The following are the unit costs of making and selling an item at a volume of 30,000 units per month (which represents the company’s capacity):
Assume the company has 300 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company’s other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. What cost is relevant as a guide for setting a minimum price on these defective units?
The Hudson Corporation has 8,000 obsolete units of a product that are carried in inventory at a manufacturing cost of $160,000. If the units are remachined for $40,000, they could be sold for $72,000. Alternatively, the units could be sold for scrap for $28,000. Which alternative is more desirable and what are the total relevant costs for that alternative?
A study has been conducted to determine if one of the product lines of Kalamazoo Company should be discontinued. This product line generates a contribution margin of $300,000 per year. Fixed expenses allocated to the product line are $390,000 per year. It is estimated that $240,000 of these fixed expenses could be eliminated if the product line is discontinued. These data indicate that if the product line is discontinued, the company’s overall net operating income would:
Ferguson Company manufactures 4,000 parts per year; the parts are used in the assembly of one of the company’s products. The unit product cost of these parts is:
The part can be purchased from an outside supplier at $40 per unit. If the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company’s net operating income as a result of buying the part from the outside supplier would be:
The managers of a firm are in the process of deciding whether to accept or reject a special order for one of its products. A cost that is not relevant to their decision is the:
Stewart Corporation manufactures solar powered calculators. The company can manufacture 1,200,000 calculators a year at a variable cost of $3,000,000 and a fixed cost of $1,800,000. Based on management’s projections for next year, 960,000 calculators will be sold at the regular price of $20.00 each. A special order has been received for 240,000 calculators to be sold at a 70% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company’s net operating income be increased as a result of the special order?
Marion Company sells its product for $126 per unit. The company’s unit product cost based on the full capacity of 300,000 units is as follows.
A special order offering to buy 120,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $18 per unit for shipping. The company has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. In negotiating a price for the special order, what should the minimum acceptable selling price per unit be?
Consider the following production and cost data for the two versions of the product that is manufactured and sold by Bellows Corporation:
Only 260,000 machine set-ups can be performed each year due to limited supply of skilled labor. There is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each year?
Edgecomb Pottery makes plates, bowls, and platters using glazes that develop starburst patterns when the pottery is fired. The art of creating this pottery, which includes throwing, bisquing, and glazing, is a craft that takes years of experience to master. The demand for the company’s pottery far exceeds the company’s studio capacity. Information concerning three of the company’s products follows.
More time could be made available by asking employees in the studio to work overtime. Assuming that this extra time would be used to produce bowls, how much should the company be willing to pay per hour to keep the studio open after normal working hours?
Sentinel Inc. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $50,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. These sales values are as follows: Product X, $25,000; Product Y, $45,000; and Product Z, $30,000. Each product may be sold at the split-off point or processed further. The additional processing costs and the sales value after further processing for each product (on an annual basis) are as follows.
Which product or products should be sold at the split-off point?