Problems -
Problem 1 - Decision Making and Ethics
Joan Paxton, VP of marketing for Supertone Recording Equipment, has developed a marketing plan for presentation to the company's president. The plan calls for television ads, something the company has never used.As part of her presentation, she will indicate the impact of the TV ads on company profit as follows:
Incremental sales from increased exposure $9,000,000
Less:
Incremental cost of goods sold $3,900,000
Cost of TV ads 2,500,000 6,400,000
Incremental profit $2,600,000
While Joan is quite confident in the cost of the ads and the incremental cost of goods sold if sales are $9,000,000, she is quite uncertain about the sales increase. In fact, she believes that her estimate is on the high side. However, she also believes that if she puts in a more conservative estimate, such as $7,000,000, the president will not go along with the TV ads even though they still will generate substantial profits at $7,000,000 of incremental sales.
Required - Is it unethical of Joan to bias her estimate of incremental sales on the high side, given that she believes the ultimate outcome is in the best interest of the company?
Problem 2 - Incremental Analysis of Outsourcing Decision
Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $295,000 per year. Highline states that its bid will cover all services and planting materials required to "keep Oakland's grounds in a condition comparable to prior years."Oakland's cost for grounds maintenance in the preceding year were $302,000 as follows:
Salary of three full-time gardeners $195,000
Plant materials 80,000
Fertilizer 7,000
Fuel 8,000
Depreciation of tractor, mowers, and other miscellaneous equipment 12,000
Total $302,000
If Oakland College outsources maintenance, it will be able to sell equipment for $30,000, and the three gardeners will be laid off.
Required
a. Analyze the one-year financial impact of outsourcing grounds maintenance.
b. How will savings in the second year differ from those in year 1?
c. Discuss qualitative factors that should be considered in the decision.
Problem 3 - Keep-or-Buy Decision, Sunk Costs
Susan Crossing purchased a used Ford Focus for $8,000.Since purchasing the car,she has spent the following amounts on parts and labor:
New stereo system $1,500
New paint job 2,500
New tires 900
New muffler 250
Total $5,150
Unfortunately, the car needs a few major repairs now; among other things, the brake rotors and pads must be replaced, and the radiator has sprung a leak. (A new radiator is needed.) The repairs are estimated to cost $2,500.
Susan has looked around at other used cars and has found a used Honda Civic for $8,500 that is in very good condition and is approximately the same age as the Ford Focus. Susan can sell the Ford Focus "as is" for $6,500.
Required
a. In trying to decide whether to repair the Ford Focus or buy the Honda Civic, Susan is upset because she has already spent $13,150 on the Focus. The car seems like it costs too much to sell at such a large loss. How would you react to her dilemma?
b. Assuming that Susan would be equally happy with either the Ford Focus or the Honda Civic, should she buy the Civic or repair the Focus? Explain your answer.
c. Are there any qualitative factors that might enter into this decision? Explain.
Problem 4 - Dropping a Product Line
Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement follows:
Pantheon Gaming
Income Statement
For the Year Ended December 31, 2011
Audio Video Accelerators Total
Sales $1,045,000 $2,255,000 $2,200,000 $5,500,000
Less cost of goods sold 575,000 1,240,000 1,870,000 3,685,000
Gross margin 470,000 1,015,000 330,000 1,815,000
Less other variable costs 53,000 69,000 20,000 142,000
Contribution margin 417,000 946,000 310,000 1,673,000
Less direct salaries 155,000 175,000 65,000 395,000
Less common fixed costs:
Rent 11,970 25,830 25,200 63,000
Utilities 4,370 9,430 9,200 23,000
Depreciation 5,890 12,710 12,400 31,000
Other administrative costs 79,230 170,970 166,800 417,000
Net income $ 160,540 $ 552,060 $ 31,400 $ 744,000
Since the profit for accelerator devices is relatively low, the company is considering dropping this product line.
Required
a. Determine the impact on profit of dropping accelerator products.
b. Discuss the potential qualitative effects of discontinuing the sale of accelerator products.
Problem 5 - Batch Size Decision and Constraints [LO A1] At Dalton Playground Equipment, the powder-coating process is a bottleneck. Typically, it takes approximately two hours to switch between jobs.The time is spent cleaning nozzles and paint tanks and recalibrating equipment. Currently the company runs relatively small batch sizes through the process but is considering increasing them to reduce setup time.
With small batch sizes, powder coating can process approximately 2,000 units per 8-hour shift, and products have an average contribution margin of $50. With large batch sizes, powder coating can process approximately 2,300 units per 8-hour shift.
Required
a. Calculate the additional profit associated with running larger batch sizes through the powder-coating process.
b. What potential problems are created by the larger batch sizes?