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132. Joe Green Enterprises has met all production requirements for the current month and has
an opportunity to produce additional units of product with its excess capacity. Unit selling prices
and costs for three models of one of its product lines are as follows:
No
Frills Standard
Options
Super
Selling price $35.00 $45.00 $65.00
Direct materials 10.00 12.00 14.00
Direct labor ($15/hr.) 7.50 12.00 21.00
Variable Overhead 4.00 6.40 11.20
Fixed Overhead 3.00 5.00 5.00
Variable overhead is charged to products on the basis of direct labor dollars, and fixed overhead
is charged to products on the basis of machine hours.
Required:
1. If Joe Green Enterprises has excess machine capacity and can add more labor as needed (that
is, neither machine capacity nor labor is a constraint), the excess production capacity should be
devoted to producing which product or products? (Show calculations.)
2. If Joe Green Enterprises has excess machine capacity but a limited amount of labor time, the
production capacity should be devoted to producing which product or products? (Show
calculations.)
133. Feel the Difference, Inc. manufactures bath and beauty products such as soaps, skin
creams, lotions, and other products primarily for people with dry and sensitive skin. It has just
introduced a new line of product that removes the spotting and wrinkling in skin associated with
aging. It sells these products in pharmacies and department stores at prices slightly higher than
those of other brands because of Feel the Difference's excellent reputation for quality and
effectiveness.
Feel the Difference currently has very low utilization of plant capacity. Two years ago, in
anticipation of rapid growth, the company opened a new large manufacturing plant, which has yet
to be utilized more than 50 percent. Partly for this reason, Feel the Difference has sought new
partners and was able, with the help of financial analysts, to locate suitable business partners.
The first potential partner identified in this search was a large supermarket chain, All-Mart,
which is interested in the partnership because it wants Feel the Difference to manufacture an
age cream to sell in its stores. The product would be essentially the same as the Feel the
Difference product but would be packaged in the All-Mart brand name. The agreement would pay
Feel the Difference $2.00 per unit and would allow All-Mart a limited right to advertise the
product as manufactured for All-Mart by Feel the Difference. Feel the Difference's CFO has made
some calculations and has determined that the direct materials, direct labor, and other variable
costs needed for the All-Mart order would be about $1.00 per unit as compared to the full cost of
$2.50 (materials, labor, and overhead) for the equivalent Feel the Difference product.
Required:
Should Feel the Difference accept the proposal from All-Mart? Why or why not? (Include
strategic considerations.)
134. SportsCards Inc. manufactures baseball cards sold in packs of 10 in drugstores and
grocery stores throughout the country. It is the second leading firm in an industry with four major
firms. SportsCards has been approached by Zip Cereal Inc., which would like to order a special
edition of cards to use as a promotion with its new cereal. SportsCards would be solely
responsible for designing and producing the cards. Zip wants to order 30,000 sets and has
offered $25,500 for the total order. Each set will consist of 30 cards. SportsCards currently
produces cards in sheets of 120.
Production, marketing and other costs (per sheet):
Direct materials $1.30
Direct labor $0.25
Variable overhead $0.45
Fixed overhead $0.20
Variable marketing $0.05
Fixed marketing $0.35
Insurance, taxes and administrative salaries $0.10
Cost for special order:
Design $2,500
Other setup costs $5,000
SportsCards would incur no marketing costs for the special order. It has the capacity to accept
this order without interrupting regular production.
Required:
1. Based solely on a short-term financial analysis, should SportsCards accept the special order?
Why or why not? Support your answer with appropriate calculations.
2. What are the important strategic issues in the decision?
135. Motor Corp. manufactures machine parts for boat engines. The CEO, James Hamilton,
was considering an offer from a subcontractor who would provide 3,000 units of product AB100
for Hamilton for a price of $230,000. If Motor Corp. does not purchase these parts from the
subcontractor it must produce them in-house with the following per-unit costs:
Direct materials $40
Direct labor 25
Variable overhead 15
Allocated fixed overhead 4
In addition to the above costs, if Hamilton produces part AB100, he would incur incremental
fixed overhead of $10,000.
Required:
Calculate the relevant costs of producing 3,000 units of product AB100.
136. Motor Corp. manufactures machine parts for boat engines. The CEO, James Hamilton,
was considering an offer from a subcontractor who would provide 3,000 units of product AB100
for Hamilton for a price of $230,000. If Motor Corp. does not purchase these parts from the
subcontractor it must produce them in-house with the following per-unit costs:
Direct materials $40
Direct labor 25
Variable overhead 15
Allocated fixed overhead 4
In addition to the above costs, if Hamilton produces part AB100, he would have incremental fixed
overhead of approximately $10,000.
