122. The Rush Company manufactures two products: L and M. The costs and revenues are as
follows:
Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a
scarce resource. During the year, 36,000 machine hours are available.
Required:
a. How many units of Products L and M should Rush produce?
123. Gigure Inc has 3,600 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?
124. Fleury Inc has 9,600 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?
125. Bruce Industries manufactures 200,000 components per year. The manufacturing cost of
the components was determined as follows:
An outside supplier has offered to sell the component for $3.40. If Bruce purchases the
component from the outside supplier, the manufacturing facilities would be unused and could be
rented out for $20,000.
Required:
a. If Bruce purchases the component from the supplier instead of manufacturing it, the effect on
income would be:
b. What is the maximum price Bruce would be willing to pay the outside supplier?
126. Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the
components was determined to be as follows:
Required:
a. Assume that the fixed manufacturing overhead reflects the cost of Tofte’s manufacturing
facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell
the component to Tofte for $34. If Tofte Industries purchases the component from the outside
supplier, the effect on income would be a
b. Assume Tofte Industries could avoid $80,000 of fixed manufacturing overhead if it purchases
the component from an outside supplier. An outside supplier has offered to sell the component for
$34. If Tofte purchases the component from the supplier instead of manufacturing it, the effect on
income would be a
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127. The Hayes Company manufactures and sells several products, one of which is called a slip
differential. The company normally sells 30,000 units of the slip differential each month. At this
activity level, unit costs are:
An outside supplier has offered to produce the slip differentials for the Hayes Company, and to
ship them directly to the Hayes Company’s customers. This arrangement would permit the Hayes
Company to reduce its variable selling expenses by one third (due to elimination of freight costs).
The facilities now being used to produce the slip differentials would be idle and fixed
manufacturing overhead would continue at 60 percent of its present level. The total fixed selling
expenses of the company would be unaffected by this decision.
Required:
What is the maximum acceptable price quotation for the slip differentials from the outside
supplier?
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128. Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of
its products. Data concerning the unit production costs of the axial tap follow:
An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If Kramer
Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing
overhead costs could be avoided. Assume that direct labor is a variable cost.
Required:
a. Assume Kramer Company has no alternative use for the facilities presently devoted to
production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each,
should Kramer Company accept the offer? Fully support your answer with appropriate
calculations.
b. Assume that Kramer Company could use the facilities presently devoted to production of the
axial taps to expand production of another product that would yield an additional contribution
margin of $80,000 annually. What is the maximum price Kramer Company should be willing to pay
the outside supplier for axial taps?
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129. Part E43 is used in one of Ran Corporation’s products. The company’s Accounting
Department reports the following costs of producing the 12,000 units of the part that are needed
every year.
An outside supplier has offered to make the part and sell it to the company for $14.70 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 $5,000 of these allocated general
overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company’s total net operating income of buying
part E43 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
130. Holtrop Corporation has received a request for a special order of 9,000 units of product
Z74 for $46.50 each. The normal selling price of this product is $51.60 each, but the units would
need to be modified slightly for the customer. The normal unit product cost of product Z74 is
computed as follows:
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 Z74
that would increase the variable costs by $6.20 per unit and that would require a one-time
investment of $46,000 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 capacity for producing the
special order.
Required:
Determine the effect on the company’s total net operating income of accepting the special order.
Show your work!
131. A customer has asked Twiner Corporation to supply 5,000 units of product D05, with some
modifications, for $40.20 each. The normal selling price of this product is $52.80 each. The normal
unit product cost of product D05 is computed as follows:
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 D05
that would increase the variable costs by $3.50 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 capacity for producing the
special order.
Required:
Determine the effect on the company’s total net operating income of accepting the special order.
Show your work!
132. Block Corporation makes three products that use the current constraint, which is a
particular type of machine. Data concerning those products appear below:
Required:
a. Rank the products in order of their current profitability from the most profitable to the least
profitable. In other words, rank the products in the order in which they should be emphasized.
Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the least
profitable product. Up to how much should the company be willing to pay to acquire more of the
constrained resource?
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133. Redner, Inc. produces three products. Data concerning the selling prices and unit costs of
the three products appear below:
Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company’s productive capacity. The grinding machine
is the constraint, with only 2,400 minutes of grinding machine time available this week.
Required:
a. Given the grinding machine constraint, which product should be emphasized? Support your
answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company should emphasize
in part (a) above, up to how much should the company be willing to pay for an additional hour of
grinding machine time?
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134. Glunn Company makes three products in a single facility. These products have the
following unit product costs:
Additional data concerning these products are listed below.
The mixing machines are potentially the constraint in the production facility. A total of 24,200
minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all three
products?
b. How much of each product should be produced to maximize net operating income? (Round off
to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing
machine time if the company has made the best use of the existing mixing machine capacity?
(Round off to the nearest whole cent.)
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135. Holvey Company makes three products in a single facility. Data concerning these products
follow:
The mixing machines are potentially the constraint in the production facility. A total of 6,300
minutes are available per month on these machines. Direct labor is a variable cost in this
company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all three
products?
b. How much of each product should be produced to maximize net operating income? (Round off
to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing
machine time if the company has made the best use of the existing mixing machine capacity?
(Round off to the nearest whole cent.)
136. The constraint at Vrana Inc. is an expensive milling machine. The three products listed
below use this constrained resource.
Required:
a. Rank the products in order of their current profitability from the most profitable to the least
profitable. In other words, rank the products in the order in which they should be emphasized.
Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the least
profitable product. Up to how much should the company be willing to pay to acquire more of the
constrained resource?
137. Explain the difference between full costs and differential costs.
138. Explain what is meant by “the full-cost fallacy” in making pricing decisions.