ACC560 Week 5 Homework
E7-3 Moonbeam Company
E7-7 Riggs Company
E7-11 Chen Minerals processes
P7-3A Thompson Industrial Products Inc
E8-2 Eckert Company
E8-6 Alma’s Recording Studio
E8-9 Rey Custom Electronics
P8-5A Gutierrez Company
E7-3 Moonbeam Company manufactures toasters. For the first 8 months of 2017, the company reported the following operating results while operating at 75% of plant capacity:
Sales (350,000 units) $4,375,000
Cost of goods sold 2,600,000
Gross profit 1,775,000
Operating expenses 840,000
Net income $ 935,000
Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed.
In September, Moonbeam Company receives a special order for 15,000 toasters at $7.60 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,000 of shipping costs but no increase in fixed operating expenses.
(a) Prepare an incremental analysis for the special order.
(b) Should Moonbeam Company accept the special order? Why or why not?
E7-7 Riggs Company purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $250 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $100 for direct materials, $80 for direct labor, and $90 for overhead. The $90 overhead is based on $78,000 of annual fixed overhead that is allocated using normal capacity.
The president of Gibbs has come to you for advice. “It would cost me $270 to make the sails,” she says, “but only $250 to buy them. Should I continue buying them, or have I missed something?”
(a) Prepare a per unit analysis of the differential costs. Briefly explain whether Riggs should make or buy the sails.
(b) If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,000 per year, would your answer to part (a) change? Briefly explain.
(c) Identify three qualitative factors that should be considered by Riggs in this make-or-buy decision. (CGA adapted)
E7-11 Chen Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.
Sales Value at Split-Off Point
Cost to Process Further
Sales Value of Processed Product
Determine whether each of the three joint products should be sold as is, or processed further.
P7-3A Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name Floor Shine. The additional processing costs for this conversion amount to $240,000.
FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner.
This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25-ounce bottle.
The company decided not to process the table cleaner into TSR and TP based on the following analysis.
Table Remover Table Polish
Cleaner (TSR) (TP) Total
Production in ounces 300,000 300,000 300,000
Revenue $204,000 $168,000 $168,000 $336,000
CDG costs 70,000* 52,500 52,500 105,000**
TCP costs 0 50,000 50,000 100,000
Total costs 70,000 102,500 102,500 205,000
Weekly gross profit $134,000 $ 65,500 $ 65,500 $131,000
*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
(a) Determine if management made the correct decision to not process the table cleaner further by doing the following.
(1) Calculate the company’s total weekly gross profit assuming the table cleaner is not processed further.
(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.
(3) Compare the resulting net incomes and comment on management’s decision.
(b) Using incremental analysis, determine if the table cleaner should be processed further.
(2) Gross Profit $186,000
E8-2 Eckert Company is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large potential market. Because of competition, Eckert does not believe that it can charge more than $90 for LittleLaser. At this price, Eckert believes it can sell 100,000 of these laser guns. Eckert will require an investment of $8,000,000 to manufacture, and the company wants an ROI of 20%.
Determine the target cost for one LittleLaser.
E8-6 Alma’s Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,352,000 in the studio and expects a return on investment (ROI) of 20%. Budgeted costs for the coming year are as follows.
Per Session Total
Direct materials (tapes, CDs, etc) $ 20
Direct labor $400
Variable overhead $ 50
Fixed overhead $950,000
Variable selling and administrative expenses $ 40
Fixed selling and administrative expenses $500,000
(a) Determine the total cost per session.
(b) Determine the desired ROI per session.
(c) Calculate the markup percentage on the total cost per session.
(d) Calculate the target price per session.
E8-9 Rey Custom Electronics (RCE) sells and installs complete security, computer, audio, and video systems for homes. On newly constructed homes it provides bids using time-and-material pricing. The following budgeted cost data are available.
Technicians’ wages and benefits $150,000 —
Parts manager’s salary and benefits — $34,000
Office employee’s salary and benefits 30,000 15,000
Other overhead 15,000 42,000
Total budgeted costs $193,000 $91,000
The company has budgeted for 6,250 hours of technician time during the coming year. It desires a $38 profit margin per hour of labor and a 80% profit on parts. It estimates the total invoice cost of parts and materials in 2017 will be $700,000.
(a) Compute the rate charged per hour of labor.
(b) Compute the material loading percentage.
(c) RCE has just received a request for a bid from Buil Builders on a $1,200,000 new home. The company estimates that it would require 80 hours of labor and $40,000 of parts. Compute the total estimated bill.
P8-5A Gutierrez Company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The Board Division has offered the Chip Division $21 per unit to supply it with chips for 40,000 boards. It has been purchasing these chips for $22 per unit from outside suppliers. The Chip Division receives $22.50 per unit for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Division is $14.50. It estimates that it will save $4.50 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity.
(a) Calculate the minimum transfer price that the Chip Division should accept. Discuss whether it is in the Chip Division’s best interest to accept the offer.
(b) Suppose that the Chip Division decides to reject the offer. What are the financial implications for each division, and for the company as a whole, of this decision?
Total loss to company $160,000
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