7. Island Princess Pineapples purchases pineapples from area farmers and processes them into rings,
juice, and skins. The cost of the pineapples is a joint cost, as is the initial processing in which the fruits
are skinned, cored, and sliced into rings. At the split-off point, Island Princess sells the skins (for
fertilizer). Juice and rings are processed further (further processing costs occurs for cooking and
canning). Data for the three products follows:
Sales
Rings
$2,000
Juice
$1,500
Fertilizer
$ 400
Further processing costs:
Rings
500
Juice
300
Joint costs
$1,600
A.
Prepare a segmented income statement for Island Princess, showing results for rings,
juice, fertilizer, and in total. Do not allocate joint costs individually.
B.
Now suppose that Island Princess is considering the option of processing the skins
further into pet food which would sell for $1,000. Additional costs would be $450.
Should this be done?
8. Rippey Corporation manufactures a single product with the following unit costs for 5,000 units:
Direct materials
$ 60
Direct labor
30
Factory overhead (40% variable)
90
Selling expenses (60% variable)
30
Administrative expenses (20% variable)
15
Total per unit
$225
Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently,
the models are sold to dealers for $412.50. Rippey’s capacity is sufficient to produce the extra 1,000
units. No additional selling expenses would be incurred on the special order.
Sales
Further processing costs
Product margin
Joint costs
Operating income
Required:
A.
What is the profit earned by Rippey Corporation on the original 5,000 units?
B.
Should Rippey accept the special order if its goal is to maximize short-run profits?
How much will income be affected?
C.
Determine the minimum price Rippey would want to receive in order to increase profits
by $7,500 on the special order.
D.
When making a special-order decision, what qualitative aspects of the decision should
Rippey Corporation consider?
9. Salley Company makes pagers. Currently, Salley purchases 10,000 plastic housings per year from an
outside company for $1 each. One of Salley’s engineers suggested that the company make its plastic
housings in-house. Estimated unit costs are as follows:
Direct materials
$0.30
Direct labor
0.20
Variable overhead
0.15
Fixed overhead*
0.40
* Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing
line and $1,600 per year in general overhead costs to be allocated to this line
A.
If Salley makes the housing in-house, net income will be $__________________
Higher or Lower?
B.
What is the highest price per unit that Salley would pay an outside company for the
housings?
C.
Now assume that all of the fixed overhead is allocated fixed overhead and will not be
affected by making the product in-house or purchasing it. If Salley makes the housing
in-house, net income will be $__________________ (Higher / Lower).
Figure 13-10.
Goutam Company prints a variety of publications and colored inserts for newspapers. Currently,
Goutam produces its own ink, including a special metallic color. India Inks has offered to supply
Goutam with the 25,000 ounces of metallic ink that it needs each year for $1.24 per ounce. Goutam is
interested because this is a particularly difficult ink to make. The purchasing department must make
special efforts to locate suppliers, the metallic component requires special handling, and, since the
metallic ink uses machinery that is also used to make other colors of ink, the machinery must be
cleaned very well before every batch of metallic. The accounting department supplied the following
unit costs:
Direct materials
$0.40
Direct labor
0.15
Variable overhead
0.06
Fixed overhead*
0.50
*Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours.
10. Refer to Figure 13-10.
A.
Based on the cost figures, if Goutam purchases metallic ink from the outside supplier,
operating income will be $__________________ (Higher / Lower)?
B.
What is the highest price per ounce that Goutam would pay an outside supplier for the
ink?
$15,750 lower = [$1.24 − ($0.40 + 0.15 + 0.06)] 25,000
The allocated fixed overhead is irrelevant.
$1,100 higher ( = [$1.00 − ($0.30 + 0.20 + 0.15 + 0.24)] 10,000). The allocated fixed
overhead is irrelevant. (fixed traceable equipment costs are $2,400/10,000 units or .24)
$0.89 = $0.30 + 0.20 + 0.15 + 0.24
traceable fixed overhead is irrelevant.
