PROBLEM 7-19 Abiline Meat Processing Page 294

Sell or Process Further

(Prepared from a situation suggested by Professor John Hardy) Abiline Meat Processing Corporation is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand and it is trying to decide whether to sell the T-bone steaks as is or to process them further into filet mignon and New York Cut steaks.

Management believes that a 1-pound T-bone steak would yield the following profit:

Wholesale selling price ($2.25 per pound)............................... $2.25
Less joint costs incurred up to the split-off point where T-bone
Steak can be identified as a separate product.......................... 1.79
Profit per pound................................................................... $ 0.55

As mentioned above, instead of being sold as is, T-bone steaks could be further processed into filet mignon and New York steaks. Cutting one-side of a T-bone steak provides the filet mignon, and cutting the other side provides New York cut. One 16-ounce T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. The cost of processing the T-bone steak into these cuts is $0.20 per pound. The filet mignon can be sold for $3.60 per pound and

The New York cut can be sold wholesale at $2.00 per pound.

REQUIRED:

1. Determine the profit per pound from processing the T-bone steaks further into filet mignon and New York cut steaks?

2. Would you recommend that the T-bone steaks be sold as is or processed further? WHY?

PROBLEM 7-20 Shutting Down or Continuing to operate a Plan (LO 7-2) Hallas Company

(NOTE:This type of decision is similar to dropping a product line)

Hallas Company manufactures a fast bonding glue in its Northwest plant. The company normally produces and sells 40,000 gallons of the glue each month. This glue, which is known as MJ-7, is used in the wood industry to manufacture plywood.The selling price of Mj-7 is $35 per gallon, variable costs are $21 per gallon, fixed manufacturing overhead costs in the plant total $230,000 per month, and the fixed selling costs total $310,000 per month.

Strikes in the mills that purchase the bulk of the MJ-7 glue have caused HallasCompany's sales to temporarily drop to only 11,000 gallons per month. Hallas Company's management estimates that the strikes will last for two months, after which sales of MJ-7 should return to normal. Due to the current low level of sales,Hallas Company's management is thinking about closing down the Northwest plant during thestrike.

If Hallas Company does close down the Northwest plant, fixed manufacturing overhead costs can be reduced by $60,000 per month and fixed selling costs can be reduced by 10% . Start up costs at the end of the shutdown period would total $14,000. Because Hallas Company uses Lean Production methods, no inventories are on hand.

REQUIRED

1. Assuming that the strikes continue for two months, would you recommend that Hallas Company close the Northwest plant? Explain. Show computation to support your answer.

2. At what level of sales(in gallons) for the two-month period should Hallas Company be indifferent between closing the plant or keeping it open. Show computation. (HINT: This is a type of break-event analysis, except that the fixed cost portion of your break-even computation should include only those fixed costs that are relevant (i.e. avoidable) over the two-month period).

PROBLEM7-22 BRONSON COMPANY - MAKE or BUY DECISION

Bronson Company manufactures a variety of ball point pens. The company has received an offer from an outside supplier to provide the ink cartridge for the company's Zippo pen line, at a price of $0.48 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.

Bronson Company estimates that if the supplier's offer were accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%.

Under present operations, Bronson Company manufacturers all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $4 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total $50, 000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pen (one box) is given below:

Direct materials.......................................... $ 1.50
Direct labor ............................................... 1.00
Manufacturing overload............................... 0.80 *
Total cost.................................................. $ 3.30

• - includes both variable and fixed manufacturing overhead based on production of 100,000 boxes of pens each year.

REPAIRED:

1. Should Bronson Company accept the outside supplier's offer? Show computations.

2. Hat is the maximum price that Bronson Company should be willing to pay the outside supplier per dozen cartridges? Explain?

3. Due to the bankruptcy of a competitor, Bronson Company expects to sell 150,000 boxes of Zippo pens next year. As previously stated, the company has presently enough capacity to produce the cartridges for only 100,000 boxes of Zippo pens annually. By incurring $30,000
In added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zippo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Bronson? Show computations to support your answer?

4. What qualitative factors should Bronson Company consider in determining whether it should make or buy the ink cartridges?

PROBLEM 7-27 UTILIZATION of a CONSTRAINED RESOURCE

BRANDiLYN TOY COMPANY

The Brandilyn Company manufacturers of a line of dolls and a doll dress sewing kit. Demand for the dolls is increasing and management request assistance from you in determining the best sales and production mix for the coming year. The following has provided the following data.

