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Problems Chapter 12

Deco Engines should accept the offer to purchase carburetors from the outside supplier for Tk. 35 per unit because: 1) The company would save Tk. 7 per unit by purchasing versus producing internally, saving Tk. 105,000 per year. 2) The freed up capacity could be used to launch a new product with projected annual margin of Tk. 150,000. Bed & Bath should drop its Linens department because: 1) The Linens department loses Tk. 200,000 annually even after removing sunk fixed costs of Tk. 340,000. 2) Dropping Linens would decrease Hardware sales by 10% but still increase overall profit by Tk. 40,000.

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160 views

Problems Chapter 12

Deco Engines should accept the offer to purchase carburetors from the outside supplier for Tk. 35 per unit because: 1) The company would save Tk. 7 per unit by purchasing versus producing internally, saving Tk. 105,000 per year. 2) The freed up capacity could be used to launch a new product with projected annual margin of Tk. 150,000. Bed & Bath should drop its Linens department because: 1) The Linens department loses Tk. 200,000 annually even after removing sunk fixed costs of Tk. 340,000. 2) Dropping Linens would decrease Hardware sales by 10% but still increase overall profit by Tk. 40,000.

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Short Cases : Chapter-12

A) Make or Buy Decision


Deco Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company
has always produced all of the necessary parts for its engines, including all of the carburetors. An
outside supplier has offered to produce and sell one type of carburetor to Deco Engines, Ltd., for
a cost of Tk 35 per unit. To evaluate this offer, Deco Engines, Ltd., has gathered the following
information relating to its own cost of producing the carburetor internally:
Items/Costs Per Unit Tk. 15,000 Units per Year
Tk.
Direct materials 14 210,000
Direct labor 10 150,000
Variable manufacturing overhead 3 45,000
Fixed manufacturing overhead, traceable 6* 90,000
Fixed manufacturing overhead, allocated 9 135,000
Total cost 42 630,000
* One-third supervisory salary; two-third depreciation of special equipment (no resale value)
Required:
i) Assume that the company has no alternative use for the facilities that are now being used to
produce the carburetors, should the outside supplier’s offer be accepted? Show all computations
ii) Suppose that if the carburetors are purchased, Deco Engine, Ltd., could use the free capacity
to launch a new product. The segment margin of the new product would be Tk.150, 000 per year.
Should Deco Engines, Ltd., accept the offer to buy the carburetors for Tk.35 per unit? Show all
computations

B) Drop or Retain a Segment


Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s
most recent monthly contribution format statement follows:
Department
Total Hardware Linens

Sales……………………………………… $4,000,000 $3,000,000 $1,000,000

Variable expenses………………………… 1,300,000 900,000 400,000

Contribution Margin.................................. 2,700,000 2,100,000 600,000

Fixed expenses…………………………… 2,200,000 1,400,000 800,000

Net operating income (loss)……………… $ 500,000 $ 700,000 $ (200,000)

A study indicates that $340,000 of the fixed expenses being charged to Linens are sunk costs that
will continue even if the Linens Department is dropped.
Required:
i) Should Linens be dropped to enhance overall profit of the company? Explain.
ii) In addition, the elimination of the Linens Department will result in a 10% decrease in the sales
of the Hardware Department. If the Linens Department is dropped, what will be the total effect
on the net operating income of the company as a whole?
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C) Special Order
Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as
gifts to members of a wedding party. The normal selling price of a gold bracelet is $189.95 and
its unit product cost is $149.00 as shown below:
Direct materials ……………… $ 84.00
Direct labor ………………………45.00
Manufacturing overhead …..…….20.00
Unit product cost ………………$ 149.00
Most of the manufacturing overhead is fixed in nature however; $4.00 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 $2.00 per bracelet and would also require acquisition of a
special tool costing $250 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.
Required: What effect would accepting this order have on the company’s net operating income if
a special price of $154.95 per bracelet is offered for this order? Should the special order be a
accepted at this price?
D) Sell or Further Process
Dorsey Company manufactures three products from a common input in a joint processing
operation. Joint processing costs up to the split-off point total $350,000 per quarter. The
company allocates these costs to the joint products on the basis of their relative split- off point.
Unit selling prices and total output at the spilt-off point are as follows:

Product Selling Price Quarterly


Output
A …………………… $ 16 per pound 15,000 pounds
B …………………… $ 8 per pound 20,000 pounds
C …………………… $ 25 per gallon 4,000 gallons
Each product can be processed further after the spilt-off point. Additional processing requires no
special facilities. The additional processing cost (per quarter) and unit selling prices after further
processing are given below:
Additional
Product Processing Costs Selling
Price
A ……………………… $ 63,000 $ 20 per pound
B ……………………… $ 80,000 $ 13 per pound
C ……………………… $ 36,000 $ 32 per gallon
Required: Which product or products should be should be sold at the split-off point and which
product or products should be processed further? Show computations.
Practice: Further Processing Decision
Handy Leather Inc. produces several products from processing 1 ton of raw leather. Material and
processing cost total is Taka 90,000 per ton, one third of which is allocated to product ‘A’. 200
units of product ‘A’ are produced from each ton of leather. The units can be sold at the spilt off
point for 250 each, or processed further at an addition variable cost of 50 per unit. The further
processing also requires additional fixed cost of Taka 7,500. The final product can be sold at
Taka 350 per unit.
Required: Should product ‘A’ be processed further or sold at split of point? Show your
calculations.
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