Question 1:
Armstrong Corporation manufactures bicycle parts. The company currently has a $19,500 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $7,000, or modified for $10,000 and sold for $20,300.
Required:
1. Which of the data above are relevant to the decision about the obsolete parts?
2. Prepare an analysis of the decision with regard to the inventory
Question 2:
Toon Town Toy Company is considering the elimination of its Packaging Department. Management has received an offer from an outside firm to supply all Toon Town's packaging needs. To help her in making the decision, Toon Town's president has asked the controller for an analysis of the cost of running Toon Town's Packaging Department. Included in that analysis is $11,100 of rent, which represents the Pack-
aging Department's allocation of the rent on Toon Town's factory building. If the Packaging Department is eliminated, the space it used will be converted to storage space. Currently Toon Town rents storage space in a nearby warehouse for $13,000 per year. The warehouse rental would no longer be necessary if the Packaging Department were eliminated.
Required:
1. Discuss each of the figures given in the exercise with regard to its relevance in the department- closing decision.
2. What type of cost is the $13,000 warehouse rental, from the viewpoint of the costs of the Packaging Department?
Question 3:
Juarez Corporation produces cleaning compounds and solutions for industrial and household use. While most of its products are processed independently, a few are related. Grit 337, a coarse cleaning powder with many industrial uses, costs $3.20 a pound to make and sells for $4.00 a pound. A small portion of the annual production of this product is retained for further processing in the Mixing Department, where it is combined with several other ingredients to form a paste, which is marketed as a silver polish selling for $8.00 per jar. This further processing requires 'A pound of Grit 337 per jar. Costs of other ingredients, labor, and variable overhead associated with this further processing amount to $5.00 per jar. Variable selling costs are $.60 per jar. If the decision were made to cease production of the silver polish, $11,200 of Mixing Department fixed costs could be avoided. Juarez has limited production capacity for Grit 337, but unlimited demand for the cleaning powder.
Required: Calculate the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337.
Question 4:
Plato Corporation manufactures two products, Alpha and Beta. Contribution margin data follow.
|
Alpha |
Beta |
| Unit sales price |
$39.00 |
$93.00 |
| Less variable cost: |
|
|
| Direct material |
$21.00 |
$15.00 |
| Direct labor |
3 |
18 |
| Variable overhead |
3.75 |
22.5 |
| Variable selling and administrative cost |
2.25 |
1.5 |
| Total variable cost |
$30.00 |
$57.00 |
| Unit contribution margin |
$9.00 |
$36.00 |
Plato Corporation's production process uses highly skilled labor, which is in short supply. The same employees work on both products and earn the same wage rate.
Required: Which of Plato Corporation's products is most profitable? Explain.