the raw material that produces
the three joint products. The following cost and sales information is available
for one batch of each product.
|
|
Sales Value at Split-Off
Point
|
Allocated
Joint Costs
|
Cost to Process Further
|
Sales Value of Processed
Product
|
|
Spock
|
$200,000
|
$40,000
|
$110,000
|
$300,000
|
|
Uhura
|
300,000
|
60,000
|
85,000
|
400,000
|
|
Sulu
|
455,000
|
80,000
|
250,000
|
800,000
|
Instructions
Determine whether each of the three joint products should be sold as is, or processed further.
Determine whether each of the three joint products should be sold as is, or processed further.
P7-3A Thompson Industrial
Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces
two products: a table cleaner and a floor cleaner from a common set of chemical
inputs (CDG). Each week 900,000 ounces of chemical input are processed at a
cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of
table cleaner. The floor cleaner has no market value until it is converted into
a polish with the trade name Floor Shine. The additional processing costs for this
conversion amount to $240,000.
FloorShine sells at $20 per 30-ounce bottle. The table cleaner
can be sold for $17 per 25-ounce bottle. However, the table cleaner can be
converted into two other products by adding 300,000 ounces of another compound
(TCP) to the 300,000 ounces of table cleaner.
This joint process will yield 300,000 ounces each of table stain
remover (TSR) and table polish (TP). The additional processing costs for this
process amount to $100,000. Both table products can be sold for $14 per
25-ounce bottle.
The company decided not to process the table cleaner into TSR
and TP based on the following analysis.
Process Further
Table Stain
Table Remover Table Polish
Cleaner (TSR) (TP) Total
Production in ounces 300,000 300,000 300,000
Revenue $204,000
$168,000 $168,000 $336,000
Costs:CDG costs 70,000* 52,500 52,500 105,000**
TCP costs 0 50,000 50,000 100,000
Total costs 70,000 102,500 102,500 205,000
Weekly gross profit $134,000 $ 65,500 $ 65,500 $131,000
*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
Instructions
(a) Determine if management made the correct decision to not process the table cleaner further by doing the following.
(1) Calculate the company’s total weekly gross profit assuming
the table cleaner is not processed further.(a) Determine if management made the correct decision to not process the table cleaner further by doing the following.
(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.
(3) Compare the resulting net incomes and comment on management’s decision.
(b) Using incremental analysis, determine if the table cleaner should be processed further.
(CMA adapted)
(2) Gross Profit $186,000
E8-2 Eckert
Company is involved in producing and selling high-end golf equipment. The
company has recently been involved in developing various types of laser
guns to measure yardages on the golf course. One small laser gun, called
LittleLaser, appears to have a very large potential market. Because of
competition, Eckert does not believe that it can charge more than $90 for
LittleLaser. At this price, Eckert believes it can sell 100,000 of these laser
guns. Eckert will require an investment of $8,000,000 to manufacture, and the
company wants an ROI of 20%.
Instructions
Determine the target cost for one LittleLaser.
Determine the target cost for one LittleLaser.
E8-6 Alma’s Recording
Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio
facilities, a digital recording of the performance, and a professional music
producer/mixer. Anticipated annual volume is 1,000 sessions. The company has
invested $2,352,000 in the studio and expects a return on investment (ROI) of
20%. Budgeted costs for the coming year are as follows.
Per Session Total
Direct materials (tapes, CDs, etc) $ 20
Direct labor $400
Per Session Total
Direct materials (tapes, CDs, etc) $ 20
Variable overhead $ 50
Fixed overhead $950,000
Variable selling and administrative expenses $ 40
Fixed selling and administrative expenses $500,000
Instructions
(a) Determine the total cost per session.
(b) Determine the desired ROI per
session. (a) Determine the total cost per session.
(c) Calculate the markup percentage on the total cost per session.
(d) Calculate the target price per session.
E8-9 Rey Custom Electronics
(RCE) sells and installs complete security, computer, audio, and video systems for homes. On
newly constructed homes it provides bids using time-and-material pricing. The
following budgeted cost data are available.
Material
Material
Time
Loading
Charges
Charges
Technicians’ wages and benefits $150,000 —
Technicians’ wages and benefits $150,000 —
Parts manager’s salary and
benefits — $34,000
Office employee’s salary and
benefits 30,000 15,000
Other overhead 15,000
42,000
Total budgeted costs $193,000 $91,000
Total budgeted costs $193,000 $91,000
The company has budgeted for 6,250 hours of technician time during the coming
year. It desires a $38 profit margin per hour of labor and a 80% profit on
parts. It estimates the total invoice cost of parts and materials in 2017 will
be $700,000.
Instructions
(a) Compute the rate charged per hour of labor.
(b) Compute the material loading
percentage. (a) Compute the rate charged per hour of labor.
(c) RCE has just received a
request for a bid from Buil Builders on a $1,200,000 new home. The company
estimates that it would require 80 hours of labor and $40,000 of parts. Compute
the total estimated bill.
P8-5A Gutierrez
Company makes various electronic products. The company is divided into a number of
autonomous divisions that can either sell to internal units or sell externally.
All divisions are located in buildings on the same piece of property. The Board
Division has offered the Chip Division $21 per unit to supply it with chips for
40,000 boards. It has been purchasing these chips for $22 per unit from outside
suppliers. The Chip Division receives $22.50 per unit for sales made to outside
customers on this type of chip. The variable cost of chips sold externally by
the Chip Division is $14.50. It estimates that it will save $4.50 per chip of selling
expenses on units sold internally to the Board Division. The Chip Division has
no excess capacity.
Instructions
(a) Calculate the minimum transfer price that the Chip Division should accept. Discuss whether it is in the Chip Division’s best interest to accept the offer.
(b) Suppose that
the Chip Division decides to reject the offer. What are the financial
implications for each division, and for the company as a whole, of this
decision?(a) Calculate the minimum transfer price that the Chip Division should accept. Discuss whether it is in the Chip Division’s best interest to accept the offer.
Total loss to company $160,000
TUTORIAL PREVIEW
(a)|
|
|
|
Net Income
Increase
|
|
|
Make Sails
|
Buy Sails
|
(Decrease)
|
|
Direct material
|
$100
|
$ 0
|
$ 100
|
|
Direct labor
|
80
|
0
|
80
|
|
Variable overhead
|
35
|
0
|
35
|
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