Question 1 - Steve has just returned from salmon fishing. He was lucky on this trip and brought home two salmon. Steve's wife, Wendy, disapproves of fishing, and to discourage Steve from further fishing trips, she has presented him with the following cost data. The cost per fishing trip is based on an average of 10 fishing trips per year.
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Cost per fishing trip:
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Depreciation on fishing boat* (annual depreciation of $2,000 ÷ 10 trips)
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$200
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Boat storage fees (annual rental of $1,600 ÷ 10 trips)
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160
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Expenditures on fishing gear, except for snagged lures (annual expenditures of $270 ÷ 10 trips)
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27
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Snagged fishing lures
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7
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Fishing license (yearly license of $40 ÷ 10 trips)
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4
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Fuel and upkeep on boat per trip
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20
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Junk food consumed during trip
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7
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Total cost per fishing trip
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$425
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Cost per salmon ($425 ÷ 2 salmon)
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$212.50
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*The original cost of the boat was $20,000. It has an estimated useful life of 10 years, after which it will have no resale value. The boat does not wear out through use, but it does become less desirable for resale as it becomes older. (Leave no cells blank - be certain to enter "0" wherever required.)
1. Assuming that the salmon fishing trip Steve has just completed is typical, what costs are relevant to a decision as to whether he should go on another trip this year?
2. Suppose that on Steve's next fishing trip he gets lucky and catches three salmon in the amount of time it took him to catch two salmon on his last trip. How much would the third salmon have cost him to catch?
Question 2 - Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $35 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:
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Per Unit
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14,100
Units per year
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Direct materials
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$9
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$126,900
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Direct labor
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11
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155,100
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Variable manufacturing overhead
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2
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28,200
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Fixed manufacturing overhead, traceable
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10*
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141,000
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Fixed manufacturing overhead, common, but allocated
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13
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183,300
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Total cost
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$45
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4634,500
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*40% supervisory salaries; 60% depreciation of special equipment (no resale value).
1a. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, compute the total cost of making and buying the parts.
1b. Should the outside supplier's offer be accepted?
Reject
Accept
2a. Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $133,900 per year. Compute the total cost of making and buying the parts.
2b. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $35 each?
Accept
Reject
Question 3 - Miyamoto Jewelers is considering a special order for 13 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $406 and its unit product cost is $263 as shown below:
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Direct materials
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$143
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Direct labor
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83
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Manufacturing overhead
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37
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Unit product cost
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$263
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Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $10 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $9 per bracelet and would also require acquisition of a special tool costing $455 that would have no other use once the special order is completed. This order would have no effect on the company's regular sales and the order could be fulfilled using the company's existing capacity without affecting any other order.
a. What effect would accepting this order have on the company's net operating income if a special price of $366 is offered per bracelet for this order?
b. Should the special order be accepted at this price?
Yes
No
Question 4 - Banner Company produces three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:
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Product
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A
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B
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C
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Selling price
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$90
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$190
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$110
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Variable costs:
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Direct materials
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40.50
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150.70
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62.60
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Direct labor
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15.00
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9.00
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12.00
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Variable manufacturing overhead
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3.00
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1.80
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2.40
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Total variable cost
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58.50
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161.50
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77.00
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Contribution margin
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$31.50
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$28.50
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$33.00
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Contribution margin ratio
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35%
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15%
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30%
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Due to a strike in the plant of one of its competitors, demand for the company's products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labor rate is $6 per hour, and only 3,040 hours of labor time are available each week.
1. Compute the amount of contribution margin that will be obtained per hour of labor time spent on each product.
2. Which orders would you recommend that the company work on next week-the orders for product A, product B, or product C?
Product B
Product A
Product C
3. By paying overtime wages, more than 3,040 hours of direct labor time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products?