Quiz #8 Chapter 13-Decision

Ford Company plans to discontinue a department that has a contribution margin of $45,360 and
$90,720 in fixed costs. Of the fixed costs, $39,690 cannot be eliminated.

Q1. Calculate the effect of this discontinuance on Manor's net operating income.

CM 45, 360-TFC 39,690 = $5,670

Power Engine Systems Inc. manufactures jet engines for the United States armed forces on a cost-
plus basis. The production cost of a particular jet engine is shown below:

Direct materials 250,000

Direct labor 150,000
Manufacturing overhead:
Supervisor's salary 35,600
Fringe benefits on direct labor 15,000
Depreciation 12,000

Q2. If production of this engine was discontinued, the production capacity would be idle, and the
supervisor would be laid off. The depreciation referred to above is for special equipment that would have
no resale value and that does not wear out through use. When asked to bid on the next contract for this
engine, the minimum unit price that Power Systems should bid is:

Avoidable Costs

DM 250,000
DL 150,000
MO 35,600+15,000

450,600

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 Bronze. Company makes 43,750 motors to be used in the production of its sewing machines. The
cost per motor at this level of activity is:

Direct materials $4.50

Direct labor $4.60
Variable manufacturing overhead $3.75
Fixed manufacturing overhead $3.45

Q3. An outside supplier has offered to supply all the motors the company needs for $15 each. If Bronze
Company decided not to make the motors, there would be no other use for the production facilities and
none of the fixed manufacturing overhead cost could be avoided. If Bronze Company decides to continue
making the motor, how much higher or lower would net operating income be than if the motors are
purchased from the outside supplier?

Make or Buy
Avoidable Costs Net payment
$4.50 $15
$4.60 15(43,750)= $656,250
$3.75

$12.85
12.85 (43,750)= $562,187.50

656,250-562,187.50 = $94,062.50 higher

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current
product lines. Expected cost and revenue data for the new cabinets are as follows:
Annual sales 7,000 units
Selling price per unit $180
Variable costs per unit:
Production $120
Selling $15
Avoidable fixed costs per year:
Production $40,000
Selling $60,000
Allocated common fixed costs per year $45,000

If the new cabinets are added, it is expected that the contribution margin of other product lines at
the cabinet shop will drop by $88,000 per year.

Q4. If new cabinet product line is added next year, the increase in net operating income resulting from
this decision would be:

Change in profit = (P-UVC) x Q – change in TFC

= (180-135)(7000) – 100,000
= 315,000 -100,000 = 215,000

215,000 – 88,000 = 127,000

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 Q5. What is the lowest selling price per unit that could be charged for the new cabinets and still make it
economically desirable to add the new product line?

88,000 = (X-135)(7000) – 100,000

+ 100,000 = (X-135)(7000)
188,000= (X-135)
7000

26.8571= X-135

26.8571 + 135 = 161.86

Broom Company makes 56,700 motors to be used in the productions of its power lawn mowers. The
manufacturing cost per motor at this level of activity is as follows:

Direct materials 10.50

Direct labor 8.60
Var. manufacturing overhead 3.75
Fixed manufacturing overhead 4.35

This motor has recently become available from an outside supplier for $26.25 per motor. If Broom
decides not to make the motors themselves, none of the fixed manufacturing overhead would be
avoidable and there would be no other use for the facilities.

Q6. If Broom decides to continue making the motor, how much higher or lower will the company's net
operating income be than if the motors are purchased from the outside supplier?

Avoidable Costs Net payment

DM 10.50 $26.25
DL 8.60
VMO3.75

$22.85

26.25-22.85 (56,700) = $192,780 Higher

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 Salisbury Corporation has been producing and selling 30,000 caps a year at $38.4 each. The
company has the capacity to produce 50,000 caps with its present facilities. The following
information is also available:

Selling price per unit: $38.4

Variable costs per unit:
Manufacturing 16.8
Selling and Administrative 7.5
Fixed costs in total:
Manufacturing 128,000
Selling and Administrative 56,000

Q7. What is the manufacturing cost per cap using the absorption (GAAP) approach? Use the production
units (no the capacity) as the denominator.

16.8+ 128,000/30,000
16.8+4.266667= $21.067/Unit

Q8. Gilbert Company has contacted Salisbury about purchasing 10,000 units at $25.00 each. Current sales
would not be affected by the special order and the variable marketing/distributing costs would be incurred
on the special order. How much does Salisbury's profit increase if the order is accepted?

Change in profit = (P-UVC) x Q – change in TFC

= (25-24.3) 10,000 – 0
= 0.7(10,000)
=$7000

Q9. Salisbury now has another customer who wants 20,000 units (all or nothing) right now. Salisbury is
wondering if they should sell 10,000 units at $25.00 each to Gilbert Company or should take the offer by
the new customer. Unfortunately, Salibury cannot take both offers. For the new customer, variable selling
and administrative costs would not be incurred. What is Salisbury's minimum price in order for them to
accept the offer from the new customer (instead of Gilbert Company)?

