122. Quinta Inc. manufactures machine parts for aircraft engines. The CEO is considering an
offer from a subcontractor who would provide 2,800 units of product QR128 for a price of
$190,000. If Quinta does not purchase these parts from the subcontractor it must produce them
in-house with the following costs:
Direct Materials $22
Direct Labor 18
Variable Overhead 14
Allocated Fixed Factory Overhead 16
Allocated Fixed Selling Costs 5
Total Cost $75
If Quinta produces part QR128, there would also be incremental fixed costs of $13,000 per
period. Should Quinta Inc. accept the offer from the subcontractor?
123. Carter Inc. produces two products, A and B. Pertinent per-unit data follow:
A B
Sales price $268 $225
Costs:
Direct materials 80 40
Direct labor 43 80
Variable factory overhead (based on direct labor hours) 60 40
Fixed factory overhead (based on direct labor hours) 30 20
Marketing expenses (all variable) 40 31
Total costs 253 211
Operating income $15 $14
There is insufficient labor capacity in the plant to meet the combined demand for both products.
Both products are produced through the same production departments. The fixed factory
overhead rate is $10 per direct labor hour. Assume that there are no avoidable fixed factory
overhead costs.
Required:
1. Calculate the unit contribution margin for each of the two products.
2. Determine which product should be produced in priority, given the labor constraint, and
explain why.
124. The following unit cost information pertained to the trumpet division of WGN Music Co.
and was based on monthly demand and sales of 100 units:
Variable manufacturing costs:
Direct materials $130
Direct labor 180
Variable factory overhead 70
Fixed factory overhead:
Depreciation 50
Rent for equipment 20
Other 20
Total manufacturing cost $470
Variable selling costs 28
Fixed selling costs 43
Total (full) product cost $541
Assume that the Trumpet Division was evaluating whether or not it would accept a special order
for 10 trumpets at $500 per unit.
Required:
1. Calculate total relevant cost per unit for each unit in the special-sales order.
2. Should WGN accept the special order; why or why not? (Show details.)
125. Winona Johnson is the president of Johnson Mfg., which manufactures coats. She is
trying to decide whether to make 3,000 Type III coats or purchase them from a subcontractor to
fill a special order that she just received. There are no marketing costs on the special order.
Acceptance of the special order would not necessitate any premium pay for overtime work or
additional fixed costs. Johnson Mfg. has supplied the following data:
Cost Data for Type III Coats:
Sale Price $42
Direct Materials 15
Direct Labor 9
Fixed Mfg. Overhead 3
Variable Mfg. Overhead 6
Variable Marketing Costs 3
Fixed Marketing Costs 1
Fixed Administrative Overhead 2
Required:
1. At what purchase price per unit would Ms. Johnson be indifferent as to whether her firm
manufactured the coats or they were purchased from a subcontractor?
2. What qualitative factors might influence Ms. Johnson’s decision regarding manufacturing the
coats or purchasing them?
126. The Crown Company must decide whether to make or buy part 128PC. Although Crown’s
idle equipment could be used to produce up to 10,000 units of the part, the company presently
needs only 7,000 units. The estimated annual cost of making part 128PC is as follows:
Allocated general manufacturing overhead $50,000
Depreciation on existing equipment 15,000
Annual additional set-up and maintenance costs 20,000
Total fixed costs $85,000
Direct materials $5
Direct labor 6
Variable manufacturing overhead 4
Total variable manufacturing cost per unit $15
Reuten Company will sell part 128PC to the Crown Company for $20 per unit.
Required:
Determine whether Crown should make or buy the part, showing calculations for your decision.
127. HJM Auto Parts makes a muffler/pipe assembly for a cost of $45 each ($10 fixed and $35
variable) and then sells it for $68. The opportunity exists to modify this assembly (to a more fuel–
efficient model) for additional direct materials and labor cost totaling $5 per unit. The new
muffler/pipe model is expected to sell for $80.00 each. Variable selling and distribution costs
would be the same at $10 per unit. Projected sales volume is 60,000 units per year for the new
model, the same level of sales as for the current assembly. Labor resources are very tight at
present but machine capacity is underutilized.
Required:
1. Should HJM modify the existing assembly?
2. What would be the increase/decrease in profit if HJM modifies the assembly?
3. How will the labor constraint affect the decision?
128. The controller for Warner Mfg. is trying to implement some of the characteristics of a
just-in-time (JIT) inventory system. She has accumulated data on Warner’s present inventory
system and obtained some projections and estimates of what the results of a JIT system would
be.
