Ch. 14 Homework

c.) highest contribution margin per unit of scarce resource. A company that is operating at full capacity should emphasize those products and services that have the highest contribution margin per unit of scarce resource.

A company that is operating at full capacity should emphasize those products and services that have the: a.) lowest total per-unit costs. b.) highest contribution margin per unit. c.) highest contribution margin per unit of scarce resource. d.) highest operating income. e.) highest sales volume.

b.) excess capacity exists and the revenue exceeds all variable costs associated with the order. A special order generally should be accepted if excess capacity exists and the revenue exceeds all variable costs associated with the order.

A special order generally should be accepted if: a.) its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order. b.) excess capacity exists and the revenue exceeds all variable costs associated with the order. c.) excess capacity exists and the revenue exceeds allocated fixed costs. d.) the revenue exceeds total costs, regardless of available capacity. e.) the revenue exceeds variable costs, regardless of available capacity.

a.) $10,000. The benefit would be ($390,000 + $30,000) − $410,000 = $10,000.

Canyon Trails is studying whether to outsource its Human Resources (H/R) activities. Salaried professionals who earn $390,000 would be terminated; in contrast, administrative assistants who earn $120,000 would be transferred elsewhere in the organization. Miscellaneous departmental overhead (e.g., supplies, copy charges, overnight delivery) is expected to decrease by $30,000, and $25,000 of corporate overhead, previously allocated to Human Resources, would be picked up by other departments. If Canyon Trails can secure needed H/R services locally for $410,000, how much would the company benefit by outsourcing? a.) $10,000. b.) $35,000. c.) $130,000. d.) $155,000. e.) Nothing, as it would be cheaper to keep the department open.

b.) Clean and ship to outlet center, $23,000. Clean and ship to outlet center is the more desirable at a relevant cost of $23,000.

Cornerstone, Inc. has $125,000 of inventory that suffered minor smoke damage from a fire in the warehouse. The company can sell the goods "as is" for $45,000; alternatively, the goods can be cleaned and shipped to the firm's outlet center at a cost of $23,000. There the goods could be sold for $80,000. What alternative is more desirable and what is the relevant cost for that alternative? a.) Sell "as is," $125,000. b.) Clean and ship to outlet center, $23,000. c.) Clean and ship to outlet center, $103,000. d.) Clean and ship to outlet center, $148,000. e.) Neither alternative is desirable, as both produce a loss for the firm.

c.) increase by $14,000. Cost of Goods Sold per unit = $145,000 − $30,000 = $115,000 / 10,000 = $11.50; Special order: $15 − 11.50 = $3.50 margin per unit; $3.50 × 4,000 = $14,000 increase in income.

Elkhorn, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows. Sales $190,000 Less: Cost of Goods Sold 145,000 Gross Margin $45,000 Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company's income will: a.) increase by $2,000. b.) decrease by $2,000. c.) increase by $14,000. d.) decrease by $14,000. e.) None of the answers is correct.

d.) 3, 5. Terminal depreciation (based on square footage) and Allocated Fairline administrative overhead would be unavoidable.

Fairline Skyways has a significant presence at the Charlotte International Airport and therefore operates the Diamond Club, which is across from gate 36 in terminal 1. The Diamond Club provides food and business services for the company's frequent flyers. Consider the following selected costs of Club operation: 1. Receptionist and supervisory salaries 2. Catering 3. Terminal depreciation (based on square footage) 4. Airport fees (computed as a percentage of club revenue) 5. Allocated Fairline administrative overhead Management is exploring whether to close the club and expand the seating area for gate 36. Which of the preceding expenses would the airline classify as unavoidable? a.) 3. b.) 4. c.) 5. d.) 3, 5. e.) None of the answers is correct.

b.) $99. The minimum price is: $50 + $19 + $22 + $8 = $99.

Forrest Corporation manufactures parts that are used in the production of washers and dryers. The following costs are associated with part no. 65: Direct materials $50 Direct labor 19 Variable manufacturing overhead 22 Fixed manufacturing overhead 15 Variable selling costs 11 The company received a special-order inquiry from an appliance manufacturer in Brazil for 15,000 units of part no. 65. The variable selling costs per unit will amount to only $8. Since Forrest has excess capacity, the minimum price that Forrest should charge the Brazil manufacturer is: a.) $91. b.) $99. c.) $105. d.) $114. e.) None of the answers is correct.

c.) Department C. $12,000 + $48,000 + $40,000 = $100,000; 12% × $25,000 = $3,000 to A; 48% × $25,000 = $12,000 to B; 40% × $25,000 = $10,000 to C. Operating income after adjusting for fixed operating allocation: A = $600 + $3,000 = $3,600 operating income; B = $12,000 − $11,800 = $200 operating income; C: $10,000 − $10,500 = $(500) operating loss. So Department C should be closed.

