1. Assume that in 2012, Andre has charged customers $15.00 per haircut, has paid each of his six barbers a salary of $53,000, and has had miscellaneous fixed costs of $16,000. It is expected that his barbers will give a total of 26,000 haircuts during the year.

Andre is considering changing the way he pays his barbers in 2013. He is considering paying each barber a salary of $23,000 plus a 53% commission on each haircut s/he gives. He will continue to charge $15.00 per haircut, and he believes that the total number of haircuts will not be affected by the way he pays his barbers.

How many total haircuts must his barbers give in 2013 in order for Andre to be indifferent between the 2012 and 2013 payment plans?

X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $12.11 per unit. X Company would have to inspect each part at a cost of $0.32 per unit. This year's production costs for 8,850 units of this part were:
Cost Item
Total
Per-Unit
Materials
$21,063
$2.38
Direct labor
41,330
4.67
Variable overhead
31,063
3.51
Fixed overhead
45,400
5.13
Total
$138,856
$15.69

If X Company buys the part, $26,332 of the fixed overhead is common and unavoidable; the rest can be avoided. In addition, if X Company buys the part, it can rent out the facilities that it currently uses to make the part and receive $10,150 per year. Estimated production next year is expected to be the same as last year.

2. If X Company buys the part, it will save?

3. X Company is concerned that next year's demand may be different than this year's demand. At what level of demand will X Company be indifferent between making and buying?

X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $14.39 per unit. This year's production costs for 97,000 units of this part were:
Materials
$557,750
Direct labor
462,690
Total overhead
432,620

Of the total overhead costs, $102,820 were fixed, and of the total fixed overhead costs, $22,620 were directly related to the part and could be avoided if the part was bought instead of made. Production next year is expected to increase to 100,850 units. There is no alternative use for the resources currently involved in the production of the part.

4. If X Company continues to make the part instead of buying it, it will save?
5. X Company is uncertain about the demand in coming years. At what level of demand will X Company be indifferent between making and buying?

Questions 6, 7, and 8 refer to the following problem:
At the end of the year, X Company had sold 61,800 units of its regular product for $809,580. A company offered to buy 4,390 units for $11.77 each. There was enough capacity to produce these additional units. The following cost functions apply to X Company's regular operations:
Cost of goods sold
$7.10X + $141,522
Selling and administrative expenses
$1.28X + $73,542

where X is the number of units produced and sold. Also, because the special order product is slightly different than the regular product, direct material cost per unit will be $0.87 less than the regular direct material cost per unit.

6. Profit on the special order is?

7. Assume that regular variable selling and administrative expenses include sales commissions of 4% of dollar sales, and there will be no sales commissions on the special order. As a result, variable selling and administrative expenses per unit for the special order will be ?

8. Assume that if X Company accepts the special order, it will lose 1,200 regular sales units. The effect of losing these sales will be to decrease profit by ?

The following information is for X Company's two products - A and B:
Ê
Product A
Product B
Total contribution margin
$36,400
$39,480
Contribution margin rate
40%
42%
Fixed costs
59,290
30,320

$49,211 of Product A's fixed costs are directly related to Product A and avoidable; $25,469 of Product B's fixed costs are directly related to Product B and avoidable. The remaining fixed costs are allocated costs and unavoidable.

9. X Company is considering dropping Product A. If it does, it can use the freed-up resources to increase sales of Product B by $17,700. If X Company drops Product A and increases Product B sales, firm profits will change by ?

10. Reconsider study problem 11-30 (Kobe O'Neal), with some different facts. Assume that O'Neal's current contract is worth $16,600,000. He is willing to consider a new contract that is $290,000 less. However, he wants the new contract to be for four years with the same salary each year. What will the annual salary have to be? Assume a discount rate of 5%?

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11. At the end of the year, X Company has an opportunity to accept a special order that will result in immediate profit of $35,000. However, the marketing manager warns that if X Company accepts the order, there will be an adverse reaction from regular customers, and regular prices will have to be reduced. As a result, revenue will fall by $9,900 in each of the next four years and $8,100 in the fifth. Assuming a discount rate of 6%, what is the net present value of accepting the special order?

12. X Company must buy either Machine A or Machine B. The useful life of both machines is seven years. The cost of eqch machine and the estimated operating costs are as follows:
Year
Machine A
Machine B
ÊÊÊ0
-$51,000Ê
-$54,000Ê
ÊÊÊ1
-6,000Ê
-7,000Ê
ÊÊÊ2
-8,000Ê
-4,000Ê
ÊÊÊ3
-8,000Ê
-3,000Ê
ÊÊÊ4
-8,000Ê
-3,000Ê
ÊÊÊ5
-6,000Ê
-3,000Ê
ÊÊÊ6
-5,000Ê
-2,000Ê
ÊÊÊ7
-4,000Ê
-2,000Ê

If X Company buys Machine B instead of Machine A, what is the payback period (in years)?

13. X Company must decide whether to continue using its current equipment or replace it with new, more efficient equipment. The current equipment will last for six more years and has a current disposal value of $10,000. The new equipment will cost $160,000 and will also last for six years. Operating costs with the current machine and the new machine are $61,500 and $30,990, respectively.
If X Company replaces the current equipment, what is the approximate internal rate of return?

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