Estimated annual direct material requirements
Unit cost for orders of 360,000 units Per unit
100,000 + units $23.00
75,000 + units 23.25
50,000 + units 23.50
25,000 + units 24.00
less than 25,000 25.00
The inventory holding cost is $0.75 per unit, per month. Warner currently purchases 120,000
units every four months. Under a JIT system Warner would purchase 30,000 units every month.
The monthly inventory schedule and the controller’s estimate for a JIT system are provided
below:
Current System: Average JIT System: Average
Month Inventory Balance Inventory Balance
January 105,000 15,000
February 75,000 15,000
March 45,000 15,000
April 15,000 15,000
May 105,000 15,000
June 75,000 15,000
(Assume the above trend continues throughout the rest of the year.)
Required:
Which system should Warner use, and why? Show calculations for your decision.
129. Marchant Industries, which produces heating blankets, has been trying to get a customer,
Home Select, Inc., to purchase a special order of heating blankets in order to keep the plant busy
at a time when production is expected to be slower than normal. Home Select has agreed, but
only if the price is reduced to $42. Listed below are some data prepared by Marchant. The
special order can be produced within available capacity, and will be made in a single batch.
Next Month’s Operating Information
Sales 10,000 units (made in 10 batches of 1,000 each)
Sales Price Per Unit $65
Per unit costs:
Variable Manufacturing Costs 28
Batch level manufacturing costs 12
Variable Marketing Costs 8
Fixed Manufacturing Costs 6
Fixed Marketing Costs 3
Special Order Information
Sales 5000 units
Sales Price Per Unit $42
There are no variable marketing costs associated with the special order, but Ruby Marchant, the
president of the firm, has spent $1,500 during the past month trying to get Home Select to
purchase this special order.
Required:
Determine the effect of the special order, if taken, on Marchant’s total operating profit.
130. Luther Company, located in Largeville, Kansas, is a retailer of durable, light-weight
luggage products known for their high-quality and innovation. Recently, the firm conducted a
relevant cost analysis of one of its product lines that has only two products, Kryptonite and
Meteorite. Sales for Meteorite are decreasing and the purchase costs increasing. The firm is
considering dropping Meteorite products and only selling Kryptonite. Luther Company allocates
fixed costs (both corporate and selling/administration) to products on the basis of sales revenue.
When the president of Luther saw the income statement, he agreed that Meteorite should be
dropped. If this is done, sales of Kryptonite are expected to increase by 15% next year; the firm’s
cost structure will remain the same.
Kryptonite Meteorite
Sales $200,000 $320,000
Variable cost of goods sold 90,000 160,000
Gross margin 110,000 160,000
Operating Expenses:
Fixed corporate costs 60,000 90,000
Variable selling and administration 22,000 59,000
Fixed selling and administration 12,000 18,000
Total Operating Expenses 94,000 167,000
Operating income (loss) $16,000 ($7,000)
Required:
1. Find the expected change in annual short-term operating income by dropping Meteorite and
selling only Kryptonite.
2. What strategic factors should be considered?
131. Old Vine Vineyard produces premium wine. Its success in the industry is due to its
quality, although all of its customers, wine shops, and specialty grocery stores, are very cost
conscious and negotiate for price cuts on all large orders. Noting that the wine industry is
becoming increasingly competitive, Old Vine is looking for a way to meet the challenge. It is
negotiating with Eastern Seasons, a regional specialty grocery store, regarding a large order of
wine. Old Vine is currently producing at under-capacity and would like to keep its production
facilities going, gaining better economies of scale by increasing production. Eastern Seasons has
agreed to a large order (2,000 bottles), but only at a price of $39 per bottle. The special order can
be produced in one batch with available capacity. Old Vine prepared these data:
Next month’s budgeted operating information (based on 10,000 units/month, and a normal batch
size of 1,000 bottles):
Regular sales price (per bottle) $55
Per-unit costs:
Variable manufacturing costs 22
Batch-level costs (incurred with each batch produced) 5
Variable marketing costs 10
Fixed manufacturing costs 6
Fixed marketing costs 2
Special order information (order is produced in
one batch
of 2,000 bottles):
Units (bottles) 2,000
Selling price per bottle $39
No variable marketing costs would be associated with the special order, but Old Vine has spent
$2,500 during the past two months trying to get Eastern Seasons to execute a deal.
Required:
1. How much will the special order change Old Vine’s total operating income?
2. How much would the special order change Old Vine’s total operating income if Old Vine is
operating at full capacity and, if it accepted the order from Eastern Seasons, would lose the sale
of 2,000 bottles to regular customers? (Assume that sales lost to normal customers would be
produced in two batches of 1,000 bottles, while the special order—as above—could be produced
in a single batch of 2,000 bottles.)
3. How might the special order fit into Old Vine’s competitive strategy?
