Problem 1. Polly Enterprises manufactures lamps that normally sell for $75 each. There are 300 defective lamps in inventory, which cost $55 each to manufacture. These defective units can be sold as-is for $20 each, or they can be processed further for a cost of $45 each and then sold for the normal selling price. Would Polly Enterprises be better off by repairing the lamps or selling them as is?
Problem 2. The Miller Company has the following information:
Month Budgeted Sales
April 6,000
May 4,000
June 5,000
July 3,000
In addition, the cost of goods sold is 60 percent of sales and the desired ending inventory level is 30 percent of next month's sales.
Required: Prepare a purchases budget for April, May and June.
Problem 3. Getting to school for your 8 A.M. class doesn't leave much time for breakfast, and you are quite hungry by the time class ends. It is a long walk to the cafeteria, the lines are long once you get there, and you find yourself having to decide between having breakfast and getting to your next class on time. Many of your friends have expressed the same problem. The administration has agreed to let you set up a table just outside the building where you will sell various snacks for $1 each. You have agreed to pay the administration $500 per month, and salaries to your friends to run the business will be another $500 per month. It will cost you 50 cents each to buy the pre-packaged snacks. You believe you can sell 2,000 snack packs per month.
a. What are the total fixed costs per month?
b. What are the total variable costs per month?
c. What is the fixed cost per snack pack?
d. What is the variable cost per snack pack?
e. What is the average cost per snack pack?
f. What is the average profit margin per snack pack?
g. Based on your analysis, should you start the business? Why or why not?
Problem 4. Smith Company needs 1,000 units of a certain part for its manufacturing process. It can buy the part from Jones Company for $106. Smith Company's plant can manufacture the part for the following unit costs:
Direct materials $12
Direct manufacturing labor $48
Variable manufacturing overhead $24
Fixed manufacturing overhead $30
Total $114
If Smith Company buys the part from Jones Company instead of manufacturing it, 40 percent of the fixed manufacturing overhead will be avoided. Should they make it or buy it? Show your calculations.
Problem 5. This information is from the records of the Greater Company for the year:
Create an income statement using the:
a. Contribution method
b. Absorption method
Problem 6. Use the following data to prepare a flexible budget. Make sure to show the contribution margin.
Budgeted Actual
Number of units 5,000 6,000
Sales price (per unit) $12.00 $10.00
Variable costs per unit:
Manufacturing $6.00 $7.00
Selling and Administrative $2.00 $3.00
Fixed costs per unit:
Manufacturing $10,000 $10,000
Administrative $5,000 $6,000
Problem 7. You are negotiating for the terms of a legal settlement, and your opponent's attorney has presented you with the following alternative settlement offers:
a. $38,000 today in one lump sum
b. $50,000 to be paid to you in five equal payments of $10,000 at the end of each of the next five years
c. Five equal annual installments of $9,100 each, beginning today
If your discount rate is 10%, what is the present value of each alternative and which alternative would you choose?
Problem 8. Erin Industries has three product lines, A, B, and C.
A B C Total
Sales 60,000 90,000 20,000 170,000
Variable costs 40,000 50,000 10,000 100,000
Contribution margin 20,000 40,000 10,000 70,000
Fixed costs:
Avoidable 9,000 20,000 6,000 35,000
Unavoidable 6,000 10,000 5,000 21,000
Operating income 5,000 10,000 (1,000) 14,000
Erin Industries is thinking of dropping product line C because it is reporting a loss. Show the effect this will have on the company's income.