Howard Enterprises, which has three departments, recently reported the following results: A - Sales revenue $12,000 Less: Operating costs 11,400 Operating income (loss) $600 B - Sales revenue $48,000 Less: Operating costs 59,800 Operating income (loss) $(11,800) C - Sales revenue 40,000 Less: Operating costs 50,500 Operating income (loss) $(10,500) The company incurred variable operating costs as well as $25,000 of fixed operating costs. The $25,000 amount was allocated to A, B, and C on the basis of sales revenue and is included in the cost figures noted above. Which department(s), if any, should be closed if none of the fixed operating costs can be avoided? a.) Department A. b.) Department B. c.) Department C. d.) Departments B and C. e.) None of the departments should be closed.

D. 6,000 units X 5,000 units Y 27,000 total hours − (2 × 6,000 of Product x) = 15,000 hours remaining; 15,000 / 3 hrs for Product y = 5,000 units.

Kingston Manufacturing has 27,000 labor hours available for producing X and Y. Consider the following information: Product X: Required labor time per unit (hours) 2 Maximum demand (units) 6,000 Contribution margin per unit $5 Contribution margin per labor hour $2.50 Product Y: Required labor time per unit (hours) 3 Maximum demand (units) 8,000 Contribution margin per unit $6 Contribution margin per labor hour $2 If Kingston follows proper managerial accounting practices, which of the following production schedules should the company set? A. 0 units X 8,000 units Y B. 1,500 units X 8,000 units Y C. 6,000 units X 0 units Y D. 6,000 units X 5,000 units Y E. 6,000 units X 8,000 units Y

e.) I and III. Both the selling price of Retox-F and the separable cost of producing Retox-F are relevant to the decision.

Kranston Company is considering whether to sell Retox at the split-off point or subject it to further processing and produce a more refined product known as Retox-F. Consider the following items: I. The selling price of Retox-F. II. The joint processing cost of Retox. III. The separable cost of producing Retox-F. Which of the above items is (are) relevant to Kranston's decision to process Retox into Retox-F? a.) I only. b.) II only. c.) III only. d.) I and II. e.) I and III.

c.) $66,700. 31,000 − (6,500 of Product M × 2) = 18,000 for Product N; 18,000 / 3 = 6,000 Product N units; CM = (6,500 × $5) + (6,000 × $5.70) = $32,500 + $34,200 = $66,700.

Newton Manufacturing has 31,000 labor hours available for producing M and N. Consider the following information: Product M: Required labor time per unit (hours) 2 Maximum demand (units) 6,500 Contribution margin per unit $5 Contribution margin per labor hour $2.50 Product N: Required labor time per unit (hours) 3 Maximum demand (units) 8,000 Contribution margin per unit $5.70 Contribution margin per labor hour $1.90 If Newton follows proper managerial accounting practices in terms of setting a production schedule, how much contribution margin would the company expect to generate? a.) $31,450. b.) $63,100. c.) $66,700. d.) $78,100. e.) None of the answers is correct.

c.) $55,000 increase Regular $240,000 − [$180,000 − ($3 × 10,000)] = $90,000 GM; $90,000 − ($4 × 10,000) = $50,000 operating income; Super $481,000 / 3,700 = $130/unit; $130 − $20 = $110; ($200 × 1,500 units) − ($110 × 1,500) − ($20 × 1,500) = $105,000. $105,000 − $50,000 = $55,000 increase.

Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow. Regular: Units 10,000, Sales Revenue 240,000 Less: COGS 180,000 Gross Margin 60,000 Less: Selling Expenses 60,000 Operating Income (loss) 0 Super: Units 3,700, Sales Revenue 740,000 Less: COGS 481,000 Gross Margin 259,000 Less: Selling Expenses 134,000 Operating Income (loss) 125,000 Total: Units 13,700, Sales Revenue 980,000 Less: COGS 661,000 Gross Margin 319,000 Less: Selling Expenses 194,000 Operating Income (loss) 125,000 Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed. If Omar Industries eliminates Regular and uses the available capacity to produce and sell an additional 1,500 units of Super, what would be the impact on operating income? a.) $28,000 increase b.) $45,000 increase c.) $55,000 increase d.) $85,000 increase e.) None of the answers is correct.

e.) increase by $5,000. 5,000 × $20 = $100,000 + $20,000 = $120,000 cost; Selling price = $125,000 = 5,000 × $25; Net difference: $125,000 − $120,000 = $5,000 increase.

Phillippe Inc. manufactures A and B from a joint process (cost = $80,000). Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and then sold for $25 per pound. If Phillippe decides to process A beyond the split-off point, operating income will: a.) increase by $10,000. b.) increase by $20,000. c.) decrease by $10,000. d.) decrease by $20,000. e.) increase by $5,000.

b.) joint product costs.

