A factory processes 1 560 ounces

Exercise 7-3 (Video)

Moonbeam Company manufactures toasters. For the first 8 months of 2020, the company reported the following operating results while operating at 75% of plant capacity:

Sales (358,400 units)

$4,377,000

Cost of goods sold

2,590,720

Gross profit

1,786,280

Operating expenses

837,760

Net income

$948,520

Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed. In September, Moonbeam receives a special order for 24,500 toasters at $8.38 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $2,900 of shipping costs but no increase in fixed costs. (a) Prepare an incremental analysis for the special order. (Round computations for per unit cost to 2 decimal places, e.g. 15.25 and all other computations and final answers to the nearest whole dollar, e.g. 5,725. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Reject Order

Accept Order

Net Income Increase (Decrease)

Revenues

$

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$

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$

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Cost of goods sold

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Operating expenses

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Net income

$

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$

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$

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(b) Should Moonbeam accept the special order?

Moonbeam Company

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the special order.

Exercise 7-7 a-b (Video)

Riggs Company purchases sails and produces sailboats. It currently produces 1,270 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $268 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $98 for direct materials, $86 for direct labor, and $90 for overhead. The $90 overhead is based on $78,740 of annual fixed overhead that is allocated using normal capacity. The president of Riggs has come to you for advice. “It would cost me $274 to make the sails,” she says, “but only $268 to buy them. Should I continue buying them, or have I missed something?”

Prepare a per unit analysis of the differential costs. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Make Sails

Buy Sails

Net Income Increase (Decrease)

Direct material

$

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$

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$

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Direct labor

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Variable overhead

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Purchase price

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Total unit cost

$

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$

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$

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Should Riggs make or buy the sails?

Riggs should

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the sails.

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If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,700 per year, would your answer to part (a) change?

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. This is because the net income will

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by $

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.

Exercise 7-11

Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $182,100 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.

Sales Value at Split-Off Point

Allocated Joint Costs

Cost to Process Further

Sales Value of Processed Product

Spock

$209,600

$40,200

$109,700

$300,900

Uhura

299,800

60,900

84,700

400,600

Sulu

455,800

81,000

250,200

799,600

Determine the incremental profit or loss that each of the three joint products. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Spock

Uhura

Sulu

Incremental profit (loss)

$

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$

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$

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Indicate whether each of the three joint products should be sold as is, or processed further.

Spock

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Uhura

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Sulu

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Problem 7-3A (Video)

Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week, 855,000 ounces of chemical input are processed at a cost of $207,000 into 570,000 ounces of floor cleaner and 285,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $250,900. FloorShine sells at $18 per 30-ounce bottle. The table cleaner can be sold for $19 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 285,000 ounces of another compound (TCP) to the 285,000 ounces of table cleaner. This joint process will yield 285,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $101,000. Both table products can be sold for $15 per 25-ounce bottle. The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Process Further

Table Cleaner

Table Stain Remover (TSR)

Table Polish (TP)

Total

Production in ounces

285,000

285,000

285,000

Revenues

$216,600

$171,000

$171,000

$342,000

Costs:

   CDG costs

69,000

*

51,750

51,750

103,500

**

   TCP costs

0

50,500

50,500

101,000

     Total costs

69,000

102,250

102,250

204,500

Weekly gross profit

$147,600

$68,750

$68,750

$137,500

*If table cleaner is not processed further, it is allocated 1/3 of the $207,000 of CDG cost, which is equal to 1/3 of the total physical output. **If table cleaner is processed further, total physical output is 1,140,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

Determine if management made the correct decision to not process the table cleaner further by doing the following. (1) Calculate the company’s total weekly gross profit assuming the table cleaner is not processed further.

Total weekly gross profit

$

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(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.

Total weekly gross profit

$

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(3) Compare the resulting net incomes and comment on management’s decision.

Management made the

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decision by choosing to not process table cleaner further.

Exercise 8-2 (Video)

Eckert Company is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large potential market. Because of competition, Eckert does not believe that it can charge more than $88 for LittleLaser. At this price, Eckert believes it can sell 117,000 of these laser guns. Eckert will require an investment of $11,700,000 to manufacture, and the company wants an ROI of 15%. Determine the target cost for one LittleLaser.

Target cost

$

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Exercise 8-6

Alma’s Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,060 sessions. The company has invested $2,308,680 in the studio and expects a return on investment (ROI) of 20%. Budgeted costs for the coming year are as follows.

Per Session

Total

Direct materials (CDs, etc.)

$ 20

Direct labor

$405

Variable overhead

$ 55

Fixed overhead

$1,001,700

Variable selling and administrative expenses

$ 40

Fixed selling and administrative expenses

$545,900

Determine the total cost per session.

Total cost

$

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per session

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Determine the desired ROI per session. (Round answer to 2 decimal places, e.g. 10.50.)

ROI

$

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per session

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Calculate the markup percentage on the total cost per session.

Markup percentage

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%

per session

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Calculate the target price per session. (Round answer to 2 decimal places, e.g. 10.50.)

Target price

$

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per session

Exercise 8-9 (Video)

Rey Custom Electronics (RCE) sells and installs complete security, computer, audio, and video systems for homes. On newly constructed homes it provides bids using time-and-material pricing. The following budgeted cost data are available.

Time Charges

Material Loading Charges

Technicians' wages and benefits

$142,800

-

Parts manager's salary and benefits

-

$35,000

Office employee's salary and benefits

27,880

15,470

Other overhead

13,600

43,260

Total budgeted costs

$184,280

$93,730

The company has budgeted for 6,800 hours of technician time during the coming year. It desires a $39 profit margin per hour of labor and an 80% profit on parts. It estimates the total invoice cost of parts and materials in 2020 will be $721,000.

Compute the rate charged per hour of labor. (Round answer to 2 decimal places, e.g. 10.50.)

Labor rate

$

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per hour

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Link to Video

Compute the material loading percentage.

Material loading percentage

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%

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RCE has just received a request for a bid from Buil Builders on a $1,218,000 new home. The company estimates that it would require 80 hours of labor and $38,000 of parts. Compute the total estimated bill.

Total estimated bill

$

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Problem 8-5A (Video)

Gutierrez Company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The Board Division has offered the Chip Division $20 per unit to supply it with chips for 39,000 boards. It has been purchasing these chips for $21 per unit from outside suppliers. The Chip Division receives $22.20 per unit for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Division is $17.20. It estimates that it will save $4.20 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity. (a) Calculate the minimum transfer price that the Chip Division should accept. (Round answers to 2 decimal places. e.g. 10.25.)

Minimum transfer price

$

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Should Chip Division accept the offer?

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(b) Suppose that the Chip Division decides to reject the offer. What are the financial implications for each division, and for the company as a whole, of this decision?

Total

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contribution margin by Board Division

$

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Total

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contribution margin by Chip Division

$

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Overall

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contribution margin for the company

$

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