7000= (P-UVC)Q – Change in TFC

7000= (X- 16.8)(20,000) – 0
7000/20,000 = X- 16.8
0.35 +16.8=X
X=17.15

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 Pepper Industries has three product lines, A, B, and C. The following information is available:
A B C
Sales 60,000 90,000 26,160
Variable costs 36,000 48,000 15,300
Contribution margin 24,000 42,000 10,860
Fixed costs:
Avoidable 9,000 18,000 6,540
Unavoidable 6,000 9,000 5,508
Operating income 9,000 15,000 -1,188

Pepper Industries is thinking of dropping product line C because it is performing poorly.

Q10. Assuming that Pepper drops line C and does not replace it, determine how the operating income will
change. Specify the dollar amount of change. If an increase, write as positive number: otherwise negative.

Change in profit = (P-UVC) x Q – traceable TFC

= 10,860 – 6540
= 4,320
The company’s operating income will decrease by $4,320 if they get rid of product C

Laser Company manufactures two products A and B. The following information was gathered:
A B
Selling price per unit $62.1 $75.9
Variable cost per unit 43.7 62.1
Total fixed costs $25,000

There are seven questions on Laser. Write down the answers for each question, since some answers
require the answers from previous questions.

Q11. If Laser Company has two potential customers, I and II. Customer I wants 9,000 units of A and
Customer II wants 6,000 units of B. Neither will take any less. What is the total contribution from selling
A to Customer I?

$62.1-43.7 = 18.4
18.4(9000)= $165,600

Q12. If Laser Company has two potential customers, I and II. Customer I wants 9,000 units of A and
Customer II wants 6,000 units of B. Neither will take any less. What is the total contribution of product
B?

$75.9-62.1 = 13.8
13.8(6000)= $82,800

Q13. Suppose Laser has a limited capacity for production and can make enough to satisfy one customer.
Which product should Laser Company produces and sells? Identify the product by writing down its total
contribution margin.

$165,600

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 Q14. Assume now that Laser Company could produce and sell any mix of product A and
B. Suppose product A takes twice as long to manufacture as product B. Each unit of product B takes one
machine hour. If only 13,000 machine hours of plant capacity are available, what should Laser do? First,
calculate the contribution margin per machine hour of product A?

CM/Unit of Constraint Resources = UCM/ # of hours require of output

A. CM/Hour= 18.4/2 =$9.2/Hour

Q15. Calculate the contribution margin per machine hour of product B?

B. CM/Hour= 13.8/1= $13.8/Hour

Q16. Identify the number of units of product A Laser should produce. (The next question will ask how
many units of B Laser should produce.)

13,000-6000= 7000
7000/2 = 3500 Units

Q17. How many units of product B should Laser produce?

6000 Units

Packard Company manufactures two sizes of tables, small and large. The following data are
available:
Small Large
Selling price per unit $125 $220
Variable cost per unit $85 $140
Machine hours required 3.2 10
Total fixed costs $37,500

Packard Company can sell a maximum of 1,200 units of each size of table.
Machine hour capacity is 9,600 hours per year.

Q18. Calculate the contribution margin per machine hour of Small tables?

Small
CM/Hour = UCM/ #machine hours required
= 40/3.2
=$12.5/MH

Q19. Calculate the contribution margin per machine hour of Large tables?
Large
CM/Hour = UCM/ #machine hours required
= 80/10
=$8/MH

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 Q20. Suppose Packard wants maximize income by choosing the right product to produce and sell. What is
their maximum income?

(3.2mh)1200Units ($12.5/mh) = 48,000

9,600-3,840 =5,760mhs left

5760*$8 = $46,080

$48,00+$46,080=$94,080

$94,080- TFC 37,500 = $56,580

Armstrong Company produces a part that is used in the manufacture of one of its products. The
costs associated with the production of 5,000 units of this part are as follows:

Direct materials $108,000

Direct labor 163,800
Variable factory overhead 72,000
Fixed factory overhead 168,000

Of the fixed factory overhead costs, $73,440 are avoidable.

Q21. Assume that there is no other use for their facilities. Suppose Armstrong can outsource the
manufacturing of the part to an outside vendor. Then the highest price that Armstrong should be willing to
pay in total (for 5,000 units of the part) is:

Avoidable Costs

108,000
163,800
72,000
73,440

$417,240 is the highest price Armstrong will be willing to pay.

Q22. The vendor made an offer to produce 5,000 units of the part for $105.00 each. In addition
Armstrong found a company that wants to rent the facilities that are currently use to make the part. They
are willing to pay $100,800 a year. Armstrong is still wondering if they should make the part themselves.
How much is the amount of cost saving if they produced themselves as opposed to buying from the
vendor. Identify the amount of saving.

Avoidable Costs Net Payment

$417,240 5000(105)= 525,000 – 100,800 = $424,200

$424,200- $417,240 = $6,960

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