104. Dunford Company produces three products with the following costs and selling prices:
If Dunford has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then
the ranking of the products from the most profitable to the least profitable use of the constrained
resource is:
105. Dunford Company produces three products with the following costs and selling prices:
If Dunford has a limit of 30,000 machine hours but no limit on units sold or direct labor hours, then
the ranking of the products from the most profitable to the least profitable use of the constrained
resource is:
106. The Miller Company manufactures wiring tools. The company is currently producing well
below its full capacity. The Brisbois Company has approached Miller with an offer to buy 5,000
tools at $17.50 each. Miller sells its tools wholesale for $18.50 each; the average cost per unit is
$18.30, of which $2.70 is fixed costs.
Required:
a. If Miller were to accept Brisbois’s offer, what would be the increase in Miller’s operating
profits?
b. Assume that Miller is operating at full capacity. If Miller were to accept Brisbois’s offer, what
would be the change in Miller’s operating profits?
107. The Pierce Company has gathered the following information for a unit of its most popular
product:
The above cost information is based on 10,000 units. Pierce currently sells 8,500 units for $62 per
unit. A distributor has offered to buy 1,000 units at a price of $50 per unit. This special order
would not disturb regular sales.
Required:
a. Calculate Pierce’s change in operating profits if the special order is accepted.
b. How many units of regular sales could be lost before this contract is not profitable?
108. The following information relates to the Klessig Company for the upcoming year.
The cost of goods sold includes $3,000,000 of fixed manufacturing overhead; the operating
expenses include $450,000 of fixed marketing expenses. A special order offering to buy 50,000
units for $25.00 per unit has been made to Klessig. Fortunately, there will be no additional
operating expenses associated with the order and Klessig has sufficient capacity to handle the
order.
Required:
a. How much will operating profits increase if Klessig accepts the special order?
b. Assume that Klessig is operating at full capacity. How much will operating profits change if
Klessig accepts the special order?
109. The following information relates to a product produced by Bayfield Company:
Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per
year, Bayfield expects to produce only 800,000 units next year. The product normally sells for $180
each. A customer has offered to buy 60,000 units for $150 each. The customer will pay the
transportation charge on the units purchased.
Required:
a. Compute the effect on income if Bayfield accepts the special order.
b. If Bayfield accepts the special order, how much could normal sales drop before all of the
differential profits disappear?
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110. Carson Corporation produces and sells three products. The three products, Alpha, Beta,
and Gamma, are sold in a local market and in a regional market. At the end of the first quarter of
the current year, the following income statement (in thousands of dollars) has been prepared:
Management has expressed special concern with the regional market because of the extremely
poor return on sales. This market was entered a year ago because of excess capacity. It was
originally believed that the return on sales would improve with time, but after a year, no noticeable
improvement can be seen from the results as reported in the above quarterly statement. In
attempting to decide whether to eliminate the regional market, the following information has been
gathered:
All administrative costs and fixed manufacturing costs are common to the three products and the
two markets and are fixed for the period. Remaining marketing costs are fixed for the period and
separable by market. All fixed costs have been arbitrarily allocated to markets.
Required:
(a.) Assuming there are no alternative uses for the Carson Corporation’s present capacity, would
you recommend dropping the regional market? Why or why not?
(b.) Prepare the quarterly income statement showing contribution margins by products. Do not
allocate fixed costs to products.
(c.) It is believed that a new product can be ready for sale next year if the Carson Corporation
decides to go ahead with continued research. The new product can be produced by simply
converting equipment presently used in producing product Gamma. This conversion will increase
fixed costs by $40,000 per quarter. What must be the minimum contribution margin per quarter be
for the new product to make the changeover financially feasible?
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111. Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these
computers to various electronics retailers to market under store brand names. It manufactures
two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, memory,
and hard drive capacity. The following information is available:
The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours.
Required:
1. A nationwide discount chain has approached Hi-Speed with an offer to buy 2,000 Lightning 2.0
computers and 2,000 Lightning 2.4 computers if the unit prices are lowered to $350 and $450,
respectively.
a. If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the
additional computers?
b. How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? All other
prices will remain the same.
