7-21
35. Product R19N has been considered a drag on profits at Buzzeo Corporation for some time
and management is considering discontinuing the product altogether. Data from the company’s
accounting system appear below:
In the company’s accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses
and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is
discontinued. What would be the effect on the company’s overall net operating income if product
R19N were dropped?
36. Lusk Company produces and sells 15,000 units of Product A each month. The selling
price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made
concerning whether Product A should be discontinued. The study shows that $70,000 of the
$100,000 in fixed expenses charged to Product A would continue even if the product was
discontinued. These data indicate that if Product A is discontinued, the company’s overall net
operating income would:
37. Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity.
Peluso’s plant manager is considering making the headlights now being purchased from an
outside supplier for $11 each. The Peluso plant has idle equipment that could be used to
manufacture the headlights. The design engineer estimates that each headlight requires $4 of
direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the
manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by
Peluso Company to manufacture the headlights should result in a net gain (loss) for each
headlight of:
38. Part I51 is used in one of Pries Corporation’s products. The company makes 18,000 units
of this part each year. The company’s Accounting Department reports the following costs of
producing the part at this level of activity:
An outside supplier has offered to produce this part and sell it to the company for $15.80 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 $26,000 of these allocated
general overhead costs would be avoided.
If management decides to buy part I51 from the outside supplier rather than to continue making
the part, what would be the annual impact on the company’s overall net operating income?
7-25
39. Iwasaki 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:
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable
if the component were bought from the outside supplier. In addition, making the component uses
1 minute on the machine that is the company’s current constraint. If the component were bought,
this machine time would be freed up for use on another product that requires 2 minutes on this
machine and that has a contribution margin of $5.20 per unit.
When deciding whether to make or buy the component, what cost of making the component
should be compared to the price of buying the component?
40. Part N29 is used by Farman Corporation to make one of its products. A total of 11,000
units of this part are produced and used every year. The company’s Accounting Department
reports the following costs of producing the part at this level of activity:
An outside supplier has offered to make the part 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 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, none of which would be avoided if the part were purchased instead of
produced internally. In addition, the space used to make part 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 part N29 from the outside supplier?
7-27
41. Fillip Corporation makes 4,000 units of part U13 each year. This part is used in one of the
company’s products. The company’s Accounting Department reports the following costs of
producing the part at this level of activity:
An outside supplier has offered to make and sell the part to the company for $21.60 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 $3,000 of these allocated
general overhead costs would be avoided. In addition, the space used to produce part U13 would
be used to make more of one of the company’s other products, generating an additional segment
margin of $13,000 per year for that product.
What would be the impact on the company’s overall net operating income of buying part U13
from the outside supplier?
42. Ethridge Corporation is presently making part H25 that is used in one of its products. A
total of 9,000 units of this part are produced and used every year. The company’s Accounting
Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to make and sell the part to the company for $15.40 each. If this
offer is accepted, the supervisor’s salary and all of the variable costs 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, none of
which would be avoided if the part were purchased instead of produced internally. If
management decides to buy part H25 from the outside supplier rather than to continue making
the part, what would be the annual impact on the company’s overall net operating income?
43. Pitkin Company produces a part used in the manufacture of one of its products. The unit
product cost of the part is $33, computed as follows:
An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only
$27 each. The company estimates that 30% of the fixed manufacturing overhead costs above will
continue if the parts are purchased from the outside supplier. Assume that direct labor is an
avoidable cost in this decision. Based on these data, the per unit dollar advantage or
disadvantage of purchasing the parts from the outside supplier would be:
44. A customer has requested that Inga Corporation fill a special order for 2,000 units of
product K81 for $25.00 a unit. While the product would be modified slightly for the special order,
product K81’s normal unit product cost is $19.90:
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 modifications made to product K81
that would increase the variable costs by $1.20 per unit and that would require an investment of
$10,000 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
spare capacity for producing the special order. If the special order is accepted, the company’s
overall net operating income would increase (decrease) by:
45. Rojo Corporation has received a request for a special order of 8,000 units of product W68
for $27.20 each. Product W68’s unit product cost is $18.50, determined 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 modifications made to product W68
that would increase the variable costs by $7.90 per unit and that would require an investment of
$31,000 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
spare capacity for producing the special order. If the special order is accepted, the company’s
overall net operating income would increase (decrease) by:
46. Ellis Television makes and sells portable televisions. Each television regularly sells for
$210. The following cost data per television is based on a full capacity of 10,000 televisions
produced each period.
A special order has been received by Ellis for a sale of 2,000 televisions to an overseas customer.
The only selling costs that would be incurred on this order would be $6 per television for
shipping. Ellis is now selling 6,000 televisions through regular channels each period. What should
be the minimum selling price per television in negotiating a price for this special order?
47. An automated turning machine is the current constraint at Naik Corporation. Three
products use this constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable. In
other words, rank the products in the order in which they should be emphasized.
48. Pappan Corporation makes three products that use compound W, the current constrained
resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable. In
other words, rank the products in the order in which they should be emphasized.
49. Consider the following production and cost data for two products, X and Y:
The company has 15,000 machine hours available each period, and there is unlimited demand for
each product. What is the largest possible total contribution margin that can be realized each
period?
50. The constraint at Mcglathery Corporation is time on a particular machine. The company
makes three products that use this machine. Data concerning those products appear below:
Assume that sufficient time is available on the constrained machine 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?
51. Wright Company produces products I, J, and K from a single raw material input. Budgeted
data for the next month follows:
If the cost of the raw material input is $78,000, which of the products should be processed
beyond the split-off point?
52. Two products, IF and RI, emerge from a joint process. Product IF has been allocated
$25,300 of the total joint costs of $46,000. A total of 2,000 units of product IF are produced from
the joint process. Product IF can be sold at the split-off point for $11 per unit, or it can be
processed further for an additional total cost of $10,000 and then sold for $13 per unit. If product
IF is processed further and sold, what would be the effect on the overall profit of the company
compared with sale in its unprocessed form directly after the split-off point?
53. Coakley Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets
costs $48 to buy from farmers and $10 to crush in the company’s plant. Two intermediate
products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold
as is for $24 or processed further for $16 to make the end product industrial fiber that is sold for
$36. The beet juice can be sold as is for $44 or processed further for $28 to make the end
product refined sugar that is sold for $70. How much profit (loss) does the company make by
processing the intermediate product beet juice into refined sugar rather than selling it as is?