Accounting Chapter 7 Addition The Facts Given Above Assume

78. In addition to the facts given above, assume that the space used to produce part R20

could be used to make more of one of the company’s other products, generating an additional

segment margin of $27,000 per year for that product. What would be the impact on the

company’s overall net operating income of buying part R20 from the outside supplier and using

the freed space to make more of the other product?

Meltzer Corporation is presently making part O13 that is used in one of its products. A

total of 3,000 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 $27.00 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.

79. If management decides to buy part O13 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?

80. In addition to the facts given above, assume that the space used to produce part O13

could be used to make more of one of the company’s other products, generating an additional

segment margin of $26,000 per year for that product. What would be the impact on the

company’s overall net operating income of buying part O13 from the outside supplier and using

the freed space to make more of the other product?

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Ahsan Company makes 60,000 units per year of a part it uses in the products it

manufactures. The unit product cost of this part is computed as follows:

An outside supplier has offered to sell the company all of these parts it needs for $45.70 a unit. If

the company accepts this offer, the facilities now being used to make the part could be used to

make more units of a product that is in high demand. The additional contribution margin on this

other product would be $318,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would

be avoided. However, $3.50 of the fixed manufacturing overhead cost being applied to the part

would continue even if the part were purchased from the outside supplier. This fixed

manufacturing overhead cost would be applied to the company’s remaining products.

81. How much of the unit product cost of $40.50 is relevant in the decision of whether to

make or buy the part?

82. What is the net total dollar advantage (disadvantage) of purchasing the part rather than

making it?

83. What is the maximum amount the company should be willing to pay an outside supplier

per unit for the part if the supplier commits to supplying all 60,000 units required each year?

Talboe Company makes wheels which it uses in the production of children’s wagons.

Talboe’s costs to produce 200,000 wheels annually are as follows:

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels

are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would

be avoided and the facilities now being used to make the wheels would be rented to another

company for $55,000 per year.

84. If Talboe chooses to buy the wheel from the outside supplier, then the change in annual

net operating income is a:

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85. What is the highest price that Talboe could pay the outside supplier for each wheel and

still be economically indifferent between making or buying the wheels?

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its

products. The cost per unit for the component at this level of activity is as follows:

Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units of

this component each year at a price of $25 per component. Assume that direct labor is a variable

cost. None of the fixed manufacturing overhead would be avoidable if this component were

purchased from the outside supplier.

86. Assume that there is no other use for the capacity now being used to produce the

component and the total fixed manufacturing overhead of the company would be unaffected by

this decision. If Rodgers Company purchases the components rather than making them internally,

what would be the impact on the company’s annual net operating income?

87. Assume that if the component is purchased from the outside supplier, $35,100 of annual

fixed manufacturing overhead would be avoided and the facilities now being used to make the

component would be rented to another company for $64,800 per year. If Rodgers chooses to buy

the component from the outside supplier under these circumstances, then the impact on annual

net operating income due to accepting the offer would be:

Meacham Company has traditionally made a subcomponent of its major product. Annual

production of 20,000 subcomponents results in the following costs:

Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of

this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the

facilities now being used to make the subcomponent would be rented to another company for

$75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the

fixed overhead would be unaffected.

88. If Meacham decides to purchase the subcomponent from the outside supplier, how much

higher or lower will net operating income be than if Meacham continued to make the

subcomponent?

89. Suppose the price for the subcomponent has not been set. At what price per unit charged

by the outside supplier would Meacham be economically indifferent between making the

subcomponent or buying it from the outside?

Elhard Company produces a single product. The cost of producing and selling a single unit

of this product at the company’s normal activity level of 40,000 units per month is as follows:

The normal selling price of the product is $51.10 per unit.

An order has been received from an overseas customer for 2,000 units to be delivered this month

at a special discounted price. This order would have no effect on the company’s normal sales and

would not change the total amount of the company’s fixed costs. The variable selling and

administrative expense would be $0.10 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

90. Suppose there is ample idle capacity to produce the units required by the overseas

customer and the special discounted price on the special order is $41.60 per unit. By how much

would this special order increase (decrease) the company’s net operating income for the

month?

91. Suppose the company is already operating at capacity when the special order is received

from the overseas customer. What would be the opportunity cost of each unit delivered to the

overseas customer?

92. Suppose there is not enough idle capacity to produce all of the units for the overseas

customer and accepting the special order would require cutting back on production of 200 units

for regular customers. The minimum acceptable price per unit for the special order is closest to:

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The Varone Company makes a single product called a Hom. The company has the capacity

to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity

level are:

The regular selling price for one Hom is $60. A special order has been received at Varone from

the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If

this special order were accepted, the variable selling expense would be reduced by 25%.

However, Varone would have to purchase a specialized machine to engrave the Fairview name on

each Hom in the special order. This machine would cost $12,000 and it would have no use after

the special order was filled. The total fixed costs, both manufacturing and selling, are constant

within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labor is a variable

cost.

93. If Varone can expect to sell 32,000 Homs next year through regular channels and the

special order is accepted at 15% off the regular selling price, the effect on net operating income

next year due to accepting this order would be a:

94. If Varone can expect to sell 32,000 Homs next year through regular channels, at what

special order price from Fairview should Varone be economically indifferent between either

accepting or not accepting this special order?

95. If Varone has an opportunity to sell 37,960 Homs next year through regular channels and

the special order is accepted for 15% off the regular selling price, the effect on net operating

income next year due to accepting this order would be a:

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be

shipped at the end of the month at a selling price of $7 each. The company has a production

capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the

company is selling 80,000 jigs per month through regular channels at a selling price of $11 each.

For these regular sales, the cost for one jig is:

If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur

shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order.

96. If Immanuel accepts this special order, the change in monthly net operating income will

be a: