Questions -
1) Delta 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 7,600 units per year is:
Direct materials $3.00
Direct labor $6.00
Variable manufacturing overhead $1.00
Fixed manufacturing overhead $4.05
Variable selling and administrative expense $1.60
Fixed selling and administrative expense $5.00
The normal selling price is $20 per unit. The company's capacity is 18,000 units per year. An order has been received from a mail-order house for 1,600 units at a special price of $15 per unit. This order would not affect regular sales.
Requirement 1: If the order is accepted, by how much will annual profits be increased or decreased?
Requirement 2: Assume the company has 1,000 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units?
2) Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows:
Department
Total Hardware Linens
Sales $4,240,000 $3,200,000 $1,040,000
Variable expenses 1,380,000 978,000 402,000
Contribution margin 2,860,000 2,222,000 638,000
Fixed expenses 2,240,000 1,450,000 790,000
Net OP income (loss) $620,000 $772,000 $(152,000)
A study indicates that $373,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 13% decrease in the sales of the Hardware Department.
Required: If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?
3) For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $8.38 per unit purchase price:
Per Unit Total
Direct materials $2.98
Direct labor 2.66
Supervision 1.32 $63,360
Depreciation 0.89 $42,720
Variable Man overhead 0.46
Rent 0.18 $8,640
Total production cost $8.49
A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $75,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Required: How much would profits per unit increase or decrease as a result of making the starters?