48. In deciding whether to sell a product “as is” or process it further, which of the following pieces of
information would not be relevant to the decision?
49. In deciding whether to sell a product “as is” or process it further, which of the following costs are relevant to
the decision?
50. In a sell “as is” or process further decision, if the incremental revenue of additional processing is greater
than the incremental cost of additional processing, then:
51. Carolina Potato Inc. currently sells cut sweet potatoes for $.85 per can. The cost of producing the sweet
potatoes is $.18 per can. Carolina Potato is considering starting a line of mashed sweet potatoes. The additional
processing costs would be $.06 per can and each can would sell for $.95. Which of the following pieces of
information is not relevant to the decision to sell “as is” or process further?
52. Hannah’s Homemade Cookies produces and sells delicious shortbread cookies. The cost of producing a bag
of cookies is $.65 and the bag sells for $3.75. Hannah is considering processing all the cookies further by
dipping them in chocolate. The additional processing costs would be $.50 per bag and the sales price of the
chocolate-dipped cookies would be $4.20 per bag. If Hannah can sell 5,000 bags of either type of cookie per
year, which of the following statements is true if she chooses to process the cookies further?
53. Wright Manufacturing
Wright Manufacturing makes picnic tables in three sizes: small, medium, and large. The picnic tables can be
sold with or without a finishing stain. The following information is available for each table:
Small
Medium
Large
Initial sales price
$60
$100
$175
Initial cost
20
40
55
Sales price after staining
70
125
210
Cost of staining
11
15
20
Number sold per month
100
300
175
Refer to the Wright Manufacturing information above. Which table(s) should be processed further?
54. Wright Manufacturing
Wright Manufacturing makes picnic tables in three sizes: small, medium, and large. The picnic tables can be
sold with or without a finishing stain. The following information is available for each table:
Small
Medium
Large
Initial sales price
$60
$100
$175
Initial cost
20
40
55
Sales price after staining
70
125
210
Cost of staining
11
15
20
Number sold per month
100
300
175
Refer to the Wright Manufacturing information above. What is the maximum amount that net income could increase each month with further
processing?
55. Joyner Products
Joyner Products makes cedar garden benches in three sizes: small, medium, and large. Joyner sells the benches
to local retailers. The benches can be sold with or without assembly. The following information is available for
each table:
Small
Medium
Large
Initial sales price
$ 90
$150
$250
Initial cost
30
45
70
Sales price after assembly
110
180
260
Cost of assembly
15
20
25
Number sold per month
120
350
150
Refer to the Joyner Products information above. Which bench(es) should be assembled before they are sold to retailers?
56. Joyner Products
Joyner Products makes cedar garden benches in three sizes: small, medium, and large. Joyner sells the benches
to local retailers. The benches can be sold with or without assembly. The following information is available for
each table:
Small
Medium
Large
Initial sales price
$ 90
$150
$250
Initial cost
30
45
70
Sales price after assembly
110
180
260
Cost of assembly
15
20
25
Number sold per month
120
350
150
Refer to the Joyner Products information above. What is the maximum amount that net income could increase each month with further processing?
57. Serenity Garden Inc.
Serenity Garden Inc. produces and sells a variety of garden accessories. One of the product lines the company
makes is unpainted gnome statues that come in three sizes: small, medium, and large. The company is
considering painting the gnomes. The following information is available regarding unpainted and painted
gnomes:
Small
Medium
Large
Initial sales price
$40
$60
$80
Initial cost
15
20
23
Sales price after painting
47
70
95
Cost of painting
8
9
11
Number sold per year
500
1,000
400
Refer to the Serenity Garden Inc. information above. Which gnomes, if any, should be painted?
58. Serenity Garden Inc.
Serenity Garden Inc. produces and sells a variety of garden accessories. One of the product lines the company
makes is unpainted gnome statues that come in three sizes: small, medium, and large. The company is
considering painting the gnomes. The following information is available regarding unpainted and painted
gnomes:
Small
Medium
Large
Initial sales price
$40
$60
$80
Initial cost
15
20
23
Sales price after painting
47
70
95
Cost of painting
8
9
11
Number sold per year
500
1,000
400
Refer to the Serenity Garden Inc. information above. What is the maximum amount that net income could increase each year with further
processing?
59. What is a special order? What factors does a company consider when examining a special order?
60. You overhear the manager of a sign shop say, “I’d never accept a special order! How could you ever make
money selling products below full cost?” Do you agree? Why or why not?
61. List at least two factors that should be considered in a make or buy decision.
62. When are fixed costs relevant in a make or buy decision? Give one example of a relevant fixed cost.
63. Berringer Enterprises manufactures 10 product lines. The following information is available for one of these
product lines:
Sales revenue
$50,000
Variable costs
35,000
Contribution margin
15,000
Fixed costs
18,000
Net income
$ (3,000)
The company’s controller is considering dropping the line because it is unprofitable. The controller believes that if the line is dropped, overall
company profits are guaranteed to increase. However, the managerial accountant says, “That is not necessarily always the case.” Do you agree or
disagree with the accountant? Why or why not?
64. Morris Inc. manufactures two products: Widgets and Gizmos. Widgets have a contribution margin per unit
of $30 and require 2 hours of direct labor while Gizmos have a contribution margin per unit of $39 and require
3 hours of direct labor.
A.
In the short-run, how should the company choose which product to produce or sell first if direct labor hours are a constraint?
B.
Assuming there is sufficient demand for each of these products, which of the above products should the company maximize production of
first? Show calculations to support your answer.
65. Describe the theory of constraints. In doing so, define bottlenecks and throughput.
66. Assuming there is sufficient customer demand either way, how does a company decide whether to sell a
product “as is” or to process it further? When should it be processed further?
67. A local skating rink charges each person $5 to skate and another $3 for each skate rental. The rink has
determined that on a daily basis, when 100 tickets are sold, the costs per skater are $.50 for variable costs and
$1 for fixed overhead costs. The rink has the capacity for up to 175 skaters per day. A local kid’s day camp has
asked the rink to allow up to 35 children to skate for $2.50 each on July 15. This price would include the cost of
a skate rental. During July, the rink averages 100 skaters per day.
Required:
A.
List two qualitative factors that should be considered by the rink before accepting the special order.
B.
What are the total relevant costs of accepting the special order?
C.
From a quantitative basis, should they accept the special order? By what amount will the rink’s net income increase or decrease if they
accept the special order?
B.
The relevant costs of accepting the order are the $.50 in variable costs per skater. If there are 35 skaters, total relevant costs are $17.50
($.50 ´ 35).
C.
Yes, they should accept the special order because the special order price of $2.50 is greater than the relevant costs of $.50 per skater. Net
income would increase by $70 [35 ´ ($2.50 – $.50)].
68. Quality Products produces and sells screen-printed t-shirts to local organizations. The normal sales price per
shirt is $12. Due to setup costs, they only accept orders of at least 100 shirts. The setup cost per order is $40 and
the variable costs per shirt are $3. Fixed overhead costs per month total $2,000. Quality Products has the
capacity to screen-print as many as 5,000 shirts per month, but is currently producing around 3,000. On May 1,
the company was approached by a local non-profit group who wishes to place a single order for 100 shirts. The
non-profit group has indicated that they can only pay $5 per shirt.
Required:
A.
List two qualitative factors that should be considered by Quality Products before accepting the special order.
B.
What are the total relevant costs of accepting the special order?
C.
From a quantitative basis, should they accept the special order? By what amount will Quality Product’s net income increase or decrease if
they accept the special order?
B.
The total relevant cost of accepting the special order is $340 [$40 set up cost + (100 ´ $3 variable costs per shirt)]. The relevant cost per
C.
Yes, they should accept the special order because the special order price of $5.00 is greater than the relevant costs of $3.40 per shirt. Net
income would increase by $160 [100 ´ ($5.00 – $3.40)].
69. American Motors manufactures automobiles. Currently, the company manufactures its own carpet mats with
the following unit cost per set when 20,000 sets are manufactured:
Direct materials
$15.00
Direct labor
20.00
Variable overhead
8.00
Fixed overhead
4.00
Total
$47.00
Another manufacturer has offered to supply American Motors with the mats at a cost of $45.00 per set. If American outsources the making of the
carpet mats, fixed overhead costs are expected to decrease by 60%.
Required:
A.
List at least two qualitative factors that American Motors should consider in this make or buy decision.
B.
What are the relevant costs per set of making the carpet mats themselves?
C.
What are the relevant costs per set of outsourcing the carpet mats?
D.
From a quantitative basis, should they make or buy the carpet mats? By what amount will the company’s net income increase or decrease if
they outsource? Show calculations.
·
Will the supplier make a quality product? Are they reliable?
·
Will the supplier be able to meet demand?
·
Will American Motors own employees’ morale be affected by
the outsourcing?
Direct materials
$15.00
Direct labor
20.00
Variable overhead
8.00
Fixed overhead ($4.00 ´ 60%)
2.40
Relevant costs per set
$45.40
The total relevant costs of outsourcing
each set of mats is $45.00.
[20,000 ´ ($45.40 – $45.00)].
70. Ergo Products manufactures a variety of ergonomic household tools including a cordless drill. The cordless
drill comes with a battery recharger. Currently, the company manufactures its own recharger for the drill with
the following unit costs:
Direct materials
$3.00
Direct labor
$3.00
Variable overhead
$1.00
In addition, when 5,000 rechargers are produced each year, Ergo applies $2 of fixed overhead costs to each recharger. Another manufacturer has
offered to supply Ergo with a recharger at a cost of $8 each. If Ergo accepts the offer, 80% of the fixed overhead allocated to the rechargers will be
avoidable.
Required:
A.
List at least two qualitative factors that Ergo Products should consider in this make or buy decision.
B.
What is the relevant cost of each recharger if they make it themselves?
C.
What is the relevant cost of each recharger if they outsource?
D.
From a quantitative basis, should they make or buy the rechargers? By what amount will the company’s net income increase or decrease if
they outsource?
·
Will the supplier make a quality product? Are they reliable?
·
Will the supplier be able to meet demand?
·
Will Ergo Product’s own employees’ morale be affected by the
outsourcing?
as follows:
Direct materials
$3.00
Direct labor
3.00
Variable overhead
1.00
Fixed overhead ($2.00 ´ 80%)
1.60
Relevant costs per set
$8.60
The relevant cost of outsourcing each
recharger is $8.00.
71. Kane Manufacturing has three product lines: A, B, and C. The following information is available for each
product line:
A
B
C
Total
Sales
$300,000
$350,000
$155,000
$805,000
Variable costs
100,000
110,000
105,000
315,000
Contribution margin
200,000
240,000
50,000
490,000
Fixed costs
40,000
55,000
52,000
147,000
Net income
$160,000
$185,000
$ (2,000)
$343,000
Management is considering dropping product line C.
Required:
A.
What is one qualitative factor that Kane should consider before dropping product line C?
B.
If it is determined that all of product line C’s fixed costs are avoidable, what would be the effect on the company’s overall net income if it
were dropped?
C.
If it is determined that none of product line C’s fixed costs are avoidable, what would be the effect on the company’s overall net income if
it were dropped?
D.
If it is determined that half of product line C’s fixed costs are avoidable, what would be the effect on the company’s overall net income if it
were dropped?
B.
Decrease in net income due to loss of contribution margin
$(50,000)
Increase in net income due to decrease in fixed costs
52,000
Overall effect on net income
$ 2,000
Decrease in net income due to loss of contribution margin
$(50,000)
Increase in net income due to decrease in fixed costs
0
Overall effect on net income
$(50,000)
Decrease in net income due to loss of contribution margin
$(50,000)
Increase in net income due to decrease in fixed costs
26,000
Overall effect on net income
$(24,000)
72. Castleberry Products manufactures three product lines: A, B, and C. The following information is available
for each product line:
A
B
C
Total
Sales
$500,000
$350,000
$400,000
$1,250,000
Variable costs
175,000
240,000
200,000
615,000
Contribution margin
325,000
110,000
200,000
635,000
Fixed costs
120,000
120,000
100,000
340,000
Net income
$205,000
$ (10,000)
$100,000
$ 295,000
Management is considering dropping product line B.
