162
180) Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in
one of its products. Data concerning the unit production costs of the B345 gasket follow:
Direct materials
$
0.15
Direct labor
0.10
Variable manufacturing overhead
0.13
Fixed manufacturing overhead
0.24
Total manufacturing cost per unit
$
0.62
An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If
Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed
manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.
Required:
a. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to
production of the B345 gaskets. If the outside supplier offers to sell the gaskets for $0.46 each,
should Kirsten Corporation accept the offer? Fully support your answer with appropriate
calculations.
b. Assume that Kirsten Corporation could use the facilities presently devoted to production of the
B345 gaskets to expand production of another product that would yield an additional contribution
margin of $10,000 annually. What is the maximum price Kirsten Corporation should be willing to
pay the outside supplier for B345 gaskets?
164
181) Gottshall Inc. makes a range of products. The company’s predetermined overhead rate is $19
per direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead
$
225,000
Fixed manufacturing overhead
$
630,000
Direct labor-hours
45,000
Component P0 is used in one of the company’s products. The unit cost of the component according
to the company’s cost accounting system is determined as follows:
Direct materials
$
21.00
Direct labor
40.80
Manufacturing overhead applied
32.30
Unit product cost
$
94.10
An outside supplier has offered to supply component P0 for $78 each. The outside supplier is
known for quality and reliability. Assume that direct labor is a variable cost, variable
manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing
overhead would not be affected by this decision. Gottshall chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?
166
182) Part U67 is used in one of Broce Corporation’s products. The company’s Accounting
Department reports the following costs of producing the 7,000 units of the part that are needed
every year.
Per Unit
Direct materials
$
8.70
Direct labor
$
2.70
Variable overhead
$
3.30
Supervisor’s salary
$
1.90
Depreciation of special equipment
$
1.80
Allocated general overhead
$
5.50
An outside supplier has offered to make the part and sell it to the company for $21.40 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 $6,000 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?
183) McGraw Company uses 5,000 units of Part X each year as a component in the assembly of
one of its products. The company is presently producing Part X internally at a total cost of
$100,000, computed as follows:
Direct materials
$
15,000
Direct labor
30,000
Variable manufacturing overhead
10,000
Fixed manufacturing overhead
45,000
Total cost
$
100,000
An outside supplier has offered to provide Part X at a price of $18 per unit. If McGraw Company
stops producing the part internally, one-third of the fixed manufacturing overhead would be
eliminated. Assume that direct labor is a variable cost.
Required:
Prepare an analysis showing the annual financial advantage or disadvantage of accepting the
outside supplier’s offer.
Outside purchase
$
90,000
Direct labor
30,000
Variable manufacturing overhead
10,000
Fixed manufacturing overhead*
15,000
Total cost
$
70,000
$
90,000
184) Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The
annual costs to manufacture the 150,000 wheels needed each year are as follows:
Total Cost
Direct materials
$165,000
Direct labor
45,000
Variable manufacturing overhead
60,000
Fixed manufacturing overhead
300,000
Total
$570,000
Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50
per wheel. If Janeiro accepts this offer, 75% of the fixed manufacturing overhead above could be
totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate
$72,000 of income annually. Assume that direct labor is a variable cost.
Required:
Based on this information, would Janeiro be financially better off to continue making the wheels or
to buy them from Kasba?
Outside purchase ($3.50 × 150,000)
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead*
Opportunity cost
Total cost
170
185) Foto Company makes 50,000 units per year of a part it uses in the products it manufactures.
The unit product cost of this part is computed as follows:
Direct materials
$
12.00
Direct labor
10.10
Variable manufacturing overhead
2.00
Fixed manufacturing overhead
14.10
Unit product cost
$
38.20
An outside supplier has offered to sell the company all of these parts it needs for $37.30 a unit. If
the company accepts this offer, the facilities now being used to make the part could be used to
make more units of a product that is in high demand. The additional contribution margin on this
other product would be $310,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be
avoided. However, $9.70 of the fixed manufacturing overhead cost being applied to the part would
continue even if the part were purchased from the outside supplier. This fixed manufacturing
overhead cost would be applied to the company’s remaining products.
Required:
a. How much of the unit product cost of $38.20 is relevant in the decision of whether to make or
buy the part?
b. What is the financial advantage (disadvantage) of purchasing the part rather than making it?
c. What is the maximum amount the company should be willing to pay an outside supplier per unit
for the part if the supplier commits to supplying all 50,000 units required each year?
