Exercise 1 - Gruner Company Produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is:
Materials $10,000
Labor 30,000
Variable overhead 20,000
Fixed overhead 40,000
Total $100,000
Gruner also incurs 50% sales commission ($0.35) on each disc sold.
Travis Corporation offers Gruner $4.74 per disc for 5,000 discs. Travis would sell the discs under its own brand name in foreign markets not yet served by Gruner. If Gruner accepts the offer, its fixed overhead will increase from $40,000 to 45,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
Instructions:
(a) Prepare an incremental analysis for the special order.
(b) Should Gruner accept the special order? Why or Why not?
(c) What assumptions underlie the decision made in part (b)?
Exercise 2 - Selleck has recently started the manufacture of RecRobo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 RecRobo's is as follows.
Cost
Direct materials ($40 per robot) $ 800,000
Direct labor ($30 per robot) 600,000
Variable overhead ($6 per robot) 120,000
Allocated fixed overhead ($25 per robot) 500,000
Total $ 2,020,000
Selleck is approached by Padong Inc., which offers to make RecRobo for $90 per unit or $1,800, 000.
Instructions:
(a) Using incremental analysis, determine whether Selleck Should accept this offer under each of the Following independent assumptions.
(1) Assume that $300,000 of the fixed overhead cost can be reduced (avoided).
(2) Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Padong In., Selleck can use the released productive resources to generate additional income of $300,000.
(b) Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier.
Exercise 3 - Nichols Company makes three models of phasers. Information on the three products is given below.
Stunner Double-Set Mega-Power
Sales $ 300,000 $ 500,000 $ 200,000
Variable expenses 150,000 200,000 140,000
Contribution margin 150,000 300,000 60,000
Fixed expenses 120,000 225,000 90,000
Net income $ 30,000 $ 75,000 $ (30,000)
Fixed expense consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,0000 (Double-Set), and $30,000 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is phased out.
Ralph Port, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.
Instructions:
(a) Compute current net income for Nichols Company.
(b) Compute net income by product line and in total for Nichols Company if the company discontinues the Mega-Power product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)
(c) Should Nichols eliminate the Mega-Power product line? Why or why not?