7, 9, 11, 12, 23, 25 (Note M For Problem 13-23, only complete requirement #3)

EXERCISE 13-7

Make or Buy a Component LO3

Han Products manufactures 30,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is as follows:

An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 per part. If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $80,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier.

Required:

Prepare computations showing how much profits will increase or decrease if the outside supplier's offer is accepted.

Han Products manufactures 30,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is as follows:

     Direct materials $3.60    Direct labor 10.00    Variable manufacturing overhead 2.40    Fixed manufacturing overhead 9.00    Total cost per part $25.00  

  

An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 per part. If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $80,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier.  

Required:

(a) What is the total amount of avoidable costs if Han buys the units from an outside supplier? (Omit the "$" sign in your response.)

  Total cost $    

(b) How much will profits increase or decrease if the outside supplier's offer is accepted? (Input the amount as positive value. Omit the "$" sign in your response.)

  Profits would increaseby $  

 Explanation:

(a) 

The costs that can be avoided as a result of purchasing from the outside are relevant in a make-or-buy decision. The analysis is:

 

Per UnitDifferential

Costs 30,000 Units  Make Buy Make Buy  Cost of purchasing   $21.00    $630,000    Cost of making:          Direct materials $3.60     $108,000     Direct labor 10.00     300,000     Variable overhead 2.40     72,000     Fixed overhead 3.00*    90,000     Total cost $19.00    $21.00   $570,000   $630,000  

  

* The remaining $6 of fixed overhead cost would not be relevant, because it will continue regardless of whether the company makes or buys the parts.

(b)

The $80,000 rental value of the space being used to produce part S-6 is an opportunity cost of continuing to produce the part internally. Thus, the complete analysis is:

  Make Buy  Total cost, as above $570,000   $630,000    Rental value of the space (opportunity cost) 80,000     Total cost, including opportunity cost $650,000   $630,000  

  Net advantage in favor of buying $20,000  

  

Profits would increase by $20,000 if the outside supplier's offer is accepted.

EXERCISE 13–9

Dropping or Retaining a Segment LO2

Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows:

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The currency in Greece is the euro, denoted above by €. Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company's total general factory overhead or total Purchasing Department expenses.

Required:

Would you recommend that the bilge pump product line be discontinued? Support your answer with appropriate computations.

Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows:

Thalassic Kataskeves, S.A.Income Statement—Bilge PumpFor the Quarter Ended March 31

  Sales   €850,000     Variable expenses:           Variable manufacturing expenses €330,000             Sales commissions 42,000             Shipping 18,000       Total variable expenses   390,000     Contribution margin   460,000     Fixed expenses:           Advertising 270,000             Depreciation of equipment (no resale value) 80,000             General factory overhead 105,000*            Salary of product-line manager 32,000             Insurance on inventories 8,000             Purchasing department 45,000†      Total fixed expenses   540,000     Net operating loss   €(80,000)  

  

*Common costs allocated on the basis of machine-hours.†Common costs allocated on the basis of sales euros.

Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company's total general factory overhead or total Purchasing Department expenses.

Required:(a) Compute the increase or decrease of net operating income if the bilge pump product line are continued or

discontinued. (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net Losses which should be indicated by a minus sign. Omit the "€" sign in your response.)

  Keep ProductLine Drop Product Line

Net OperatingIncome Increase

or (Decrease)

  Sales €      €      €      Variable expenses:      

       Variable manufacturing expenses               

       Sales commissions              

       Shipping              

  Total variable expenses              

  Contribution margin                 Fixed expenses:      

       Advertising              

       Depreciation of equipment               

       General factory overhead              

       Salary of product line manager              

       Insurance on inventories              

       Purchasing department              

  Total fixed expenses              

  Net operating Income (loss) €      €      €    

  

(b) Would you recommend that the bilge pump product line be discontinued?     No

 Explanation:(b)

No, the bilge pump product line should not be discontinued.

