54. Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets costs $51
to buy from farmers and $14 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 $20 or
processed further for $18 to make the end product industrial fiber that is sold for $45. The beet
juice can be sold as is for $41 or processed further for $21 to make the end product refined sugar
that is sold for $62. How much profit (loss) does the company make by processing one batch of
sugar beets into the end products industrial fiber and refined sugar?
55. Beilke Corporation processes sugar beets in batches that it purchases from farmers for
$53 a batch. A batch of sugar beets costs $12 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 $20 or processed further for $10 to make the end product industrial fiber that is sold for
$26. The beet juice can be sold as is for $30 or processed further for $29 to make the end
product refined sugar that is sold for $79. Which of the intermediate products should be
processed further?
56. Zollars Cane Products, Inc., processes sugar cane in batches. The company buys a batch
of sugar cane from farmers for $70 which is then crushed in the company’s plant at a cost of $19.
Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The
cane fiber can be sold as is for $21 or processed further for $13 to make the end product
industrial fiber that is sold for $42. The cane juice can be sold as is for $44 or processed further
for $26 to make the end product molasses that is sold for $88. How much profit (loss) does the
company make by processing one batch of sugar cane into the end products industrial fiber and
molasses?
57. Kempler Corporation processes sugar cane in batches. The company purchases a batch
of sugar cane for $34 from farmers and then crushes the cane in the company’s plant at the cost
of $15. Two intermediate products, cane fiber and cane juice, emerge from the crushing process.
The cane fiber can be sold as is for $26 or processed further for $17 to make the end product
industrial fiber that is sold for $41. The cane juice can be sold as is for $32 or processed further
for $22 to make the end product molasses that is sold for $51. Which of the intermediate
products should be processed further?
Two alternatives, code-named X and Y, are under consideration at Afalava Corporation. Costs
associated with the alternatives are listed below.
58. Are the materials costs and processing costs relevant in the choice between alternatives
X and Y? (Ignore the equipment rental and occupancy costs in this question.)
59. What is the differential cost of Alternative Y over Alternative X, including all of the
relevant costs?
Zurasky Corporation is considering two alternatives: A and B. Costs associated with the
alternatives are listed below:
60. Are the materials costs and processing costs relevant in the choice between alternatives
A and B? (Ignore the equipment rental and occupancy costs in this question.)
61. What is the differential cost of Alternative B over Alternative A, including all of the
relevant costs?
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Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can
then be sold directly to stores or they can be used by Austin Wool Products to make afghans.
Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn
and for the afghans are as follows:
Each month 4,000 spindles of yarn are produced that can either be sold outright or processed
into afghans.
62. If Austin chooses to produce 4,000 afghans each month, the change in the monthly net
operating income as compared to selling 4,000 spindles of yarn is:
63. What is the lowest price Austin should be willing to accept for one afghan as long as it
can sell spindles of yarn to the outside market for $12 each?
The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total
cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be
sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present
condition for $50,000.
64. The sunk cost in this situation is:
65. What is the net advantage or disadvantage to the company from upgrading the computers
rather than selling them in their present condition?
66. Suppose the selling price of the upgraded computers has not been set. At what selling
price per unit would the company be as well off upgrading the computers as if it just sold the
computers in their present condition?
The management of Fries Corporation has been concerned for some time with the financial
performance of its product R89H and has considered discontinuing it on several occasions. 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 $31,000 of the fixed manufacturing expenses
and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is
discontinued.
67. According to the company’s accounting system, what is the net operating income earned
by product R89H?
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68. What would be the effect on the company’s overall net operating income if product R89H
were dropped?
The management of Freshwater Corporation is considering dropping product C11B. Data
from the company’s accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company’s accounting
system. Further investigation has revealed that $211,000 of the fixed manufacturing expenses
and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B is
discontinued.
69. According to the company’s accounting system, what is the net operating income earned
by product C1
70. What would be the effect on the company’s overall net operating income if product C11B
were dropped?
The Western Company is considering the addition of a new product to its current product lines.
The expected cost and revenue data for the new product are as follows:
If the new product is added to the existing product line, then sales of existing products will
decline. As a consequence, the contribution margin of the other existing product lines is expected
to drop $78,000 per year.
71. If the new product is added next year, the increase in net operating income resulting from
this decision would be:
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72. What is the lowest selling price per unit among those listed below that could be charged
for the new product and still make it economically desirable to add the new product?
Condensed monthly operating income data for Cosmo Inc. for November is presented below.
Additional information regarding Cosmo’s operations follows the statement.
Three-quarters of each store’s traceable fixed expenses are avoidable if the store were to be
closed.
Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a ten percent decrease in
Mall Store sales, while closing the Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.
73. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase
(decrease) in Cosmo’s operating income of:
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74. Cosmo is considering a promotional campaign at the Town Store that would not affect
the Mall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order to
increase Town Store sales by ten percent would result in a monthly increase (decrease) in
Cosmo’s operating income of:
The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its
current product lines. Expected cost and revenue data for the new cabinets are as follows:
If the new cabinets are added, it is expected that the contribution margin of other product lines at
the cabinet shop will drop by $20,000 per year.
75. If the new cabinet product line is added next year, the increase in net operating income
resulting from this decision would be:
76. What is the lowest selling price per unit that could be charged for the new cabinets from
the following list and still make it economically desirable to add the new product line?
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Knaack Corporation is presently making part R20 that is used in one of its products. A
total of 18,000 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 produce and sell the part to the company for $27.70 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, none of which would be avoided if the part were purchased instead of
produced internally.
77. If management decides to buy part R20 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?