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7-121
137. 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?
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138. Foulds Company makes 10,000 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 $42.30 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 $39,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would
be avoided. However, $6.40 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.
Required:
a. How much of the unit product cost of $47.90 is relevant in the decision of whether to make or
buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
c. 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 10,000 units required each year?
7-123
139. Jerston Company has an annual plant capacity of 3,000 units. Data concerning this
product are given below:
The company has received a special order for 500 units at a selling price of $45 each. Regular
sales would not be affected, and sales commissions on the 500 units would be reduced by one-
third. This special order would have no impact on total fixed costs.
Required:
Determine whether the company should accept the special order. Show all computations.
140. Nowlan Co. manufactures and sells trophies for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 11,000 trophies each month; current monthly
production is 8,800 trophies. The company normally charges $87 per trophy. Cost data for the
current level of production are shown below:
The company has just received a special one-time order for 500 trophies at $50 each. For this
particular order, no variable selling and administrative costs would be incurred. This order would
also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
143. Humes Corporation makes a range of products. The company's predetermined overhead
rate is $16 per direct labor-hour, which was calculated using the following budgeted data:
Management is considering a special order for 700 units of product J45K at $64 each. The normal
selling price of product J45K is $75 and the unit product cost is determined as follows:
If the special order were accepted, normal sales of this and other products would not be affected.
The company has ample excess capacity to produce the additional units. Assume that direct
labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours,
and total fixed manufacturing overhead would not be affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit?
7-127
144. 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 spare 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!
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145. Jumonville 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 70,000 units per month is as follows:
The normal selling price of the product is $56.70 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 $0.70 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. 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 $51.20 per unit. By how much would this
special order increase (decrease) the company's net operating income for the month?
b. 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?
c. 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 700 units for regular
customers. What would be the minimum acceptable price per unit for the special order?
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146. 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?
7-131
147. 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?
7-132
148. 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.)
7-134
149. 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.)
7-136
150. 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?
7-137
151. Prevatte Corporation purchases potatoes from farmers. The potatoes are then peeled,
producing two intermediate products-peels and depeeled spuds. The peels can then be
processed further to make a cocktail of organic nutrients. And the depeeled spuds can be
processed further to make frozen french fries. A batch of potatoes costs $45 to buy from farmers
and $11 to peel in the company's plant. The peels produced from a batch can be sold as is for
animal feed for $27 or processed further for $16 to make the cocktail of nutrients that are sold for
$47. The depeeled spuds can be sold as is for $38 or processed further for $27 to make frozen
french fries that are sold for $59.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how
much money does the company make from processing one batch of potatoes into the cocktail of
organic nutrients and frozen french fries? Show your work!
b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or
processed further into an end product? Explain.
7-138
152. Spurrier Corporation produces two intermediate products, A and B, from a common input.
Intermediate product A can be further processed into end product X. Intermediate product B can
be further processed into end product Y. The common input is purchased in batches that cost
$50 each and the cost of processing a batch to produce intermediate products A and B is $15.
Intermediate product A can be sold as is for $28 or processed further for $18 to make end
product X that is sold for $43. Intermediate product B can be sold as is for $31 or processed
further for $24 to make end product Y that is sold for $68.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how
much money does the company make from processing one batch of the common input into the
end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed further into an
end product? Explain.
7-139
153. Harris Corp. manufactures three products from a common input in a joint processing
operation. Joint processing costs up to the split-off point total $200,000 per year. The company
allocates these costs to the joint products on the basis of their total sales value at the split-off
point.
Each product may be sold at the split-off point or processed further. The additional processing
costs and sales value after further processing for each product (on an annual basis) are:
The "Further Processing Costs" consist of variable and avoidable fixed costs.
Required:
Which product or products should be sold at the split-off point, and which product or products
should be processed further? Show computations.
7-140
154. Iaukea Company makes two products from a common input. Joint processing costs up to
the split-off point total $49,600 a year. The company allocates these costs to the joint products
on the basis of their total sales values at the split-off point. Each product may be sold at the
split-off point or processed further. Data concerning these products appear below:
Required:
a. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-
off point?
b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-
off point?
c. What is the minimum amount the company should accept for Product X if it is to be sold at the
split-off point?
d. What is the minimum amount the company should accept for Product Y if it is to be sold at the
split-off point?