Required:
A.
What is one qualitative factor that Castleberry should consider before dropping product line B?
B.
If it is determined that all of product line B’s fixed costs are avoidable, what would be the effect on the company’s overall net income if it
were dropped?
C.
If it is determined that none of product line B’s fixed costs are avoidable, what would be the effect on the company’s overall net income if
it were dropped?
D.
If it is determined that $80,000 of product line B’s fixed costs are avoidable, what would be the effect on the company’s overall net income
if it were dropped?
sales of the other product
lines.
Decrease in net income due to loss of contribution margin
$(110,000)
Increase in net income due to decrease in fixed costs
120,000
Overall effect on net income
$ 10,000
Decrease in net income due to loss of contribution margin
$(110,000)
Increase in net income due to decrease in fixed costs
Overall effect on net income
$(110,000)
D.
Decrease in net income due to loss of contribution margin
$(110,000)
Increase in net income due to decrease in fixed costs
80,000
Overall effect on net income
$ (30,000)
73. Grissom Products installs standard and deluxe storage sheds. Selected data related to each product is as
follows:
Standard
Deluxe
Sales price per unit
$2,000
$4,000
Direct materials per unit
350
600
Direct labor per unit
250
350
Variable overhead per unit
100
200
Direct labor hours per unit
4
6
Most of the installation process of the sheds is done using direct labor. There are a maximum of 24,000 direct labor hours available each year.
Required:
A.
If there is unlimited demand for both products, how many of each type of shed should be installed in order to maximize profits?
B.
If the company believes that there is sufficient demand for up to 4,000 standard and 2,500 deluxe sheds each year, how many of each type
should be installed in order to maximize profits?
74. Zing Inc. produces both soft and firm twin-size mattresses. Selected data related to each product is as
follows:
sheds in order to maximize income.
Contribution margin per unit
$1,300
$2,850
¸ Direct labor hours per unit
¸ 4
¸ 6
Contribution margin per direct labor hour
$ 325
$ 475
standard sheds to maximize income.
Soft
Firm
Sales price per unit
$300
$400
Direct materials per unit
50
70
Direct labor per unit
40
60
Variable overhead per unit
20
30
Direct labor hours per unit
40 minutes
60 minutes
Most of the stuffing process is done by hand. There are a maximum of 2,000,000 direct labor minutes available each year.
Required:
A.
If there is unlimited demand for both products, how many of each type of mattress should be produced in order to maximize profits?
B.
If the company believes that there is sufficient demand for up to 30,000 soft and 20,000 firm mattresses each year, how many of each type
should be installed in order to maximize profits?
and no firm mattresses in order to maximize income.
Soft
Firm
Contribution margin per unit
$ 190
$ 240
¸ 40
¸ 60
Contribution margin per direct labor minute
$4.75
$4.00
of 50,000 soft mattresses can be produced (2,000,000/40)
B.
Zing should produce 30,000 soft and 13,333 firm mattresses
to maximize income.
75. Sugarhill Products makes a wood product in three sizes: small, medium, and large. Currently, the company
does not stain any of the products, but market research has indicated that they can be sold with or without a
finishing stain. The following information is available:
Small
Medium
Large
Initial sales price
$1,500
$2,300
$4,000
Initial cost
500
800
1,300
Sales price after staining
1,650
2,400
4,400
Cost of staining
100
190
300
Number sold per year
300
300
150
Required:
A.
Which products should be stained? Support your answer with calculations.
B.
If all the products are stained, what is the overall effect on net income? Support your answer with calculations.
large products.
Small
Medium
Large
Incremental revenue
$150
$100
$400
Incremental cost
100
190
300
Incremental profit
$ 50
$ (90)
$100
increase $3,000 as follows:
Small
Medium
Large
Incremental profit (loss)
$ 50
$ (90)
$ 100
300
300
150
Overall effect on net income
$15,000
$(27,000)
$15,000
Overall effect: $15,000 – $27,000 + $15,000 = $3,000