Suppose that the customer has offered instead to buy
up
to
3,000 each of the two models at $350
and $450, respectively.
c. How many of each product should be manufactured and sold? Assume current demand will not
be affected by the special order. Also assume that the company cannot increase its production
capacity to meet the extra demand.
d. How much will the profits change if this order is accepted instead?
112. The operations of BSC Corporation are divided into the Kaplan Division and the Norton
Division. Projections for the next year are as follows:
Required:
a. Operating income for BSC Corporation as a whole if the Norton Division were dropped would be
b. If the Norton Division were dropped, Kaplan Division’s sales would increase by 45%. If this
happened, the operating income for BSC Corporation as a whole would be:
113. The Tally Company produces 15,000 units of item QT34 annually at a total cost of
$600,000.
Manufacturing overhead is 36% variable. The Daisy Company has offered to supply all 15,000
units of QT34 per year for $35 per unit. If Tally accepts the offer, $8 per unit of the fixed overhead
would be avoided. In addition, some of Tally’s leased facilities could be vacated, reducing lease
payments by $90,000 per year.
Required:
a. By how much would Tally’s profits change if 15,000 of part QT34 are purchased from Daisy?
b. At what price would Tally be indifferent to Daisy’s offer?
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114. The Sutton Division of Haugen Company produces wheels for off-road sport vehicles.
One-half of Sutton’s output is sold to the Wilson Division of Haugen; the remainder is sold to
outside customers. Sutton’s estimated operating profit for the year is:
Wilson Division has an opportunity to purchase 20,000 wheels of the same quality from an outside
supplier on a continuing basis.
Required:
a. The Sutton Division cannot sell any additional products to outside customers. Should the
Haugen Company allow Wilson Division to purchase the wheels from the outside supplier at
$13.00 per unit?
b. If the Sutton Division is now operating at full capacity and can sell all its units to outside
customers at the present selling price, what is the differential cost to Haugen of requiring that the
wheels be made internally and sold to Wilson Division?
c. If the Sutton Division is now operating at full capacity and can sell all its units to outside
customers at the present selling price, what is the minimum selling price that Sutton should
accept from Wilson Division?
d. The Sutton Division cannot sell any additional products to outside customers. What is the
minimum selling price that Sutton should accept from the Wilson Division?
115. Buffalo Industries produces two products. Information about the products is as follows:
The company’s fixed costs totaled $140,000, of which $30,000 can be directly traced to Product Q
and $90,000 can be directly traced to Product R.
Required:
The effect on the firm’s profits if Product R is dropped would be:
116. Cameron Tool Company has two retail stores, one in Dallas and the other in Sand Creek.
The Dallas store had sales of $200,000, a contribution margin of 35 percent, and a segment
margin of $28,000. The company’s two stores have total sales of $500,000, an average
contribution margin of 32 percent, and a total segment margin of $62,000.
Required:
Prepare a segmented contribution approach statement for Cameron.
117. Bisson Industries has two divisions: the North Division and the South Division. Information
relating to the divisions for the year just ended is as follows:
Common fixed expenses have been allocated equally to each of the two divisions.
Required:
Prepare a segmented contribution approach income statement for Bisson.
118. The operations of Hurley Corporation are divided into the Northern Division and the
Eastern Division. Projections for the next year are as follows:
Required:
a. Operating income for Hurley Corporation, as a whole, if the Eastern Division were dropped
would be:
b. If Eastern Division is dropped, Northern’s sales will increase by 20%. What will Hurley
Corporation’s operating income be?
119. The Wood Company manufactures two products: A and B. The costs and revenues are as
follows:
Total demand for Product A is 7,000 units and for Product B is 5,000 units. Machine time is a
scarce resource. During the year, 48,000 machine hours are available. Product A requires 6
machine hours per unit, while Product B requires 2.5 machine hours per unit.
Required:
a. How many units of Products A and B should Wood produce?
b. What will be the maximum possible contribution margin?
120. Gerber Inc has 5,200 machine hours available each month. The following information on
the company’s three products is available:
Required:
a. What production schedule will maximize the company’s profits?
b. What will be the maximum possible contribution margin?
121. Osgood Inc has 6,400 machine hours available each month. The following information on
the company’s three products is available:
Required:
a. What production schedule will maximize the company’s profits?
b. What will be the maximum possible contribution margin?