CHAPTER 5:
SHORT-TERM DECISIONS AND ACCOUNTING INFORMATION
Problems
1. Wilson Company expects the following results, without considering any of
the changes described below.
Product A Product B
Total
--------- ------------Sales
$100
$300
$400
Variable costs
40
100
140
---------Contribution margin
$ 60
$200
$260
Fixed costs - avoidable
(20)
(30)
(50)
- unavoidable
(50)
(100)
(150)
---------Profit (loss)
$(10)
$ 70
$ 60
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====
====
The unavoidable costs are allocated based on unit sales of 1,000 A and
2,000 B. CONSIDER EACH QUESTION INDEPENDENTLY UNLESS TOLD OTHERWISE.
a. Compute Wilson's income if product A is dropped.
b. If product A were dropped and the unit sales of product B increased by
30%, what would the company's income be?
c. Product A can be dropped and replaced with a new product, C, which would
have avoidable fixed costs of $50. Product C would sell for $0.60, have
variable costs of $0.20, and expected volume of 400 units. Compute
Wilson's income if A were replaced by C.
d. Suppose now that products A and B are joint products that are being sold
at split-off. All of the costs shown on the income statement are the
materials, labor, and overhead of the joint process. Find income if
product B were processed further at additional costs of $90 and sold for
$350.
2. Arapahoe Corp. can make three products from a joint process. The monthly
cost of the joint process is $10,000. Following are data about the three
products.
Product
------A
B
C
Sales Value
at
Split-off Point
--------------$ 8,000
$ 9,000
$
0
Sales Value
if Further
Processed
----------$12,000
$10,000
$ 2,500
Costs of
Additional
Processing
---------$2,500
$2,000
$1,000
a. Which product(s) should be sold at the split-off point?
b. Arapahoe is currently processing all three products rather than selling
any of them at the split-off point. Find its current income.
3. Madison Co. operates a joint process. Three products, B, C, and D emerge
from that process, each of which can be sold immediately or processed
further. Monthly output is 50,000 gallons; 50% is B, 30% is C, and 20% is
D. You have the following information.
B
C
D
------------------Per-gallon split-off price
$ 8
$ 9
$ 6
Per-gallon price after further
processing
$13
$15
$12
Per-gallon variable cost of
further processing
$ 4
$ 2
$ 4
Avoidable direct fixed costs of
further processing, per month
$35,000
$45,000
$18,000
Unavoidable direct fixed costs
of further processing, per month $18,000
$40,000
$ 7,000
Which product(s), if any, should be sold at split-off?
4. Milton Company has three products: A, B, and C. Three machines are used to
produce the products. The contribution margins, sales demands, and time on
each machine (in minutes) is as follows:
time
time
time
Demand
CM
on M1
on M2
on M3
A
100
$45
10
15
12
B
80
$30
10
5
8
C
60
$40
5
10
5
There are 2,400 minutes available on each machine during the week. All
materials needed are readily available on a just-in-time basis.
a. What are the load factors for each of the three machines?
b. Which machine is the bottleneck?
c. How many units of A, B, and C should be produced during the week?
5. LaCrosse Company expects the following results, without considering any of
the changes described below.
Product A
Product B
Total
---------------------Sales
$1,000
$3,000
$4,000
Variable costs
400
1,000
1,400
------------Contribution margin
$ 600
$2,000
$2,600
Fixed costs - avoidable
(200)
(300)
(500)
- unavoidable
(500)
(1,000)
(1,500)
-------------Profit (loss)
$ (100)
$ 700
$ 600
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======
The unavoidable costs are allocated based on unit sales of 1,000 A and
2,000 B. An exporter has offered $0.80 per unit for 200 units of A.
a. Find the change in income if LaCrosse accepts the order, assuming no
loss of regular sales.
b. The managers believe that if they accept the special order, they will
lose some sales at the regular price. Determine the number of units
they could lose before the order became unprofitable.
c. The managers believe that they will lose 80 units at the regular price
if they accept the order. Calculate the price they must charge for the
special order to increase income by $50.
6. Mays Company manufactures 200,000 units of part XYZ annually. The following
information has been collected:
Materials
Direct labor
Variable overhead
Fixed overhead
Total costs
$200,000
110,000
50,000
100,000
-------$460,000
========
Clemens Company has offered to provide part XYZ for $2 per unit. Assume no
other productive use of the space exists.
a. What would be the dollar impact if Mays accepted the offer?
b. What is the maximum price Mays is willing to pay for the part?
7. Gonzalez can produce any of three products with its current production
line. The heat treating equipment has 400 hours available during any given
month. Per unit production, sales, and cost statistics are as follows:
A
B
C
------Selling price
$15
$20
$10
Variable cost
$ 9
$12
$ 7
Required time in heat treat
1.5 hrs 2.5 hrs. 1.0 hrs
Maximum demand per month
100
100
100
a. How many of each product should Gonzalez produce and sell?
b. Suppose the selling price of C increases to $12. How many of each
product should Gonzalez produce and sell?
8. Scottso Enterprises has the following products and costs:
Unit demand per month
Selling price
Materials
Labor and overhead
Sales commission
A
2,000
B
3,000
C
4,000
$500
150
180
50
$600
300
210
75
$800
350
300
100
Labor and overhead are applied to each product at a rate of $30 per machine
hour. Management considers both labor and overhead to be fixed costs.
a. Scottso currently has 60,000 hours available for production each month.
How many units should be produced and sold for each product?
b. An exporter has approached Scottso with an offer to purchase 500 units
of product C for a discounted price. This is a one-time order and will
not affect normal sales. No commission will be paid. What is the minimum
price Scottso should accept?
9. Miami Company currently sells 3,000 units of product A for $1.25 each.
Variable costs are $0.60, avoidable fixed costs are $750, and unavoidable
allocated fixed costs are $1,500. An exporter has offered $0.90 per unit
for 800 units of product A.
a. Find the change in income if Miami can accept the order without
affecting current sales.
b. The managers believe that if they accept the special order, they will
lose some sales at the regular price. Determine the number of units
they could lose before the order became unprofitable.
c. The managers believe that they will lose 270 units at the regular price
if they accept the order. Calculate the price they must charge for the
special order to increase income by $200.
10. Arpeggio Company manufactures 1,000 units of part XYZ annually. The
following information has been collected:
Materials
Direct labor
Variable overhead
Fixed overhead
$200,000
110,000
50,000
100,000
-------Total costs
$460,000
========
Mobile Company has offered to provide part XYZ for $400 per unit. If
Arpeggio accepts the offer another product will be moved into the space
vacated, saving $60,000 a year in rent.
a. What would be the dollar impact if Arpeggio accepted the offer?
b. What is the maximum price Arpeggio is willing to pay for the part?