4-82
95.
Liu Inc. is considering whether to continue to make a component or to buy it from an
outside supplier. The company uses 13,000 of the components each year. The unit product
cost of the component according to the company’s cost accounting system is given as
follows:
Direct materials
$8.80
Direct labor
5.80
Variable manufacturing overhead
1.60
Fixed manufacturing overhead
3.60
Unit product cost
$19.80
Purchase cost
96.
Item N29 is used by Tyner Corporation to make one of its products. A total of 11,000 units
of this Item are produced and used every year. The company’s Accounting Department
reports the following costs of producing the Item at this level of activity:
Per Unit
Direct materials
$5.90
Direct labor
1.70
Variable manufacturing overhead
5.40
Supervisor’s salary
2.60
Depreciation of special equipment
3.20
Allocated general overhead
3.30
An outside supplier has offered to make the Item and sell it to the company for $21.20
each. If this offer is accepted, the supervisor’s salary and all of the variable costs,
including the direct labor, can be avoided. The special equipment used to make the Item
was purchased many years ago and has no salvage value or other use. The allocated
general overhead represents fixed costs of the entire company, none of which would be
avoided if the Item were purchased instead of produced internally. In addition, the space
used to make Item N29 could be used to make more of one of the company’s other
products, generating an additional segment margin of $29,000 per year for that product.
What would be the impact on the company’s overall net operating income of buying Item
N29 from the outside supplier?
4-86
97.
Bacon Company makes four products in a single facility. These products have the
following unit product costs:
Products
A
B
C
D
Direct materials
$14.30
$10.20
$11.00
$10.60
Direct labor
19.40
27.40
33.60
40.40
Variable
manufacturing
overhead
4.30
2.70
2.60
3.20
Fixed
manufacturing
overhead
26.50
34.80
26.60
37.20
Unit product cost
$64.50
$75.10
$73.80
$91.40
Additional data concerning these products are listed below.
Products
A
B
C
D
Grinding minutes
per unit
3.80
5.30
4.30
3.40
Selling price per
unit
$76.10
$93.50
$87.40
$104.20
Variable selling
cost per unit
$2.20
$1.20
$3.30
$1.60
Monthly demand
in units
4,000
4,000
3,000
2,000
The grinding machines are the constraint in the production facility. A total of 53,600
minutes are available per month on these machines.
Direct labor is a variable cost in this company.
How many minutes of grinding machine time would be required to satisfy demand for all
four products?
4-88
98.
Bacon Company makes four products in a single facility. These products have the
following unit product costs:
Products
A
B
C
D
Direct materials
$14.30
$10.20
$11.00
$10.60
Direct labor
19.40
27.40
33.60
40.40
Variable
manufacturing
overhead
4.30
2.70
2.60
3.20
Fixed
manufacturing
overhead
26.50
34.80
26.60
37.20
Unit product cost
$64.50
$75.10
$73.80
$91.40
Additional data concerning these products are listed below.
Products
A
B
C
D
Grinding minutes
per unit
3.80
5.30
4.30
3.40
Selling price per
unit
$76.10
$93.50
$87.40
$104.20
Variable selling
cost per unit
$2.20
$1.20
$3.30
$1.60
Monthly demand
in units
4,000
4,000
3,000
2,000
The grinding machines are the constraint in the production facility. A total of 53,600
minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Which product makes the LEAST profitable use of the grinding machines?
4-89
4-90
99.
Bacon Company makes four products in a single facility. These products have the
following unit product costs:
Products
A
B
C
D
Direct materials
$14.30
$10.20
$11.00
$10.60
Direct labor
19.40
27.40
33.60
40.40
Variable
manufacturing
overhead
4.30
2.70
2.60
3.20
Fixed
manufacturing
overhead
26.50
34.80
26.60
37.20
Unit product cost
$64.50
$75.10
$73.80
$91.40
Additional data concerning these products are listed below.
Products
A
B
C
D
Grinding minutes
per unit
3.80
5.30
4.30
3.40
Selling price per
unit
$76.10
$93.50
$87.40
$104.20
Variable selling
cost per unit
$2.20
$1.20
$3.30
$1.60
Monthly demand
in units
4,000
4,000
3,000
2,000
The grinding machines are the constraint in the production facility. A total of 53,600
minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Which product makes the MOST profitable use of the grinding machines?
4-91
4-92
100.
Bacon Company makes four products in a single facility. These products have the
following unit product costs:
Products
A
B
C
D
Direct materials
$14.30
$10.20
$11.00
$10.60
Direct labor
19.40
27.40
33.60
40.40
Variable
manufacturing
overhead
4.30
2.70
2.60
3.20
Fixed
manufacturing
overhead
26.50
34.80
26.60
37.20
Unit product cost
$64.50
$75.10
$73.80
$91.40
Additional data concerning these products are listed below.
Products
A
B
C
D
Grinding minutes
per unit
3.80
5.30
4.30
3.40
Selling price per
unit
$76.10
$93.50
$87.40
$104.20
Variable selling
cost per unit
$2.20
$1.20
$3.30
$1.60
Monthly demand
in units
4,000
4,000
3,000
2,000
The grinding machines are the constraint in the production facility. A total of 53,600
minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Up to how much should the company be willing to pay for one additional minute of
grinding machine time if the company has made the best use of the existing grinding
101.
Darren Company produces three products with the following costs and selling prices:
Product
X
Y
Z
Selling price per unit
$40
$30
$35
Variable costs per unit
24
16
20
Contribution margin per unit
$16
$14
$15
Direct labor hours per unit
4
2
3
Machine hours per unit
5
7
4
If Darren 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:
Z
Selling price per unit
$40
Variable costs per unit
24
16
20
Contribution margin per unit
$16
Direct labor hours per unit
Unit CM per direct labor hour
102.
Darren Company produces three products with the following costs and selling prices:
Product
X
Y
Z
Selling price per unit
$40
$30
$35
Variable costs per unit
24
16
20
Contribution margin per unit
$16
$14
$15
Direct labor hours per unit
4
2
3
Machine hours per unit
5
7
4
If Darren 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:
Selling price per unit
Variable costs per unit
Contribution margin per unit
Machine hours per unit
Unit CM per machine hour
Essay Questions
103.
104.
The Parton Company has gathered the following information for a unit of its most popular
product:
Direct materials
$20
Direct labor
15
Overhead (60% variable)
20
Cost to manufacture
$55
105.
The following information relates to the Klear Company for the upcoming year.
Amount
Per Unit
Sales
$9,000,000
$30.00
Cost of goods sold
7,200,000
24.00
Gross margin
1,800,000
6.00
Operating expenses
675,000
2.25
Operating profits
$1,125,000
$3.75
106.
The following information relates to a product produced by Baywatch Company:
Direct materials
$50
Direct labor
35
Variable overhead
30
Fixed overhead
40
Unit cost
$155
4-100
107.
Douglas 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:
Total
Local
Regional
Sales revenue
$5,200
$4,000
$1,200
Cost of goods sold
4,040
3,100
940
Gross margin
1,160
900
260
Marketing costs
420
240
180
Administrative costs
208
160
48
Operating profits
$532
$500
$32
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:
Products
Alpha
Beta
Gamma
Sales revenue
$2,000
$1,600
$1,600
Variable
manufacturing cost
% of sales
60%
70%
60%
Variable marketing
cost
3%
2%
2%
Product Sales by
Markets
Local
Regional
Alpha
$1,600
$400
Beta
1,200
400
Gamma
1,200
400