EXERCISE 13–11

Sell or Process Further LO6

Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $60,000 per ton, one-fourth of which is allocated to product X15. Seven thousand units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $9 each, or processed further at a total cost of $9,500 and then sold for $12 each.

Required:

Should product X15 be processed further or sold at the split-off point?

Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $60,000 per ton, one-fourth of which is allocated to the product X15. Seven thousand units of product X15 are produced from each ton of clypton.The units can either be sold at the split-off point for $9 each, or processed further at a total cost of $9,500 and then sold for $12 each.  

Required:Should product X15 be processed further or sold at the split-off point?

→Should be processed further.

Should be sold at the split off point.

     Sales value if processed further      (7,000 units × $12 per unit) $84,000    Sales value at the split-off point      (7,000 units × $9 per unit) 63,000    Incremental revenue 21,000    Less cost of processing further 9,500    Net advantage of processing further $11,500  

  

The $60,000 cost incurred up to the split-off point is not relevant in a decision of what to do after the split-off point.

EXERCISE 13–12

Utilization of a Constrained Resource LO5

Benoit Company produces three products, A, B, and C. Data concerning the three products follow (per unit):

Demand for the company's products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $3 per pound with a maximum of 5,000 pounds available each month.

Required:

Which orders would you advise the company to accept first, those for A, for B, or for C? Which orders second? Third?

Benoit Company produces three products, A, B, and C. Data concerning the three products follow (per unit):

  Product  A             B            C             Selling price $80           $56           $70           Variable expenses:            Direct materials 24           15           9                Other variable expenses 24           27           40            Total variable expenses 48           42           49            Contribution margin $32           $14           $21          

  Contribution margin ratio 40%       25%       30%      

  

Demand for the company's products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $3 per pound with a maximum of 5,000 pounds available each month.

Required:

(a) Compute contribution margin per pound of materials used. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

 Contribution

margin

  Product A $      

  Product B $      

  Product C $      

    

(b) Which orders would you advise the company to accept first, those for A, for B, or for C? Which orders second? Third?

     Product A   Second  Product B   Third  Product C   First

 Explanation:(a)

    Product A Product B Product C(1) Direct materials required per unit $24     $15     $9    (2) Cost per pound $3     $3     $3    (3) Pounds required per unit (1) ÷ (2) 8     5     3    (4) Contribution margin per unit $32     $14     $21    (5) Contribution margin per pound

   of materials used (4) ÷ (3) $4.00     $2.80     $7.00    

(b)

Because Product C uses the least amount of material per unit of the three products, and because it is the most profitable of the three in terms of its use of materials, some students will immediately assume that this is an infallible relationship. That is, they will assume that the way to spot the most profitable product is to find the one using the least amount of the constrained resource. The way to dispel this notion is to point out that Product A uses more material (the constrained resource) than Product B, but yet it is preferred over Product B. The key factor is not how much of a constrained resource a product uses, but rather how much contribution margin the product generates per unit of the constrained resource.

PROBLEM 13-23 Relevant Cost Analysis in a Variety of Situations [LO2, LO3, LO4]

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Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company's unit costs at this level of activity are given below:

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increased fixed selling expenses be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. Compute the per unit break-even price on this order.

3. The company has 1,000 Daks on hand that have some irregularities and are therefore considered to be “seconds.” Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? Explain.

4. Due to a strike in its supplier's plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 30% of normal levels for the two-

month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period?

5. An outside manufacturer has offered to produce Daks and ship them directly to Andretti's customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.

3. The relevant cost is $1.20 per unit, which is the variable selling expenseper Dak. Because the irregular units have already been produced, allproduction costs (including the variable production costs) are sunk. Thefixed selling expenses are not relevant because they will be incurredwhether or not the irregular units are sold. Depending on how theirregular units are sold, the variable expense of $1.20 per unit may noteven be relevant. For example, the units may be disposed of through a liquidator without incurring the normal variable selling expense.