Problems
1. Wilson Company expects the following results, without considering any of
the changes described below.
Product A Product B Total
--------- --------- -----
Sales $100 $300 $400
Variable costs 40 100 140
---- ---- ----
Contribution margin $ 60 $200 $260
Fixed costs - avoidable (20) (30) (50)
- unavoidable (50) (100) (150)
---- ---- ----
Profit (loss) $(10) $ 70 $ 60
===== ==== ====
The unavoidable costs are allocated based on unit sales of 1,000 A and
2,000 B. CONSIDER EACH QUESTION INDEPENDENTLY UNLESS TOLD OTHERWISE.
a. Compute Wilson's income if product A is dropped.
b. If product A were dropped and the unit sales of product B increased by
30%, what would the company's income be?
c. Product A can be dropped and replaced with a new product, C, which
would have avoidable fixed costs of $50. Product C would sell for
$0.60, have variable costs of $0.20, and expected volume of 400 units.
Compute Wilson's income if A were replaced by C.
d. Suppose now that products A and B are joint products that are being
sold at split-off. All of the costs shown on the income statement are
the materials, labor, and overhead of the joint process. Find income
if product B were processed further at additional costs of $90 and sold
for $350.
SOLUTION:
a. Wilson's income: $20 ($200 CM from B - $30 - $150)
b. Wilson's income: $80 ($260 CM from B - $30 - $150)
c. Wilson's income: $130 [$20 + 400($0.60 - $0.20) - $50]
d. Wilson's income: $20 ($60 CM from A + $50 incremental revenue –
$90 incremental cost)
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2. Arapahoe Corp. can make three products from a joint process. The monthly
cost of the joint process is $10,000. Following are data about the three
products.
Sales Value Sales Value Costs of
at if Further Additional
Product Split-off Point Processed Processing
------- --------------- ----------- ----------
A $ 8,000 $12,000 $2,500
B $ 9,000 $10,000 $2,000
C $ 0 $ 2,500 $1,000
a. Which product(s) should be sold at the split-off point?
b. Arapahoe is currently processing all three products rather than selling
any of them at the split-off point. Find its current income.
SOLUTION:
a. Product B should be sold at split-off.
b. Income: $9,000 ($12,000 + $10,000 + $2,500 - $2,500 - $2,000 - $1,000 -
$10,000)
3. Madison Co. operates a joint process. Three products, B, C, and D emerge
from that process, each of which can be sold immediately or processed
further. Monthly output is 50,000 gallons; 50% is B, 30% is C, and 20% is
D. You have the following information.
B C D
------- ------- -------
Per-gallon split-off price $ 8 $ 9 $ 6
Per-gallon price after further
processing $13 $15 $12
Per-gallon variable cost of
further processing $ 4 $ 2 $ 4
Avoidable direct fixed costs of
further processing, per month $35,000 $45,000 $18,000
Unavoidable direct fixed costs
of further processing, per month $18,000 $40,000 $ 7,000
Which product(s), if any, should be sold at split-off?
SOLUTION:
B should be sold at split-off.
B: [50,000 x 50%] x [$13 - $8 - $4] - $35,000 = -$10,000
C: [50,000 x 30%] x [$15 - $9 - $2] - $45,000 = $15,000
D: [50,000 x 20%] x [$12 - $6 - $4] - $18,000 = $2,000
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4. Milton Company has three products: A, B, and C. Three machines are used to
produce the products. The contribution margins, sales demands, and time on
each machine (in minutes) is as follows:
time time time
Demand CM on M1 on M2 on M3
A 100 $45 10 15 12
B 80 $30 10 5 8
C 60 $40 5 10 5
There are 2,400 minutes available on each machine during the week. All
materials needed are readily available on a just-in-time basis.
a. What are the load factors for each of the three machines?
b. Which machine is the bottleneck?
c. How many units of A, B, and C should be produced during the week?
SOLUTION:
a. M1: 87.5% [(10 x 100) + (10 x 80) + (5 x 60)]/2,400
M2: 104.2% [(15 x 100) + (5 x 80) + (10 x 60)]/2,400
M3: 89.2% [(12 x 100) + (8 x 80) + (5 x 60)]/2,400
b. The bottleneck is M2 as identified by the load factor exceeding 100%
c. A: 93, B: 80, C: 60
A: $45/15 = $3
B: $30/5 = $6
C: $40/10 = $4
Time available 2,400
Produce B first 80 x 5 = 400
Time remaining 2,000
Produce C: 60 x 10 = 600
Time remaining 1,400
Produce A 93 x 15 1,395
Time remaining 5
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5. LaCrosse Company expects the following results, without considering any of
the changes described below.
Product A Product B Total
--------- --------- ------
Sales $1,000 $3,000 $4,000
Variable costs 400 1,000 1,400
----- ----- -----
Contribution margin $ 600 $2,000 $2,600
Fixed costs - avoidable (200) (300) (500)
- unavoidable (500) (1,000) (1,500)
----- ------ -----
Profit (loss) $ (100) $ 700 $ 600
===== ====== ======
The unavoidable costs are allocated based on unit sales of 1,000 A and
2,000 B. An exporter has offered $0.80 per unit for 200 units of A.
a. Find the change in income if LaCrosse accepts the order, assuming no
loss of regular sales.
b. The managers believe that if they accept the special order, they will
lose some sales at the regular price. Determine the number of units
they could lose before the order became unprofitable.
c. The managers believe that they will lose 80 units at the regular price
if they accept the order. Calculate the price they must charge for the
special order to increase income by $50.
