Questions -
Q1. (Prepared from a situation suggested by Professor John W. Hardy.) Abilene Meat Processing Corporation is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as is or to process them further into filet mignon and New York cut steaks.
Management believes that a 1-pound T-bone steak would yield the following profit:
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Wholesale selling price ($2.40 per pound)
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$2.40
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Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product
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1.40
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Profit per pound
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$1.00
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As mentioned above, instead of being sold as is, the T-bone steaks could be further processed into filet mignon and New York cut steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut. A one pound (16-ounce) T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. The cost of processing the T-bone steaks into these cuts is $0.17 per pound. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold wholesale for $2.90 per pound.
Required:
1. Determine the profit per pound from processing the T-bone steaks further into filet mignon and New York cut steaks.
Q2. Barker Company has a single product called a Zet. The company normally produces and sells 88,000 Zets each year at a selling price of $44 per unit. The company's unit costs at this level of activity are given below:
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Direct materials
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$7.50
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Direct labor
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11.00
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Variable manufacturing overhead
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3.80
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Fixed manufacturing overhead
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5.00 ($440,000 total)
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Variable selling expenses
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2.70
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Fixed selling expenses
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6.50 ($572,000 total)
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Total cost per unit
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$36.50
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A number of questions relating to the production and sale of Zets are given below. Each question is independent.
Required:
1. Assume that Barker Company has sufficient capacity to produce 118,800 Zets each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 35% above the present 88,000 units each year if it were willing to increase the fixed selling expenses by $130,000.
a. Calculate the incremental net operating income.
2. Assume again that Barker Company has sufficient capacity to produce 118,800 Zets each year. The company has an opportunity to sell 30,800 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total $15,400. The only selling costs that would be associated with the order would be $1.80 per unit shipping cost. Compute the per unit break-even price on this order.
3. One of the materials used in the production of Zets is obtained from a foreign supplier. Civil unrest in the supplier's country has caused a cutoff in material shipments that is expected to last for three months. Barker Company has enough material on hand to operate at 25% of normal levels for the three-month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plant would reduce fixed manufacturing overhead costs by 35% during the three-month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the three-month period?
4. The company has 700 Zets on hand that were produced last month and have small blemishes. Due to the blemishes, it will be impossible to sell these units at the normal price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price?
5. An outside manufacturer has offered to produce Zets and ship them directly to Barker's customers. If Barker Company accepts this offer, the facilities that it uses to produce Zets would be idle; however, fixed manufacturing overhead costs would continue at 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be reduced by 60%. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.
Q3. Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company's Zippo pen line, at a price of $0.58 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.
Bronson Company estimates that if the supplier's offer were accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%.
Under present operations, Bronson Company manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $6 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total $60,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pens (one box) is given below:
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Direct materials
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$1.30
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Direct labor
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1.20
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Manufacturing overhead
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0.70*
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Total cost
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$3.20
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* Includes both variable and fixed manufacturing overhead, based on production of 150,000 boxes of pens each year.
Required:
1a. Calculate the total variable cost of producing one box of Zippo pens?
1b. Calculate the total variable cost of purchasing one box of Zippo pens?
2. What is the maximum price that Bronson Company should be willing to pay the outside supplier per dozen cartridges?
3. Due to the bankruptcy of a competitor, Bronson Company expects to sell 200,000 boxes of Zippo pens next year. As previously stated, the company presently has enough capacity to produce the cartridges for only 150,000 boxes of Zippo pens annually. By incurring $38,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zippo pens. The variable cost per unit to produce the additional cartridges would be the same as at present.
a. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Bronson?
b. Compute total cost for the following alternatives.
Produce all cartridges internally $
Purchase all cartridges externally $
Produce the cartridges as per 3a above $
Q4. Hallas Company manufactures a fast-bonding glue in its Northwest plant. The company normally produces and sells 43,000 gallons of the glue each month. This glue, which is known as MJ-7, is used in the wood industry to manufacture plywood. The selling price of MJ-7 is $31 per gallon, variable costs are $21 per gallon, fixed manufacturing overhead costs in the plant total $226,000 per month, and the fixed selling costs total $300,000 per month.
Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Hallas Company's sales to temporarily drop to only 10,000 gallons per month. Hallas Company's management estimates that the strikes will last for two months, after which sales of MJ-7 should return to normal. Due to the current low level of sales, Hallas Company's management is thinking about closing down the Northwest plant during the strike.
If Hallas Company does close down the Northwest plant, fixed manufacturing overhead costs can be reduced by $50,000 per month and fixed selling costs can be reduced by 12%. Start-up costs at the end of the shutdown period would total $13,000. Because Hallas Company uses Lean Production methods, no inventories are on hand.
Required:
1a. Assuming that the strikes continue for two months, what is the impact on income by closing the plant.
2. At what level of sales (in gallons) for the two-month period should Hallas Company be indifferent between closing the plant or keeping it open?