Question

PROBLEM 7–18 Relevant Cost Analysis in a Variety of Situations [LO 7–2, LO 7–3, LO 7–4]Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below:Direct materials................................$10.00Direct labor ...................................4.50Variable manufacturing overhead................2.30Fixed manufacturing overhead ..................5.00($300,000 total)Variable selling expenses.......................1.20Fixed selling expenses ......................... 3.50($210,000 total)Total cost per unit..............................$26.50A number of questions relating to the production and sale of Daks follow. Each question is independent.Required: 1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increased fixed selling expenses be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. Compute the per unit break-even price on this order. 3. The company has 1,000 Daks on hand that have some irregularities and are therefore consid-ered to be “seconds.” Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for set-ting a minimum selling price? Explain. 4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company 318Chapter 7nor78542_ch07_280-332.indd 318 11/19/15 11:02 AMhas enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? 5. An outside manufacturer has offered to produce Daks and ship them directly to Andretti’s cus-tomers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.PROBLEM 7–19 Dropping or Retaining a Segment [LO 7–2]Jackson County Senior Services is a nonprofit organization devoted to providing essential ser-vices to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:TotalHomeNursingMeals OnWheelsHouse-keepingRevenues..........................$900,000$260,000$400,000$240,000Variable expenses .................. 490,000 120,000 210,000 60,000Contribution margin................. 410,000 140,000 190,000 80,000Fixed expenses: Depreciation .....................68,0008,00040,00020,000 Liability insurance.................42,00020,0007,00015,000 Program administrators’ salaries . . . .115,00040,00038,00037,000 General administrative overhead*... 180,000 52,000 80,000 48,000Total fixed expenses ................ 405,000 120,000 165,000 120,000Net operating income (loss) ..........$ 5,000$ 20,000$ 25,000$ (40,000)*Allocated on the basis of program revenues.The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year’s results were very similar to the results for previous years and are represen-tative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program.The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.Required: 1. Should the Housekeeping program be discontinued? Explain. Show computations to support your answer. 2. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services.PROBLEM 7–20 Sell or Process Further [LO 7–7](Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as they are initially cut or to process them further into filet mignon and the New York cut. has enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? 5. An outside manufacturer has offered to produce Daks and ship them directly to Andretti’s cus-tomers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.

Answer 1

	1
	A	Increase in sales units	75000	(60000*1.25)
	B=A*32	Increase in Sales Revenue		$2,400,000
	C=A*10	Increase in direct material cost	$750,000
	D=A*4.5	Increase in direct labor cost	$337,500
	E=A*2.3	Increase in variable mfg.overhead cost	$172,500
	F	Increase in Fixed mfg.overhead cost	$0
	G=A*1.2	Increase in variable Selling expense	$90,000
	H	Increase in fixed Selling expense	$80,000
	I=C+D+E+F+G+H	Total increase in costs		$1,430,000
	B-I	Net Increase in profit		$970,000
		Yes, Increased fixed selling expense will be justified
		It willincrease profit by $970,000
	2	Per Unit Break Even Price
	A	Increase in sales units	20000
	B=A*10	Increase in direct material cost	$200,000
	C=A*4.5	Increase in direct labor cost	$90,000
	D=A*2.3	Increase in variable mfg.overhead cost	$46,000
	E	Increase in Fixed mfg.overhead cost	$0
	F=A*1.7	Import duty	$34,000
	G	Permits and License costs	$9,000
	H=A*3.2	Shipping Cost	$64,000
	I=B+C+D+E+F+G+H	Total increase in costs		$443,000
	J	BREAK EVEN SALES REVENUE	$443,000
	K=J/A	BREAK EVEN PRICE	$22.15
	3	RELEVANT UNIT COSTS
	A	Direct Materials	$10
	B	Direct Labor	$4.50
	C	Variable Manufacturing Overhead	$2.30
	D	Variable Selling expense	$1.20
	E=A+B+C=D	Total Relevant Cost	$18
		Relevant costs are marginalcosts for producing those 1000 units
		Fixed costs are anyway incurred whether we produce those 1000 units or not
		Hence ,Fixed costs are not relevant
	4
		Costs if Plant is closed:
		Fixed manufacturing expenses	$30,000	(300000*0.6*(2/12)
		Fixed Selling expenses	$28,000	(210000*0.8*(2/12)
		Total Loss during two month closure	$58,000
		If Plant is not Closed:
	A	sales in units	3000	(60000*0.3*(2/12)
	B=A*32	Sales Revenue		$96,000
	C=A*10	Direct material cost	$30,000
	D=A*4.5	Direct labor cost	$13,500
	E=A*2.3	variable mfg.overhead cost	$6,900
	F	Fixed mfg.overhead cost	$50,000	(300000*92/12)
	G=A*1.2	Variable Selling expense	$3,600
	H	Fixed Selling expense	$35,000	(210000*(2/12)
	I=C+D+E+F+G+H	Total costs		$139,000
	B-I	Net LOSS during 2 months		-$43,000
		Net Loss will be lower if plant is not closed
		If Plant is closed, increase in loss=	$15,000	(58000-43000)