Exercise E7-6
Finn's Seafood Restaurant has been approached by New England Investments, which wants to hold an employee recognition dinner next month. Lillian Sumner, a manager of the restaurant agreed to a charge of $70 per person, for food, wine, and dessert, for 175 people. She estimates that the cost of unprepared food will be $35 per person and beverages will be $13 per person.
To be able to accommodate the group, Lillian will have to close the restaurant for dinner that night. Typically, she would have served 190 people with an average bill of $54 per person. On a typical night, the cost of unprepared food is $20 per person and beverages are $16 per person.No additional staff will need to be hired to accommodate the group from New England Investments.
Part a. Calculate the incremental profit or loss associated with accepting the New England Investments group.
Part b. What was the opportunity cost of accepting the New England Investments group?
Part c. Should Lillian have considered any qualitative factors in her decision? Explain
Exercise E7-8
Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:
Cost Per unit
Variable Cost:
Direct material $900
Direct labor $600
Variable Overhead $300
Total Variable Costs $1800.00
Fixed Costs:
Depreciation of Equipment $500
Depreciation of Building $200
Supervisory salaries $300
Total Fixed Cost $1,000.00
Total overall Cost $2,800.00
The company has an offer from Duvall Valves to produce the part for $2,000 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas. The equipment cannot be used elsewhere in the Company, and it has no market value. However, the space occupied by the production of the value can be used by another production group that is currently leasing space for $55,000 per year.
Required: Should the company make or buy the value.?
Exercise E7-13
Computer village sells computer equipment
Computer Village sells computer equipment and home office furniture. Currently the furniture product line takes up approximately 50 percent of the company's retail floor space. The president of Computer village is trying to decided whether the company should continue offering furniture or concentrate on computer equipment. Below is a product line income statement for the company. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative salaries.
Computer Equipment Home Furniture Office Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold $ 700,000 $500,000 $1,200,000
Contribution margin $500,000 $300,000 $800,000
Less direct fixed costs:
Salaries: $175,000 $175,000 $350,000
Other $60,000 $60,000 $120,000
Less allocated fixed cost:
Rent $14,118 $9,882 $24,000
Insurance $3,529 $2,471 $6,000
Cleaning $4,117 $2,883 $7,000
President's Salary $76,740 $53,530 $130,000
Other $7,058 $4,942 $12,0000
Net Income: $159,708 ($8,708) $151,000
Required
Determine whether Computer Villages should discontinue the furniture line and the financial benefit (cost) of dropping it.