Required:
Determine whether Motor Corp. should accept the offer from the subcontractor. Show
calculations to support your answer.
137. Lester-Smith Company manufactures three wood construction components: wood
trusses, wood floor joists, and beams. The plant is operating at full capacity. It can produce 200
trusses, 1,000 joists, and 600 beams per month. The company sells everything it produces.
Monthly revenues and expenses for the three products are as follows:
Sales revenues:
Trusses $12,000
Joists 40,000
Beams 90,000
Total revenue $142,000
Expenses:
Variable cost:
Trusses $10,000
Joists 24,000
Beams 48,000
Total variable cost $82,000
Fixed cost allocation:
Trusses $4,000
Joists 12,000
Beams 24,000
Total fixed cost $40,000
Total cost $122,000
Total profit $20,000
Required:
1. The firm makes wood trusses mainly to satisfy certain customers by offering a full line of
wood components. Lately, it had a problem making a profit on the trusses and is considering
buying them from another manufacturer at $55 a truss. Based solely on a short-term financial
analysis, should the firm buy these trusses or continue to make its own? (Show calculations.)
2. Lester-Smith has an opportunity to produce an additional 400 beams for a customer at a price
of $100 each. If the company accepts this special order, it cannot produce trusses because the
plant will be operating at full capacity. Should the firm accept this special order? (Show
calculations.)
138. Three Stars Inc. manufactures prefabricated houses. The firm's president, Michelle
Brown, is interested in determining whether it would be better to manufacture the doors used in
the houses or to buy them from a supplier. The following information, based on production of 500
doors, has been gathered to help determine the best option:
Per-Unit Costs
Direct materials $35
Direct labor 50
Variable overhead 10
Fixed overhead:
Administrative salaries $7
Property taxes 2
Insurance 5
Utilities 5
Miscellaneous fixed overhead 6
Total cost $120
Of the fixed overhead costs, Three Stars estimates that it could save $5 per unit of
miscellaneous fixed overhead if it purchases the doors from a supplier and allocates all other
fixed costs elsewhere. The cost to purchase 500 doors would be $55,000.
Required:
On the basis of a short-run financial analysis, Should Three Stars make or purchase the doors?
Show calculations to support your answer.
139. A recent article in
The
McKinsey
Quarterly
, present a useful list of some of the ways that
strategic decisions can go wrong because of human shortcomings: 1. Overconfidence; 2. Loss
aversion; 3. Champion Bias; 4. Misaligned risk aversion; and 5. Misaligned time horizon
Required:
Provide a one sentence explanation for each of the five human shortcomings in decision making.
140. What strategic factors/considerations are generally relevant to the special-order decision
problem (i.e., whether a company should accept a one-time order from a customer with whom
the company does not generally do business)?
141. The firm of Miller, Lombardi, and York was recently formed by the merger of two
companies providing accounting services. York's business was providing personal financial
planning, while Miller and Lombardi conducted audits of small governmental units and provided
tax-planning and preparation services for several commercial firms. The combined firm has
leased new offices and acquired several microcomputers that are used by the professional staff
in each area of service. However, in the short run the firm does not have the financial resources
to acquire computers for all of its professional staff.
The expertise of the professional staff can be divided into three distinct areas that match the
services provided by the firm, i.e., tax preparation and tax planning, insurance and investments,
and auditing. However, since the merger, the new firm has to turn away business in all three
service lines. One of the problems is that while the total number of staff seems adequate, the
staff members are not completely interchangeable. Limited financial resources do not permit
hiring any new staff in the near future, and therefore, the supply of staff is restricted in each
area.
Rick Oliva has been assigned the responsibility of allocating staff and computers to the various
engagements. Management has given Oliva the objective of maximizing revenues in a manner
consistent with maintaining a high level of professional service in each of the areas of service.
Management's time is billed at $200 per hour and staff's time is billed at $140 per hour for those
with experience, and $100 per hour for inexperienced staff. Pam Wren, a member of the staff,
recently completed a course in managerial accounting at the local university. She suggested to
Oliva, based on material covered in the course she took, that he use linear programming to
determine how best to assign staff and computers to the various engagements.
Required:
1. Identify and discuss the assumptions underlying the linear programming model.
2. Explain the reasons why linear programming would be appropriate for Miller, Lombardi, and
York to use in making staff assignments.
3. Identify and discuss the data that would be needed to develop a linear programming model for
Miller, Lombardi, and York.
4. Discuss objectives other than revenue maximization that Rick Oliva should consider before
making staff allocations.
