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
53. Refer to the Wright Manufacturing information above. Which table(s) should be processed further?
a.
Small and medium tables
b.
Medium and large tables
c.
Large tables
d.
Small, medium, and large tables
54. Refer to the Wright Manufacturing information above. What is the maximum amount of increase in
net income from further processing?
a.
$81,125
b.
$ 5,525
c.
$82,125
d.
$ 5,625
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
$ 80
$120
$225
Initial cost
30
50
95
Sales price after assembly
120
160
245
Cost of assembly
20
25
40
Number sold per month
200
175
150
55. Refer to the Joyner Products information above. Which bench(es) should be assembled before they are
sold to retailers?
a.
Small and medium
b.
Medium and large
c.
Small and large
d.
Small, medium, and large
56. Refer to the Joyner Products information above. What is the maximum amount of increase in net
income from further processing?
a.
$3,625
b.
$2,625
c.
$6,625
d.
$4,000
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
57. Refer to the Serenity Garden Inc. information above. Which gnomes, if any, should be painted?
a.
Small, medium, and large
b.
Medium and large
c.
Small and medium
d.
None should be painted.
58. Refer to the Serenity Garden Inc. information above. What is the maximum amount of increase in net
income from further processing?
a.
$2,100
b.
$2,600
c.
$7,600
d.
$1,600
SHORT ANSWER
1. What is a special order? What factors does a company consider when examining a special order?
2. 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?
3. List at least two factors that should be considered in a make or buy decision.
4. When are fixed costs relevant in a make or buy decision? Give one example of a relevant fixed cost.
5. 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?
6. 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.
B.
Morris Inc. should maximize the production of Widgets. Widgets have a contribution
7. Describe the theory of constraints. In doing so, define bottlenecks and throughput.
8. Assuming there is sufficient customer demand either way, how does a company decide whether to sell
a product or to process it further? When should it be processed further?
PROBLEM
1. 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?
are 35 skaters, total relevant costs are $17.50 ($.50 35).
2. 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?
3. American Motors manufactures automobiles. Currently, the company manufactures its own carpet
mats with the following unit cost per set when 25,000 sets are manufactured:
Direct materials
$25.00
Direct labor
15.00
Variable overhead
5.00
Fixed overhead
10.00
Total
$55.00
Another manufacturer has offered to supply American Motors with the mats at a cost of $50.00 per set.
If American outsources the making of the carpet mats, fixed overhead costs are expected to decrease
by 80%.
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.
4. 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?
B.
The relevant costs of making each set themselves is $53.00 computed as follows:
Direct materials
Direct labor
15.00
Variable overhead
Fixed overhead ($10.00 80%)
Relevant costs per set
C.
The total relevant costs of outsourcing each set of mats is $50.00.
making of 25,000 sets, net income will increase by $75,000 [25,000 ($53.00 − $50.00)].
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?
5. Kane Manufacturing has three product lines: A, B, and C. The following information is available for
each product line:
A
B
C
Total
Sales
$600,000
$450,000
$300,000
$1,350,000
Variable costs
200,000
150,000
230,000
580,000
Contribution margin
400,000
300,000
70,000
770,000
Fixed costs
75,000
60,000
85,000
220,000
Net income
$325,000
$240,000
$ (15,000)
$550,000
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?
A.
Kane should consider the effect that dropping product line C might have on the sales of
The relevant cost of making each recharger themselves is $8.60 computed as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead ($2.00 80%)
Relevant costs per set
The relevant cost of outsourcing each recharger is $8.00.
rechargers, net income will increase by $3,000 [5,000 ($8.60 − $8.00)].
6. 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?
other product lines.
Decrease in net income due to loss of contribution margin
$(70,000)
Increase in net income due to decrease in fixed costs
85,000
Overall effect on net income
$ 15,000
Decrease in net income due to loss of contribution margin
$(70,000)
Increase in net income due to decrease in fixed costs
Overall effect on net income
$(70,000)
Decrease in net income due to loss of contribution margin
$(70,000)
Increase in net income due to decrease in fixed costs
42,500
Overall effect on net income
$(27,500)
7. 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 cost per unit
350
600
Direct labor cost per unit
250
350
Variable overhead cost per unit
100
200
Direct labor hours per unit
4 hours
6 hours
Most of the installation process of the sheds is done using manual 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?
Grissom should maximize the installation of the deluxe sheds because they have the
highest contribution margin per direct labor hour. They should install 4,000 deluxe sheds
and no standard sheds in order to maximize income.
Contribution margin per unit
$1,300
$2,850
Decrease in net income due to loss of contribution margin
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
Overall effect on net income
Decrease in net income due to loss of contribution margin
Increase in net income due to decrease in fixed costs
Overall effect on net income
8. Zing Inc. produces both soft and firm twin-size mattresses. Selected data related to each product is as
follows:
Soft
Firm
Sales price per unit
$400
$500
Direct materials per unit
95
110
Direct labor per unit
35
55
Variable overhead per unit
15
20
Direct labor hours per unit
30 minutes
45 minutes
Most of the stuffing process is done by hand. There are a maximum of 2,400,000 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 35,000 soft and 33,000
firm mattresses each year, how many of each type should be installed in order to
maximize profits?
Zing should maximize the production of the soft mattresses because they have the highest
contribution margin per direct labor minute. They should produce 80,000 soft mattresses
and no firm mattresses in order to maximize income.
Contribution margin per unit
Contribution margin per direct labor minute
If there are 2,400,000 direct labor minutes available and each soft mattress takes 40
Contribution margin per direct labor hour
$ 475
If there are 24,000 direct labor hours available and each deluxe shed takes 6 hours to
install, then a maximum of 4,000 deluxe sheds can be installed (24,000/6 hours).
Grissom should install 2,500 deluxe and 2,250 standard sheds to maximize income.
labor hours available for standard sheds, a total of 2,250 standard sheds can be installed
(9,000/4 hours).
9. 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.
Incremental revenue
$100
Incremental cost
Incremental profit
x number sold per year
Zing should produce 35,000 soft and 30,000 firm mattresses to maximize income.