11. Refer to Figure 13-10. Upon hearing of the analysis of the cost of making the metallic ink in-house
versus buying it from an outside supplier, Jim Webb, the production supervisor said “That’s nuts! This
ink is a real pain to make and $1.24 per ounce sounds like a bargain to me!” Based on Jim’s feelings,
Anna Ruiz (a new CMA in the accounting office) did an ABC analysis of ink production. She came up
with the same direct materials, direct labor and variable overhead, as well as the following information
on activities required by metallic ink production.
Setups
$ 60,000
600 setups per year
Purchasing
$270,000
9,000 purchase orders per year
The metallic ink requires 300 purchase orders per year and 80 setups.
A.
If Goutam purchases the ink from the outside supplier, operating income would be
$__________________ Higher Lower (circle one)
B.
What is the highest price per ounce that Goutam would pay an outside company for the
ink?
A.
$1,250 higher
($0.68 is the per ounce cost of setups and purchasing)
Setups = [($60,000/600) 80]/25,000 = 0.32
Purchasing = [($270,000/9,000) 300]/25,000 = 0.36
$1.29, since this is the avoidable cost of making the ink in-house, Goutam would not
12. Sherpa Company manufactures tents and sleeping bags. Tents are priced at $80, have variable cost of
$55, and direct fixed costs of $120,000. Sleeping bags are priced at $60, have variable cost of $35, and
direct fixed costs of $66,000. Common fixed costs equal $200,000. Last year, the division sold 5,000
tents and 10,000 sleeping bags.
A.
What was the segment margin for tents last year?
B.
What was the segment margin for sleeping bags last year?
C.
What was Sherpa’s operating income last year?
D.
If Sherpa stopped making tents, what would operating income be?
$0.61 since this is the avoidable cost of making the ink in-house, Goutam would not
13. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is
$30,000. Information about the three products follows:
X
Y
Z
Anticipated production
5,600 lbs.
10,000 lbs.
2,500 lbs.
Selling price/lb. at split-off
$2.00
$1.00
$3.00
Additional processing costs/lb. after split-off
(all variable)
$1.50
$1.25
$.75
Selling price/lb. after further processing
$2.50
$3.75
$6.25
Allocated joint costs
$12,000
$10,500
$7,500
Required:
A.
Determine whether each product should be sold at split-off or processed further.
B.
Determine the firm’s income if the firm processed all three products beyond split-off.
$11,200
$14,000
Sell at split-off
$10,000
$37,500
Process further
$25,000
$15,625
Process further
$13,750
Sales
$1,000,000
Less: Variable cost
Contribution margin
Less: Direct fixed overhead
Segment margin
Less: Common fixed overhead
Operating income
Segment margin for tents = $5,000
Segment margin for sleeping bags = $184,000
Operating income = ($11,000)
Operating income without tents = ($16,000)
14. The operations of Grant Corporation are divided into the Fix Division and the Roach Division.
Projections for the next year are as follows:
Fix
Roach
Division
Division
Total
Sales revenue
$60,000
$40,000
$100,000
Variable expenses
20,000
15,000
35,000
Contribution margin
$40,000
$25,000
$ 65,000
Direct fixed expenses
12,500
30,000
42,500
Segment margin
$27,500
$ (5,000)
$ 22,500
Allocated common costs
10,000
7,500
17,500
Total relevant benefit (loss)
$17,500
$(12,500)
$ 5,000
Required:
A.
Determine operating income for Grant Corporation as a whole if the Roach Division is
dropped.
B.
Should the Roach Division be eliminated?
Sales
$60,000
Variable costs
20,000
Contribution margin
$40,000
Direct fixed costs
12,500
Segment margin
$27,500
Allocated common costs:
($10,000 + $7,500)
17,500
Operating income
$10,000
15. Classy Carry manufactures two types of handbags, the Clutch and the Tote, with unit contribution
margins of $9 and $15, respectively. Regardless of the type, each handbag must go through a
stitching machine. The company owns 4 stitching machines and each provides 3,000 hours of
machine time per year. Each Clutch handbag requires 12 minutes of machine time and each Tote
handbag requires 30 minutes of machine time. There are no other constraints.
The joint costs are not relevant to the decision.