SOLUTION:
a. Change in income: $80 increase [200 x ($0.80 - $0.40 variable cost per
unit)]
b. Sales to lose: 133 units [$80/($1.00 - $0.40)] = 133
c. Price: $0.89
Lost contribution margin (80 x $0.60) $48.0
Desired profit 50.0
-----
Contribution margin required from special order $98.0
Divided by 20. units 200
-----
Equals contribution margin per unit $0.49
Plus variable cost 0.40
-----
Equals required price $0.89
=====
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6. Mays Company manufactures 200,000 units of part XYZ annually. The
following information has been collected:
Materials $200,000
Direct labor 110,000
Variable overhead 50,000
Fixed overhead 100,000
--------
Total costs $460,000
========
Clemens Company has offered to provide part XYZ for $2 per unit. Assume no
other productive use of the space exists.
a. What would be the dollar impact if Mays accepted the offer?
b. What is the maximum price Mays is willing to pay for the part?
SOLUTION:
a. $40,000 less profits ($360,000 make - $400,000 buy)
Cost to buy the part: 200,000 x $2 = $240,000
Cost to make the part: $200,000 + 110,000 + 50,000 = $360,000
b. $1.80 ($360,000/200,000)
7. Gonzalez can produce any of three products with its current production
line. The heat treating equipment has 400 hours available during any given
month. Per unit production, sales, and cost statistics are as follows:
A B C
--- --- ---
Selling price $15 $20 $10
Variable cost $ 9 $12 $ 7
Required time in heat treat 1.5 hrs 2.5 hrs. 1.0 hrs
Maximum demand per month 100 100 100
a. How many of each product should Gonzalez produce and sell?
b. Suppose the selling price of C increases to $12. How many of each
product should Gonzalez produce and sell?
SOLUTION:
a. 100 A, 100 B, 0 C
A: ($15 - 9)/1.5 = $4.00/hr 100 x 1.5 hrs = 150.0 hrs
B: ($20 - 12)/2.5 = $3.20/hr 100 x 2.5 hrs = 250.0
C: ($10 - 7)/1.0 = $3.00/hr 0 (no hours remaining)
b. 100 A, 60 B, 100 C
C: ($12 - 7)/1.0 = $5.00/hr 100 x 1.0 hrs = 100.0 hrs
A: ($15 - 9)/1.5 = $4.00/hr 100 x 1.5 hrs = 150.0
B: ($20 - 12)/2.5 = $3.20/hr (400 - 100 - 150)/2.5 hrs = 60 units
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8. Scottso Enterprises has the following products and costs:
A B C
Unit demand per month 2,000 3,000 4,000
Selling price $500 $600 $800
Materials 150 300 350
Labor and overhead 180 210 300
Sales commission 50 75 100
Labor and overhead are applied to each product at a rate of $30 per
machine hour. Management considers both labor and overhead to be fixed
costs.
a. Scottso currently has 60,000 hours available for production each month.
How many units should be produced and sold for each product?
b. An exporter has approached Scottso with an offer to purchase 500 units
of product C for a discounted price. This is a one-time order and will
not affect normal sales. No commission will be paid. What is the
minimum price Scottso should accept?
SOLUTION:
a. A: 2,000 B: 1,142 C: 4,000
Throughput/hour for A: $50 [(500 - 150 - 50)/(180/30)]
Throughput/hour for B: $32.14 [(600 - 300 - 75)/(210/30)]
Throughput/hour for C: $35 [(800 - 350 - 100)/(300/30)]
Hours available 60,000
Produce A: 2,000 x 6 12,000
Time remaining 48,000
Produce C: 4,000 x 10 40,000
Time remaining 8,000
Produce B: 1,142 x 7 7,994
Time remaining 6
b. $575
Lost throughput of B: $32.14 x 7 hours = $225
Materials 350
Minimum price $575
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9. Miami Company currently sells 3,000 units of product A for $1.25 each.
Variable costs are $0.60, avoidable fixed costs are $750, and unavoidable
allocated fixed costs are $1,500. An exporter has offered $0.90 per unit
for 800 units of product A.
a. Find the change in income if Miami can accept the order without
affecting current sales.
b. The managers believe that if they accept the special order, they will
lose some sales at the regular price. Determine the number of units
they could lose before the order became unprofitable.
c. The managers believe that they will lose 270 units at the regular price
if they accept the order. Calculate the price they must charge for the
special order to increase income by $200.
SOLUTION:
a. Change in income: $240 increase [800 x ($0.90 - $0.60)]
b. Sales to lose: 369 units [$240/($1.25 - $0.60)] = 369
c. Price: $1.07
Lost contribution margin (270 x $0.65) $175.5
Desired profit 200.0
-----
Contribution margin required from special order $375.5
Divided by 800 units 800
-----
Equals contribution margin per unit $0.47 rounded
Plus variable cost 0.60
-----
Equals required price $1.07
=====
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10. Arpeggio Company manufactures 1,000 units of part XYZ annually. The
following information has been collected:
Materials $200,000
Direct labor 110,000
Variable overhead 50,000
Fixed overhead 100,000
--------
Total costs $460,000
========
Mobile Company has offered to provide part XYZ for $400 per unit. If
Arpeggio accepts the offer another product will be moved into the space
vacated, saving $60,000 a year in rent.
a. What would be the dollar impact if Arpeggio accepted the offer?
b. What is the maximum price Arpeggio is willing to pay for the part?
SOLUTION:
a. $20,000 more profits ($420,000 make - $400,000 buy)
Cost to buy the part: 1,000 x $400 = $400,000
Cost to make the part: $200,000 + 110,000 + 50,000 = $360,000 + 60,000
rent = $420,000
b. $420 ($420,000/1,000)
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