Questions -
Q1. Masse Corporation uses part G18 in one of its products. The company's Accounting Department reports the following costs of producing the 16,800 units of the part that are needed every year.
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Per Unit
|
|
Direct materials
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$4.00
|
|
Direct labor
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$4.70
|
|
Variable overhead
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$7.70
|
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Supervisor's salary
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$8.40
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Depreciation of special equipment
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$9.00
|
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Allocated general overhead
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$6.00
|
An outside supplier has offered to make the part and sell it to the company for $33.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $22,800 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G18 could be used to make more of one of the company's other products, generating an additional segment margin of $30,000 per year for that product.
Required:
a. Calculate the effect on the company's total net operating income of buying part G18 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
Make
Buy
Q2. Jumonville Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 81,000 units per month is as follows:
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Direct materials
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$27.70
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Direct labor
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$5.40
|
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Variable manufacturing overhead
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$3.00
|
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Fixed manufacturing overhead
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$12.20
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Variable selling & administrative expense
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$2.60
|
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Fixed selling & administrative expense
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$10.20
|
The normal selling price of the product is $57.80 per unit.
An order has been received from an overseas customer for 3,100 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.80 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $52.30 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers. What would be the minimum acceptable price per unit for the special order?
Q3. Nutall Corporation is considering dropping product N28X. Data from the company's accounting system appear below:
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Sales
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$740,000
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|
Variable expense
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$341,000
|
|
Fixed manufacturing expenses
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$257,000
|
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Fixed selling and administrative expense
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$205,000
|
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $199,500 of the fixed manufacturing expenses and $114,500 of the fixed selling and administrative expenses are avoidable if product N28X is discontinued.
Required:
a. According to the company's accounting system, what is the net operating income earned by product N28X?
b1. What would be the effect on the company's overall net operating income of dropping product N28X?
b2. Should the product be dropped?
No
Yes