#1 Waldo Mining Company currently is operating at less than 50% of practical capacity. The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is $3 and the variable cost per ton is $2. Fixed costs per month total $10,000.
Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals market rebounds and prices once again rise. Management has implemented a cost reduction program over the past year that has been successful in reducing costs to the point that suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $10,000 to $4,000 per month.
Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed?
#2 New Brands Company is currently operating at 80 percent capacity. Worried about the company's performance, the general manager reviewed the company's operating performance. (All fixed costs are allocated costs.)
Segment North South East West
Sales 30 40 20 10
Less: variable costs 11 8 21 8
Contribution margin 19 32 (1) 2
Less: fixed costs 9 12 6 3
Operating profit (loss) 10 20 (7) (1)
a) What is the current operating profit for the company as a whole?
b) If the manager eliminated the two unprofitable segments, what would be the new operating profit for the company as a whole?
c) How can management maximize profits?
#3 Given the following facts for the Histep Company:
Differential costs per order $20
Annual requirement 1,000 units
Inventory carrying costs $1.00 per unit per year
Purchase cost per unit $10
a) Complete the following chart
Average Order Size # of units in Inventory Order Total
Annual Orders Inventory Carrying Costs Costs Costs
2
4
5
8
10
b) Using trial and error, which order size should be used?
c) Using the economic order quantity formula, what is the optimal number of units in each order?
#4 Target costing and pricing. Mega Products makes valves for a variety of oil extraction equipment. Mega Products sells the valves to companies that manufacture and sell pumps. The company's market research department has discovered a market for valves that is similar in automated manufacturing equipment in another industry. The market research department indicates that they could sell to those new outlets for $250. Assume Mega Products desires an operating profit of 20 percent of sales.
What is the highest acceptable manufacturing cost for which Mega products would produce the valves?
#5 Make or buy. Towson, Inc., produces semiconductors of which part no. 200 is a subassembly. Towson, Inc., currently produces part no. 200 in its own shop. The Baltic Company offers to supply it at a cost of $205 per 500 units. An analysis of the costs Towson
Cost per 500
Units
Direct (Variable) Material $70
Direct (Variable Labor 80
Other Variable Costs 20
Fixed Costs (a) 40
Total $210
(a) Fixed overhead comprises largely depreciation on general-
Purpose equipment and factory buildings.
Management of Towson, Inc., needs your advice in answering the following questions:
a) Should Towson, Inc., accept the offer from Baltic if Towson's plant is operating well below capacity?
b) Should the offer be accepted if Baltic reduces the price to $170 per 500 units?
c) Suppose Towson can find other profitable uses for the facilities that it now uses in turning out part no. 200. How would that affect the price Towson is willing to pay Baltic?
#6 Customer Profitability analysis. TMBank's management is evaluating the profitability of providing special Christmas Club accounts. The company's financial analysts have developed the following cost information:
Cost to Acquire New Christmas Club Accounts, $100,000 per year
Including Advertising and account setup costs
Costs to process transactions and service these $50 per account per year
Accounts
On average, each account generates $75 per year in fees and interest. After inquiring whether the costs above are all differential, you learn that the $100,000 per year cost to acquire accounts includes $10,000 of advertising that TM Bank would have done with or without the new accounts. The remainder of the $100,000 costs are differential. Further, you learn that $5 of the $50 to process and service accounts are general office costs allocated to these accounts, which are incurred whether or not the bank has the new accounts. The bank has an average of 3,500 new Christmas Club accounts each year.
Should TM Bank continue to offer these promotional accounts?
#7 Dropping a product line. Timepiece Products, a clock manufacturer, operates at capacity. Constrained by machine time, the company decides to drop the most unprofitable of its three product lines. The accounting department came up with the following data from last year's operations:
Manuel Electric Quartz
Machine Time per Unit 0.4 Hour 2.5 hours 5.0 hours
Selling price per unit $20 $30 $50
Less Variable costs per unit $10 $14 $28
Contribution Margin $10 $16 $22
Which line should Timepiece Products drop? (hint: compute the contribution per machine hour because machine time is the constraint)
#8 Product mix decision. The Jackson Company has one machine on which it can produce either of two product, Y or Z. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Jackson can sell all output at current prices. Product Y requires one hour of machine time per unit of output and Product Z requires two hour of machine time per unit of output. The following information summarizes the per-unit cash inflows and costs of products Y and Z.
Product Y Product Z
(per unit) (per unit)
Selling price $30 $55
Materials $4 $6
Labor $1 $3
Allocated portion of fixed costs $14 $26
Total costs per unit $19 $35
Gross Margin per unit $11 $20
Selling costs are the same whether Jackson produces Product Y or Z or both; you may ignore them.
Should Jackson Company plan to produce Product Y, Product Z, or some mixture of both? Why?