1.
Assume
a
retailing
company has two departments—
and
. The company’s most recent contribution format income statement follows:
| Total | |||||
|---|---|---|---|---|---|
| $ | 8 | $ 350,000 | $ | 4 | |
| 3 | 2 | 12 | 200,000 | ||
| 4 | 80,000 | 230,000 | 250,000 | ||
| 400,000 | 1 | 40,000 | 260,000 | ||
| $ 80,000 | $ 90,000 | $ ( | 10 |
The company says that $110,000 of the fixed expenses being charged to Department B are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department B is discontinued the sales in Department A will drop by 6%. What is the financial advantage (disadvantage) of discontinuing Department B?
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2. Assume a company is considering buying 10,000 units of a component part rather than making them. A supplier has agreed to sell the company 10,000 units for a price of $40 per unit. The company’s accounting system reports the following costs of making the part:
| Per Unit | 10,000 Unitsper Year |
|---|---|
| $ 18 | $ 180,000 |
| 1 | 20,000 |
| $ 44 | $ 440,000 |
One-half of the traceable fixed manufacturing overhead relates to supervisory salaries and the remainder relates to depreciation of equipment with no salvage value. If the company chooses to buy this component part from a supplier, then the supervisor who oversees its production would be discharged. If the company begins buying the part from a supplier, it can use freed up capacity to produce and sell 2,350 more units of another product that earns a contribution margin per unit of $7.00. What is the financial advantage (disadvantage) of buying 10,000 units from the supplier?———————-
3. Assume a company manufactures many products, one of which normally sells for $48 per unit. The company’s accounting system reports the following unit product cost for this product:
| $ 40 |
The company estimates that $3 of its manufacturing overhead varies with respect to the number of units produced. The remainder of its overhead is fixed and unaffected by the volume of units produced within the relevant range.
A customer has approached the company with an offer to buy 300 units of a customized version of the product mentioned above for $39. The company can fulfill this order using existing manufacturing capacity. To accommodate the customer’s desired product design, the company would incur additional direct materials cost per unit of $3. It would also have to buy a special tool for $530 that has no other use or resale value after the special order is completed. Assuming that accepting this order will not have any effect on sales to other customers, what is the financial advantage (disadvantage) of accepting the special order?
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4. Assume a company has three products—A, B, and C—that emerge from a joint process. The selling prices and outputs for each product at the split-off point are as follows:
| Product | Selling Price | Output | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| $ 33 | per pound | 14,000 | pounds | |||||||
| $ 29 | 18,000 | |||||||||
| $ 24 | 19,000 |
Each product can be processed further beyond the split-off point. The additional processing costs for each product and their respective selling prices after further processing are as follows:
| Additional Processing Costs | |
|---|---|
| $ 65,000 | $ 37 |
| $ 72,500 | $ 34 |
| $ 70,000 | $ 30 |
What is financial advantage (disadvantage) of further processing Product B?
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5. Part U67 is used in one of Broce Corporation’s products. The company’s Accounting Department reports the following costs of producing the 15,000 units of the part that are needed every year.
| $ 1.90 |
| $ 2.90 |
| $ 5.70 |
| $ 6.20 |
| $ 7.30 |
| $ 4.40 |
An outside supplier has offered to make the part and sell it to the company for $23.00 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $21,000 of these allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
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