Question

Bacon Company makes four products in a single facility. These products have the following unit product costs: Products A B C D Direct materials $ 14.90 $ 10.80 $ 11.60 $ 11.20 Direct labor 20.00 28.00 34.20 41.00 Variable manufacturing overhead 4.90 3.30 3.20 3.80 Fixed manufacturing overhead 27.10 35.40 27.20 37.80 Unit product cost $ 66.90 $ 77.50 $ 76.20 $ 93.80 Additional data concerning these products are listed below. Products A B C D Grinding minutes per unit 3.80 5.30 4.30 3.40 Selling price per unit $ 76.70 $ 94.10 $ 88.00 $ 104.80 Variable selling cost per unit $ 2.80 $ 1.80 $ 3.90 $ 2.20 Monthly demand in units 4,240 4,240 3,240 2,240 The grinding machines are the constraint in the production facility. A total of 54,800 minutes is available per month on these machines. Direct labor is a variable cost in this company. Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)

2. Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant manager is considering making the headlights now being purchased from an outside supplier for $14.80 each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.95 of direct materials, $3.95 of direct labor, and $6.95 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Parton Company to manufacture the headlights should result in a net gain (loss) for each headlight of: (CMA adapted)

3. Tara Inc. is considering using stocks of an old raw material in a special project. The special project would require all 440 kilograms of the raw material that are in stock and that originally cost the company $3,080 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $145 for all 440 kilograms. What is the relevant cost of the 440 kilograms of the raw material when deciding whether to proceed with the special project? (CIMA adapted)

Answer 1

1)
Products	A	B	C	D
Selling price per unit	$            77	$            94	$            88	$          105
Direct materials	$            15	$            11	$            12	$            11
Direct labor	$            20	$            28	$            34	$            41
Variable manufacturing overhead	$              5	$              3	$              3	$              4
Total Variable Cost Per Unit	$            40	$            42	$            49	$            56
Contribution Margin Per Unit	$            37	$            52	$            39	$            49
Divide : Grinding minutes per unit	3.8	5.3	4.9	3.4
Contribution Margin Per Minute	$         9.71	$         9.81	$         7.96	$       14.35
Rank in Terms of Profitability	3	2	4	1
The company should be willing to pay up to the contribution margin per minute for the marginal job, which is	$         7.96
2. Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant manager is considering making the headlights now being purchased from an outside supplier for $14.80 each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.95 of direct materials, $3.95 of direct labor, and $6.95 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Parton Company to manufacture the headlights should result in a net gain (loss) for each headlight of: (CMA adapted)
	Make	Buy
Purchase cost		14.8
Direct Materials	4.95
Direct Labour	3.95
Variable manufacturing overhead = 60% x 6.95	4.17
Total cost	13.07	14.8
Advantang of making over buying (14.8 - 13.07)	1.73
The company should make the part rather than buy it from the outside supplier since it costs 1.73 less
3. Tara Inc. is considering using stocks of an old raw material in a special project. The special project would require all 440 kilograms of the raw material that are in stock and that originally cost the company $3,080 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $145 for all 440 kilograms. What is the relevant cost of the 440 kilograms of the raw material when deciding whether to proceed with the special project? (CIMA adapted)
Proceeds of sale at the discounted price: 440 kgs × $6.50 per kg	$  2,860.00
Less: delivery cost	$   (145.00)
Relevant cost	$  2,715.00