$14,350 ($13,750 + $25,000 + $5,600 − $30,000)
Required:
A. What is the contribution margin per hour of machine time for each type of handbag?
B. What is the optimal mix of handbags?
C. What is the total contribution margin earned for the optimal mix?
ANS:
16. Gordon Company produces two types of gears, Gear Q and Gear S, with unit contribution margins of
$2 and $5, respectively. Each gear must spend time on a special machine. The firm owns ten machines
that together provide 25,000 hours of machine time per year. Gear Q requires 0.10 hours of machine
time; Gear S requires 0.4 hours of machine time.
A.
What is the contribution margin per hour of machine time for Gear Q? Gear S?
B.
If Gordon faces only the production constraint (25,000 hours of machine time), how
many units of Gear Q should be produced? Gear S? What is the total contribution
margin from this product mix?
C.
Now suppose that Gordon cannot sell more than 200,000 units of each type of gear.
How many units of Gear Q should be produced? Gear S? What is the total contribution
margin from this product mix?
Contribution margin per unit
Required machine time per unit
Contribution margin per hour of machine time
12,000 hours = 60,000 Clutch bags
0.20 hour per Clutch handbag
17. David Company produces two types of gears, Gear A and Gear B, with unit contribution margins of $6
and $8, respectively. Each gear must spend time on a special machine. The firm owns five machines
that together provide 12,000 hours of machine time per year. Gear A requires 12 minutes of machine
time; Gear B requires 24 minutes of machine time.
A.
What is the contribution margin per hour of machine time for Gear A? Gear B?
B.
If David faces only the production constraint (12,000 hours of machine time), how
many units of Gear A should be produced? Gear B? What is the total contribution
margin from this product mix?
C.
Now suppose that David cannot sell more than 45,000 units of each type of gear. How
many units of Gear A should be produced? Gear B? What is the total contribution
margin from this product mix?
Gordon should produce only Gear A, and no Gear B.
Gear A units = 12,000/0.20 = 60,000
Gear B units = 0
Total contribution margin = $6(60,000) = $360,000
Gear A units = 45,000
Remaining machine time = 12,000 hours − (45,000 0.2) = 3,000 machine hours
Gear B units = 3,000/0.4 = 7,500
Gordon should produce only Gear Q, and no Gear S.
Gear Q units = 25,000/0.10 = 250,000
Gear S units = 0
Total contribution margin = $2(250,000) = $500,000
Gear Q units = 200,000
Remaining machine time = 25,000 hours − (200,000 0.1) = 5,000 machine hours
Gear S units = 5,000/0.4 = 12,500
Total contribution margin = $2(200,000) + $5(12,500) = $462,500
18. Auden makes three types of vitamin supplements, all of which require the use of encapsulating
machines that have capacity of 10,000 hours. Information on the three types (per case) follows:
Basic
Vita-Stress
Antioxidant+
Selling price
$100
$125
$160
Variable cost
50
70
90
Machine hours
0.4
0.50
0.8
A.
What is the contribution margin per case for each type?
B.
What is the contribution margin per hour of machine time for each type?
C.
Based on your analysis in requirement B, if the company can sell all that it can make of
all of the products, how many of each type should be sold to maximize total
contribution margin?
Basic
Vita-Stress
Antioxidant+
Price
$100
$125
$160
Contribution margin
Vita-Stress = (1 hour/0.5) $55 = $110
Antioxidant+ = (1 hour/0.8) $70 = $87.50
Basic = (1 hour/0.4 cases per hour) 10,000 hours
Antioxidant+ = 0
19. The Exchange Company is in the process of developing a new product called LS500. The company
requires a 35% profit. The LS500 current design carries with it a total cost of $125.
Required:
A. What is the sales price of the LS500 using markup costing?
Total contribution margin = $6(45,000) + $8(7,500) = $330,000
B. Assume that the Exchange Company’s marketing department has determined that consumers are
willing to pay $140 for the LS500. What is the target cost for this product?
ESSAY
1. “The accounting decision making model is not useful in real life because it only looks at the numbers.”
Critique this statement and give an example for which it does not hold true.
2. Why does a special order decision frequently ignore fixed overhead?
3. The managers of Computer World are trying to determine the best method of deciding the price of
their new ultra minicomputer. This computer will present the customers with several unique features
that their other computers do not offer. They have asked you to explain the advantages and
disadvantages of the two costing methods they are considering; markup costing and target costing.