186) Marsdon Company has an annual production capacity of 15,000 units. The costs associated
with production and sale of the company’s product are given below:
Manufacturing costs:
Variable
$12 per unit
Fixed (annual cost)
$90,000
Selling and administrative costs:
Variable (sales commissions)
$3 per unit
Fixed (annual cost)
$60,000
The company presently is selling 12,000 units annually at a selling price of $28 each. A special
order has been received from a distributor who wants to purchase 3,000 units at a special price of
$20 each. Regular sales would not be affected by this order and the order could be filled without
any impact on total fixed costs. Sales commissions on the special order would be reduced by
one-third.
Required:
Determine whether the company should accept the special order.
Incremental revenues (3,000 units × $20)
Less incremental costs:
Variable manufacturing (3,000 units × $12)
Variable selling (3,000 units × $2)
Net advantage of accepting the order
173
187) McNiff Corporation makes a range of products. The company’s predetermined overhead rate
is $28 per direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead
$
180,000
Fixed manufacturing overhead
$
380,000
Direct labor-hours
20,000
Management is considering a special order for 200 units of product O96S at $122 each. The
normal selling price of product O96S is $149 and the unit product cost is determined as follows:
Direct materials
$
67.00
Direct labor
32.00
Manufacturing overhead applied
44.80
Unit product cost
$
143.80
If the special order were accepted, normal sales of this and other products would not be affected.
The company has ample excess capacity to produce the additional units. Assume that direct labor
is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total
fixed manufacturing overhead would not be affected by the special order.
Required:
The financial advantage (disadvantage) for the company as a result of accepting this special order
would be:
188) Anglen Co. manufactures and sells trophies for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly
production is 14,400 trophies. The company normally charges $103 per trophy. Cost data for the
current level of production are shown below:
Variable costs:
Direct materials
$460,800
Direct labor
$316,800
Selling and administrative
$15,840
Fixed costs:
Manufacturing
$404,640
Selling and administrative
$74,880
The company has just received a special one-time order for 900 trophies at $48 each. For this
particular order, no variable selling and administrative costs would be incurred. This order would
also have no effect on fixed costs. Assume that direct labor is a variable cost.
Required:
Should the company accept this special order? Why?
Direct materials
Direct labor
Total
Current monthly production
Average direct materials and direct labor cost per unit
189) Wehrs Corporation has received a request for a special order of 6,000 units of product K19
for $32.30 each. The normal selling price of this product is $33.45 each, but the units would need
to be modified slightly for the customer. The normal unit product cost of product K19 is computed
as follows:
Direct materials
$
15.00
Direct labor
3.80
Variable manufacturing overhead
1.40
Fixed manufacturing overhead
2.10
Unit product cost
$
22.30
Direct labor is a variable cost. The special order would have no effect on the company’s total fixed
manufacturing overhead costs. The customer would like some modifications made to product K19
that would increase the variable costs by $4.90 per unit and that would require a one-time
investment of $23,000 in special molds that would have no salvage value. This special order would
have no effect on the company’s other sales. The company has ample spare capacity for producing
the special order.
Required:
Determine the effect on the company’s total net operating income of accepting the special order.
Incremental revenue (6,000 units × $32.30 per unit)
$
193,800
Less incremental costs:
Direct materials (6,000 units × $15.00 per unit)
90,000
Direct labor (6,000 units × $3.80 per unit)
22,800
Variable manufacturing overhead (6,000 units × $1.40 per unit)
Modifications (6,000 units × $4.90 per unit)
29,400
Special molds
23,000
Total incremental cost
173,600
Financial advantage (disadvantage)
$
20,200
177
190) Juliani Company produces a single product. The cost of producing and selling a single unit of
this product at the company’s normal activity level of 50,000 units per month is as follows:
Direct materials
$
32.50
Direct labor
$
7.20
Variable manufacturing overhead
$
1.30
Fixed manufacturing overhead
$
20.90
Variable selling & administrative expense
$
1.90
Fixed selling & administrative expense
$
7.30
The normal selling price of the product is $75.00 per unit.
An order has been received from an overseas customer for 3,000 units to be delivered this month at
a special discounted price. This order would have no effect on the company’s normal sales and
would not change the total amount of the company’s fixed costs. The variable selling and
administrative expense would be $0.30 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and
the special discounted price on the special order is $65.60 per unit. What is the financial advantage
(disadvantage) for the company next month if it accepts the special order?
b. Suppose the company is already operating at capacity when the special order is received from
the overseas customer. What would be the opportunity cost of each unit delivered to the overseas
customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer
and accepting the special order would require cutting back on production of 1,000 units for regular
customers. What would be the minimum acceptable price per unit for the special order?
