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Quesion 2

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Part 1 Show impact of dropping flight 482 on airline's profits

Keep the Drop the


Difference
Flight Flight
Ticket revenue $14,000
Variable expenses $1,050
Contribution margin $12,950
Less flight expenses:
Salaries, flight crew $1,800
Flight promotion $750
Depreciation of aircraft $1,550
Fuel for aircraft $5,800
Liability insurance $4,200
Salaries, flight assistants $1,500
Baggage loading and flight preparation $1,700
Overnight costs for flight crew and
assistants at destination $300
Total flight expenses $17,600
Net operating loss -$4,650
Rev
Var
CM

Sal Crew
Promo
Depr
Fuel
Insur.
Sal Asst
Baggage

Night
Total
Op Loss
Part 1 Recommend to close or keep plant open?

1. Company should not close the plant; continue to operate at reduced level of 11,000 litres produced and sold each month.
2. Closing will result in $140,000 greater loss over 2-month period than if company continues to operate
3. Potential loss of goodwill among customers who need the 11,000 litres of MJ-7 each month
4. Adverse effect on employee morale.
5. Customer needs will not be met (no inventories are on hand); may permanently lose their business to competitor

Part 2 Point of indifference between closing and keeping plant open?


40,000 Litres Sold
$35 Selling Price
$21 Variable cost
$230,000 Fixed MOH
$310,000 Fixed Selling

11,000 Decreased sales L/month


2 Length of Strike
$60,000 Fixed MOH Close Savings/month
10% Fixed Selling Close Savings/months
$14,000 Start-up Costs

000 litres produced and sold each month.


continues to operate
ach month

ose their business to competitor

d keeping plant open?


40,000 Litres Sold
$35 Selling Price
$21 Variable cost
$230,000 Fixed MOH
$310,000 Fixed Selling

11,000 Decreased sales L/month


2 Length of Strike
$60,000 Fixed MOH Close Savings/month
10% Fixed Selling Close Savings/months
$14,000 Start-up Costs
12,000 Dropped Level of Sales Litres (2 months)
Part 1 Assume 40,000 carburetors, show unit costs and total cost alternatives for MAKES vs BUY
Part 2a Same recommendations if 50,000 carburetors?

Part 2b Same recommendations if 60,000 carburetors?


Part 3 Other factors that the company should consider?

a. Will volume in future years be increasing, or will it remain constant at 40,000 units per year? (If
volume increases, then renting new equipment becomes more desirable (based on numbers above.)

b. Can quality control be maintained if the carburetors are purchased from the outside supplier?

c. Does the company have some other profitable use for the space now being used to produce the
carburetors? Does production of the carburetors require use of a constrained resource?

d. Will the outside supplier be dependable in meeting shipping schedules?

e. Can the company begin making the carburetors again if the supplier proves to be undependable, or
are there alternative suppliers?

f. If the outside supplier’s offer is accepted and the need for carburetors increases in future years, will
the supplier have the capacity to provide more than 40,000 carburetors per year?

g. Will the rental cost of the equipment change in the future?


tives for MAKES vs BUY
$120,000 Rent New/yr
$16 Purchase each
$5.50 DM
$8.00 DL
$1.20 Var OH
$7.30 Fix OH
$1.50 Supervision
$1.80 Depr
$4.00 Gen OH
$22.00 Total Cost/Unit
25% New eq reduce DL Var OH
$60,000 Supervision Cost/yr
60,000 New capacity
40,000 Part 1 Volume

$120,000 Rent New/yr


$16 Purchase each
$5.50 DM

$8.00 DL
$1.20 Var OH
$7.30 Fix OH
$1.50 Supervision
$1.80 Depr
$4.00 Gen OH
$22.00 Total Cost/Unit
25% New eq reduce DL Var OH
$60,000 Supervision Cost/yr
60,000 New capacity
50,000 Part 2a Volume

$120,000 Rent New/yr

$16 Purchase each


$5.50 DM
$8.00 DL
$1.20 Var OH
$7.30 Fix OH
$1.50 Supervision
$1.80 Depr
$4.00 Gen OH
$22.00 Total Cost/Unit
25% New eq reduce DL Var OH
$60,000 Supervision Cost/yr
60,000 New capacity
60,000 Part 2b Volume
Part 1 Incremental contribution margin (if any) from further processing the wool into sweaters
Part 2
her processing the wool into sweaters?
Selling price per sweater $30.00
Cost per sweater to manufacture:
Raw materials:
Wool yarn $16.00
Buttons, thread, lining 2.00
Total raw materials 18.00
Direct labour 5.80
Manufacturing overhead 8.70 32.50
Manufacturing profit (loss) -$2.50

Selling price per spindle of yarn $20.00


Cost to manufacture:
Raw materials (raw wool) $7.00
Direct labour 3.60
Manufacturing overhead 5.40 16.00
Manufacturing profit $4.00
Total 10
Per Unit
Bangles
Incremental revenue 10 Units
Incremental costs: $389.95 Sell
Less Variable costs: $349.95 Sell spec
Direct materials $143 DM
Direct labour $86 DL
Variable manufacturing overhead $35 MOH
Special filigree $264 Unit
Total variable cost
Fixed costs: $7 V MOH
Purchase of special tool $28 F MOH
Total incremental cost $35 MOH
Incremental operating income
$6 Extra
$465 Tool

Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing
overhead and the cost of the special tool are relevant overhead costs in this situation. The other
manufacturing overhead costs are fixed and are not affected by the decision.
Part 1
Ski Golf Fishing Ski
Selling price/unit Sell 200
Variable cost/unit Var 60
CM per unit Time 2
Time (min) Kgs 7
CM/unit

Part 2
Ski Golf Fishing
Selling price/unit
Variable cost/unit
CM per unit
KG
CM/kg

Part 3
Golf Fishing
300 255
140 55
5 4
4 8
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2 12 Exercise 12-3 View Transcript 9:12


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2 12 Problem 12-28 View Transcript 14:54
2 12 Problem 12-30 View Transcript 7:25

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