Demand Selling
Next year Price per Direct Direct
Product Unit Unit Materials Labor
Marcy............................ 26, 000 $ 35.00 $3.50 $4.00
Tina................................ 42, 000 $ 24.00 $2.30 $3.00
Carl................................ 40,000 $ 22.00 $4.50 $8.40
Lenny ............................ 46, 000 $ 18.00 $3.10 $6.00
Sewing kit..................... 450, 000 $ 14.00 $1.50 $2.40

The following information is available:

a. The company's plant has the capacity of 150,000 direct- labor per year on a single-shift basis. The company's present employees and equipment can produce all five products.

b. The direct rate of $12.00 per hour is expected to remain unchanged during the coming year.

c. Fixed cost total is $356, 000. Variable overhead cost are $4.00 per direct labor -hour.

d. All of the company's on manufacturing cost are fixed.

e. The company's finished goods inventory is negligible and can be ignored.

REQUIRED

1. Determine the contribution per direct labor-hour expended on each product.

2. Prepare a schedule showing the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year.

3. Examine the data you have computed in (1) and (2) above. How would you allocate the 150, 000 direct labor-hours of capacity to Brandilyn Toy's company various products?

4. What is the highest price, in terms of rate per hour, that BrandilynToy's company should be willing to pay for additional capacity (that is for added direct labor time).

5. Identify ways in which the company might be able to obtain additional output so that it would not have to leave some demand for its product unsatisfied.

PROBLEM 8-24 SIMPLE RATE of RETURN ; PAYBACK

NAGOYA AMUSEMENTS COMPANY

Nagoya Amusements Corporation places electronic games and other amusement devices in supermarkets and similar outlets throughout Japan. Nagoya's Amusement is investigating the purchase of a new electronic game called Mystic Invaders. The manufacturer will sell 20 games to Nagoya Amusements for a total price of Yen180,000. (Japanese currency is YEN) The Nagoya Amusements has determined the following additional information about the game.

a. The game will have a five year useful life and negligible salvage value. The company uses straight line depreciation.

b. The game would replace other games that are unpopular and generating little revenue. These other games would be sold for a total of Y30,000.

c. Nagoya''s Amusements estimates that Mystic Invaders would annual incremental revenues of Y200,000 (total for all 20 games). Annual incremental out of pocket cost would be (in total): maintenance, Y50,000 and insurance Y10,000. In addition, Nagoya Amusements would haveto pay a commission of 40% of total revenues to the supermarkets and other outlets in which the games were placed.

REQUIRED

(HINT: Ignore Income taxes)

1. Prepare a contribution format Income Statement showing the next operating income from Mystic Invaders.

2. Compute the Single Rate of Return on Mystic Invaders. Will the game be purchased if Nagoya Amusements accepts any project with a simple rate of return than 14%.

3. Compute the payback period on Mystic Invaders. If the company accepts any investments with a payback period of less than three years, will the game be purchased?

PROBLEM 8-26 CHEATEAU BEAUNE

SIMPLE RATE of RETURN; PAYBACK; INTERNAL RATE OF RETURN

Chateau Beaune is a family owned winery located in the Burgundy region of France, which is headed by Gerard Despinoy. The harvesting season is early fall in the busiest part of the year for the winery, and Many part-timer workers are hired to help pick and process grapes. Mr. Despinoy is investigating the purchasing of the harvesting machine that would significantly reduce the amount of labor required in the picking process. The harvesting machine is built to straddle grapevines, which are laid out in low-lying rows. Two workers are carried on the machine just above ground level, one of each side of the vine. As the machine slowly crawls through the vineyard, the workers cut bunches of grapes from the vines, which then fall into a hopper. The debris is then pulverized and spread behind the machine as a rich ground mulch. MrDespinoy has gathered the following information relating to the decision of whether to purchase the machine.

a. The winery would save 190, 000 EURO per year in labor costs with the new harvesting machine, In addition, the company would no longer have to purchase and spread ground mulch- at an annual saving of 10,000-EURO/France currency.

b. The harvesting machine would cost 480,000-EURO. It would have an estimated 12 year useful life and zero salvage value. The winery uses straight-line depreciation ,

c. Annual out-of-pocket costs associated with the harvesting machine would be insurance, 1,000-EURO; fuel, 9000-euro, and a maintenance contract, 12000-euro. In addition, two operators will be hired and trained for the machine, and they would be paid a total of 70,000-euro per year, including benefits.

d. Mr. Despinoy feels that the investments in the harvesting machine should earn at least a 16% rate of return.

REQUIRED (HINT: Ignore the Income Tax)

1. Determine he annual net savings in cash operating cost that would be realized if the harvesting were purchased.

2. Compute the single rate of return expected from the harvesting machine.

3. Compute the payback period on the harvesting machine. Mr. Despinoy will not purchase equipment unless it has a payback period of five years or less. Under the criterion, should the harvesting machine be purchase.

4. Compute (to the nearest whole percent) the internal rate of return promised by the harvesting machine. Based on computation, does it appear that the simple rate of return is an accurate guide in investment decisions.