Assignment:
Situation 1: Labor cost classification
ABC Manufacturing Company has recently opened a plant in Bermuda in order to take advantage of certain tax benefits. In order to quality for these tax benefits, the company's direct manufacturing labor costs must be at least 20% of total manufacturing costs for the period.
ABC Manufacturing normally classifies direct manufacturing wages as direct manufacturing labor, but classifies fringe benefits, overtime premiums, idle time, and vacation time and sick leave as indirect manufacturing labor (part of manufacturing overheads).
During the first period of operations in Bermuda, ABC incurs a total of $2,500,000 in manufacturing costs. Of that, $410,000 is direct manufacturing labor wages, $45,000 is overtime premium, $86,000 is fringe benefits, $20,500 is vacation time and sick leave, and $10,900 is idle time.
Required
Based on ABC Manufacturing Company's normal cost classification practices, is the company likely to quality for the for the tax benefit? Show you calculations.
Bob Ryan, the manager of the new Bermuda plant, is concerned that he will not get a bonus this year because the plant will not get the tax benefit. Describe TWO specific adjustments to ABC Manufacturing normal cost classification practices that Bod Ryan might ask the plant controller to make to ensure that ABC gets the tax benefit? (Be very specific in your response). Provide a specific rationale that Bod Ryan might use to justify each of the adjustments you described above.
Indicate whether the plant controller should make EACH of the TWO adjustments you described in part 2 above. Support your opinion with appropriate and logical arguments.
Situation 2: CVP Analysis
Aranguez Corporation produces a molded plastic casing, LX20A, for desktop computers. Summary data from its 2013 income statement are as follows:
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Revenues
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$ 8,000,000
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Variable costs
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(4,800,000)
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Fixed costs
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(3,000,000)
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Operating income
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$ 200,000
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Jane Dall, Aranguez's president, is very concerned about Aranguez Corporation's poor profitability. She asks Giselle James, production manager, and Lester Saline, controller, to see if there are ways to reduce costs.
After two weeks, James returns with a proposal to reduce variable costs to 50% of revenues by reducing the costs Aranguez currently incurs for safe disposal of waste plastic. Saline is concerned that this would expose the company to potential environmental liabilities. He tells James, "We would need to estimate some of these potential environmental costs and include them in our analysis."
"You cannot do that," James replies. "We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company. We don't want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing."
Required
Calculate Aranguez Corporation's breakeven revenues for 2013.
Calculate Aranguez Corporation's breakeven revenues for 2013, if variable costs were 50% of revenues.
Calculate Aranguez Corporation's margin of safety as a percent of sales assuming that variable costs have been reduced to 50% of sales.
Given Giselle James's comments, what should Lester Saline do? Be sure to refer to the IMA's Ethical Guidance which is presented on pages 9-11 of the course text. Make sure you include the following in your answer:
Who are the stakeholders in this situation?
How do each of the four (4) concepts described in the Guidelines apply to this situation?
Ultimately, what should Lester Saline do in this scenario?
Situation 3: Sell or Process Further
The Scottie Sweater Company produces Sweaters under the "Scottie" label. The company buys raw wool and processes it into wool yarn from which the sweaters are woven. One spindle of wool is required to produce one sweater. The costs and revenues associated with the sweaters are given below:
Per Sweater
Selling price $30.00
Cost to manufacture:
Raw materials:
Buttons, thread, lining $ 2.00
Wool yarn 6.00
Total Raw Materials 18.00
Direct labor 5.80
Manufacturing overhead 8.70 32.50
Manufacturing Profit (loss) $(2.50)
Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. The yarn is purchased by other companies for use in production of wool blankets and other wool products. Since the development of the market for the wool yarn, a continuing dispute has existed in the Scottie Sweater Company as to whether the yarn should be sold simply as yarn or processed into sweaters. Current cost and revenue data on the yarn are given below.
Per Spindle of Yarn
Selling price $20.00
Cost to manufactur
Raw materials (raw wool $7.00
Direct labor 3.60
Manufacturing overhead 5.40 16.00
Manufacturing profit $ 4.00
The market for sweaters is temporarily depressed, due to unusually warm weather in the western states where the sweaters are sold. This has made it necessary for the company to discount the selling price of the sweaters to $30 from the normal $40 price. Since the market for wool yarn has remained strong, the dispute has again surfaced over whether the yarn should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued; she is upset about having to sell sweaters at a $2.50 loss when the yarn could be sold for a $4.00 profit. However, the production superintendent does not want to close down a large portion of the factory. He argues that the company is in the sweater business, not the yarn business, and that the company should focus on its core strength.
All of the manufacturing overhead costs are fixed and would not be affected even if sweaters were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labor costs. Materials and direct labor costs are variable.
Required:
Would you recommend that the wool yarn be sold outright or processed into sweaters? Support your answer with appropriate computations and explain your reasoning.
What is the lowest price that the company should accept for a sweater? Support your answer with appropriate computations and explain your reasoning.