The Green Corporation's management is evaluating a special order from a regular customer. The customer has offered to purchase 6,000 units of a Green Corporation product at a price that would provide a contribution margin of $5 per unit. Green's management wants to accept the offer because so doing would allow them to keep its current work force fully employed. Otherwise, Green will lay-off 20 workers home for a week, depriving the workers of their weekly $500 wages. Accepting the offer will tie up approximately 1,000 square feet of a building leased at an annual cost of $60 per square foot. At the present time, Green Corporation has no alternative use for this portion of the facilities.
Based on just the information presented above, how much is the Green Corporation's opportunity costs associated with accepting this special order from the customer? Which costs are relevant and which are irrelevant?
Explain whether it is or is not feasible to assign interdepartmental services to production departments using ABC. What are the most common methods of assigning nonmanufacturing department costs to manufacturing? Using examples will make your answers more effective.
1. The Arizona Company uses a joint process to produce products A, B, C, and D. Each product may be sold at its split-off point or processed further. Joint processing costs for a single batch of joint products are $120,000. Other relevant data are as follows:
|
Product
|
Sales Value
At Split-Off
|
Additional
Processing Costs
|
Sales Value of
Final Product
|
|
A
|
$ 25,000
|
$12,000
|
$ 48,000
|
|
B
|
24,000
|
16,000
|
36,000
|
|
C
|
44,000
|
28,000
|
70,000
|
|
D
|
17,000
|
10,000
|
32,000
|
|
Total
|
$110,000
|
$66,000
|
$186,000
|
Determine which products should be processed further.
2. Gleeson manufactures a single product with the following full unit costs for 6,000 units:
|
Direct materials
|
$160
|
|
Direct labor
|
80
|
|
Manufacturing overhead (40% variable)
|
240
|
|
Selling expenses (60% variable)
|
80
|
|
Administrative expenses (10% variable)
|
40
|
|
Total per unit
|
$600
|
A company recently approached Gleeson with a special order to purchase 1,000 units for $575. Gleeson currently sells the models to dealers for $1,100. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order.
Required:
a. Ignoring the special order, determine Gleeson's profit on production and sales of 6,000 units. Ignore taxes in these analyses.
b. Should Gleeson accept the special order if its goal is to maximize short-run profits? Determine the impact on profit of accepting the order.
c. Determine the minimum price Gleeson would want, to increase before tax profits by $160,000 on the special order.
d. When making a special order decision, what non-quantitative aspects of the decision should Gleeson consider?
3. The Belmont Company uses 5,000 units of part 301 each year. The full manufacturing cost of one unit of part 301 at this volume is:
Direct materials $ 5.00
Direct labor 7.50
Variable manufacturing overhead 3.00
Average fixed manufacturing overhead 2.00
Total $17.50
An outside supplier has offered to sell Belmont unlimited quantities of part 301 at a unit cost of $17.00. If Belmont accepts this offer, it can eliminate 60 percent of the fixed costs assigned to part 301. Furthermore, the space devoted to the manufacture of part 301 can be rented to another company for $10,000 per year.
Determine in dollars, the increase or decrease of annual profits from Belmont accepting the offer of the outside supplier.
4. Chaplin Corporation produces a product that passes through two departments. For October, the following equivalent unit schedule was prepared for the first department:
|
|
Materials
|
Conversion
|
|
Units completed
|
275,000
|
275,000
|
|
Units EWIP x fraction complete:
|
|
|
|
Materials (24,000 x 100 percent)
|
24,000
|
|
|
Conversion (24,000 x 30 percent)
|
_______
|
7,200
|
|
Equivalent units in process
|
299,000
|
282,200
|
Costs assigned to beginning work-in-process:
Materials $77,490
Conversion 30,304
Manufacturing costs incurred during the month:
Materials $75,000
Conversion 60,000
Required:
a. Compute the unit cost for October using the weighted average method. (Round unit costs to 2 decimal places.)
b. Determine the cost of goods transferred out.
c. Determine the cost of ending work-in-process.
5. Presented below is selected information from the Kudlick Company's current period accounting records (in $000s):
Sales $25,000
Raw Materials Used 5,500
Direct Labor Costs 2,000
Period Costs (Selling and Administrative) 5,000
Beginning Raw Material Inventory 600
Ending Raw Material Inventory 2,000
Net Income 600
Beginning Work-in-Process Inventory 0
Ending Work-in-Process Inventory 600
Beginning Finished Goods Inventory 1400
Ending Finished Goods Inventory 800
* NOTE: All raw materials used were direct materials.
Required: Determine the following (in dollars):
a. Raw Material Purchases
b. Gross Profit
c. Cost of Goods Manufactured
d. Manufacturing Overhead
6. Bailey Corporation has four categories of overhead. The expected overhead costs for each category for next year are as follows:
|
Maintenance
|
$420,000
|
|
Materials handling
|
180,000
|
|
Setups
|
150,000
|
|
Inspection
|
300,000
|
The company has been asked to submit a bid for a proposed job. The plant manager believes that obtaining this job would result in new business in future years. Bids are usually based upon full manufacturing cost plus 30 percent. Estimates for the proposed job are as follows:
|
Direct materials
|
$10,000
|
|
Direct labor (750 hours)
|
$15,000
|
|
Number of material moves
|
8
|
|
Number of inspections
|
5
|
|
Number of setups
|
3
|
|
Number of machine-hours
|
300
|
Expected activity for the four activity-based cost drivers that would be used is:
|
Machine-hours
|
20,000
|
|
Material moves
|
4,000
|
|
Setups
|
200
|
|
Quality inspections
|
8,000
|
Required:
a. Determine the amount of overhead that would be allocated to the proposed job if 40,000 direct labor-hours are used as the volume-based cost driver. Determine the total costs of the proposed job. Determine the company's bid if the bid is based upon full manufacturing cost plus 30 percent. (Round amounts to 2 decimal places.)
b. Determine the amount of overhead that would be applied to the proposed project if activity-based costing is used. Determine the total costs of the proposed job if activity-based costing is used. Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent. (Round amounts to 2 decimal places.)
c. Which product costing method produces the more competitive bid?