Product costs incurred before the split-off point in a joint processing environment are called: a.) separable processing costs. b.) joint product costs. c.) relevant costs. d.) scrap costs. e.) spoilage costs.

The maximum objective function value is achieved when X = 6 and Y = 6. Thus, the company should produce 6 drums of kreolite-red per day and 6 drums of kreolite-blue per day. The objective function value at the optimal solution is a $456 total contribution margin.

Southern California Chemical Company manufactures two industrial chemical products, called kreolite-red and kreolite-blue. Two machines are used in the process, and each machine has 24 hours of capacity per day. The following data are available: Kreolite-Red: Selling price per drum $116 Variable cost per drum $86 Hours required per drum on machine I 2hr. Hours required per drum on machine II 3hr. Kreolite-Blue: Selling price per drum $132 Variable cost per drum $86 Hours required per drum on machine I 2hr. Hours required per drum on machine II 3hr. The company can produce and sell partially full drums of each chemical. For example, a half drum of kreolite-red sells for $58 Determine the value of the objective function value at the optimal solution by solving the problem graphically.

Contribution margin: Kreolite-Red: Price $116 Unit variable cost 86 Unit contribution margin $30 Kreolite-Blue: Price $132 Unit variable cost 86 Unit contribution margin $46 Linear program: Maximize 30X+46Y Subject to: Machine I: 2X+2Y≤24 Machine II: 1X+3Y≤24 X, Y≥0

Southern California Chemical Company manufactures two industrial chemical products, called kreolite-red and kreolite-blue. Two machines are used in the process, and each machine has 24 hours of capacity per day. The following data are available: Kreolite-Red: Selling price per drum $116 Variable cost per drum $86 Hours required per drum on machine I 2hr. Hours required per drum on machine II 3hr. Kreolite-Blue: Selling price per drum $132 Variable cost per drum $86 Hours required per drum on machine I 2hr. Hours required per drum on machine II 3hr. The company can produce and sell partially full drums of each chemical. For example, a half drum of kreolite-red sells for $58 Formulate the product-mix problem as a linear program, assuming X, Y ≥ 0. X denotes Kreolite-Red and Y denotes Kreolite-Blue.

true An opportunity cost is the potential benefit given up when the choice of one action precludes a different action.

T/F The term "opportunity cost" is best defined as the benefit associated with a rejected alternative when making a choice.

c.) Maximize Z = 5X + 14Y. Product X CM /unit = $8 - 3 = $5; Product Y CM/unit = $19 - $5 = $14; Therefore, maximize Z = 5X + 14Y

Technostrain Corporation manufactures two products: X and Y. The company has 4,000 hours of machine time available and can sell no more than 800 units of product X. Other pertinent data follow. Product X: Selling price $8.00 Variable cost 3.00 Fixed cost 3.50 Machine time per unit 2 hours Product Y: Selling price $19.00 Variable cost 5.00 Fixed cost 6.25 Machine time per unit 3 hours Which of the following is Technostrain's objective function? a.) Maximize Z = 2X + 3Y. b.) Maximize Z = 8X + 19Y. c.) Maximize Z = 5X + 14Y. d.) Maximize Z = 1.50X + 7.75Y. e.) Minimize Z = 6.50X + 11.25Y.

e.) 2X + 3Y ≤ 4,000. 2 hrs for Product X and 3 hrs for Product Y with 4,000 hours available results in 2X + 3Y ≤ 4,000.

Technostrain Corporation manufactures two products: X and Y. The company has 4,000 hours of machine time available and can sell no more than 800 units of product X. Other pertinent data follow. Product X: Selling price $8.00 Variable cost 3.00 Fixed cost 3.50 Machine time per unit 2 hours Product Y: Selling price $19.00 Variable cost 5.00 Fixed cost 6.25 Machine time per unit 3 hours a.) Maximize Z = 5X + 14Y. b.) Minimize Z = 6.50X + 11.25Y. c.) X ≥ 800. d.) 2X ≤ 4,000; 3Y ≤ 4,000. e.) 2X + 3Y ≤ 4,000.

a.) Yes, Omaha would be better off by $23,000. $350,000 − $280,000 − $30,000 − ($90,000 × 70%) = $(23,000).

The Boot Department at the Omaha Department Store is being considered for closure. The following information relates to boot activity: Sales revenue $350,000 Variable costs: Cost of goods sold 280,000 Sales commissions 30,000 Fixed operating costs 90,000 If 70% of the fixed operating costs are avoidable, should the Boot Department be closed? a.) Yes, Omaha would be better off by $23,000. b.) Yes, Omaha would be better off by $50,000. c.) No, Omaha would be worse off by $13,000. d.) No, Omaha would be worse off by $40,000. e.) None of the answers is correct.