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Chapter 12
92. Wyandott Co. produces two products. Both products pass through a firing process that is operating at full capacity and
is a production bottleneck. Product A requires 2 hours of processing and has a contribution margin per unit of $60.
Product B requires 1 hour of processing and has a contribution margin of $40. Which of the following provides the most
accurate assessment of the situation assuming unlimited demand for each product?
a.
Production of Product B rather than Product A will generate the maximum profitability for Wyandotte.
b.
Production of Product A rather than Product B will generate the maximum profitability for Wyandotte.
c.
Raising the selling price of Product B by $20 will cause management to be indifferent between producing
Product A or Product B.
d.
Raising the selling price of Product A by $10 will cause management to be indifferent between producing
Product A or Product B.
93. In attempting to improve profitability when faced with a bottleneck related to hours that is involved in the production
of two or more products, which of the following is most important for management to consider?
a.
Contribution margin per unit for each product
b.
Time required for each different product passing through the bottleneck
c.
Selling price or sales revenue generated by each product produced through the bottleneck
d.
Contribution margin per bottleneck hour for each product
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94. Brickman's Pharmacy sells a variety of products. The business is divided into four segments or departments for
reporting purposes. The departments and their operating results are shown below:
Pharmaceuticals
Cosmetics
Grocery
Household
Sales Revenue
$ 600,000
$ 300,000
$ 200,000
$ 400,000
Variable Costs
425,000
200,000
170,000
250,000
Contribution Margin
$ 175,000
$ 100,000
$ 30,000
$ 150,000
Fixed Costs
80,000
60,000
40,000
80,000
Net Income (Loss)
$ 95,000
$ 40,000
$ (10,000)
$ 70,000
The fixed costs consist of insurance, property taxes, interest, and other costs that will not be eliminated if a department is
discontinued.
Brickman's management is considering eliminating the grocery department. Assuming sales in the other departments will
not be affected by dropping the grocery department, what will be the effect on the company's total operating income?
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95. Grey Inc. has been purchasing a component, Z for $85 a unit. The company is currently operating at 75% of full
capacity, and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Z,
determined by absorption costing method, is estimated as follows:
Direct materials
$30
Direct labor
15
Variable factory overhead
26
Fixed factory overhead
10
Total
$81
Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Z.
96. FDE Manufacturing Company has a normal plant capacity of 75,000 units per month. Because of an extra large
quantity of inventory on hand, it expects to produce only 60,000 units in May. Monthly fixed costs and expenses are
$150,000 ($2 per unit at normal plant capacity), and variable costs and expenses are $13 per unit. The present selling price
is $25 per unit. The company has an opportunity to sell 5,000 additional units at $14.30 per unit to an exporter who plans
to market the product under its own brand name in a foreign market. The additional business is therefore not expected to
affect the regular selling price or quantity of sales of FDE Manufacturing Company.
Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price.
Chapter 12
97. Pull Company is considering the disposal of equipment that is no longer needed for operations. The equipment
originally cost $600,000, and accumulated depreciation to date totals $460,000. An offer has been received to lease the
machine for its remaining useful life for a total of $300,000, after which the equipment will have no salvage value. The
repair, insurance, and property tax expenses during the period of the lease are estimated at $75,800. Alternatively, the
equipment can be sold through a broker for $230,000 less a 10% commission.
Prepare a differential analysis report, dated June 15 of the current year, on whether the equipment should be leased or
sold.
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98. Product J is one of the many products manufactured and sold by Gooble Company. An income statement by product
line for the past year indicated a net loss for Product J of $7,250. This net loss resulted from sales of $265,000, cost of
goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents
fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs,
and expenses are not expected to change significantly from those of the current year. However, because of the net loss,
management is considering the elimination of the unprofitable endeavor. Because of the large number of products
manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued.
Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J.
99. Jarvis Company uses the total cost concept of applying the cost-plus approach to product pricing. The costs and
expenses of producing and selling 35,000 units of Product E are as follows:
Variable costs:
Direct materials
$ 3.00
Direct labor
1.25
Factory overhead
0.75
Selling and administrative expenses
3.00
Total
$ 8.00
Fixed costs:
Factory overhead
$50,000
Selling and administrative expenses
20,000
Jarvis desires a profit equal to a 14% rate of return on invested assets of $450,000.
(a)
Determine the amount of desired profit from the production and sale of Product E.
(b)
Determine the total costs and the cost amount per unit for the production and sale of 35,000
units of Product E.
(c)
Determine the markup percentage for Product E.
(d)
Determine the selling price of Product E.
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100. Tidewater Company uses the product cost concept of applying the cost-plus approach to product pricing. The cost
and expenses of producing and selling 50,000 units of Product K are as follows:
Variable costs:
Direct materials
$ 5.00
Direct labor
8.50
Factory overhead
2.50
Selling and administrative expenses
1.00
Total
$ 17.00
Fixed costs:
Factory overhead
$50,000
Selling and administrative expenses
34,000
Tidewater desires a profit equal to a 10% rate of return on invested assets of $1,285,000.
(a)
Determine the amount of desired profit from the production and sale of Product K.
(b)
Determine the total manufacturing costs and the cost amount per unit for the production and
sale of 50,000 units of Product K.
(c)
Determine the markup percentage for Product K.
(d)
Determine the selling price of Product K.
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101. Glover Inc. manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000. Glover
desires a profit equal to a 12% rate of return on assets. Assets of $785,000 are devoted to producing Product B, and
100,000 units are expected to be produced and sold.
(a)
Compute the markup percentage using the total cost concept.
(b)
Compute the selling price of Product B.
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102. Kirk Co. manufactures mobile cellular equipment and develops a price for the product by using a variable cost
concept. Kirk incurs variable costs of $1,900,000 in the production of 100,000 units. Fixed costs total $50,000. The
company employs $4,725,000 of assets and wishes to earn a profit equal to a 10% rate of return on assets.
(a)
Compute a markup percentage based on the variable costs concept.
(b)
Determine a selling price.
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