Question

Fahringer Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

	BJ	XS	QR
Selling price per unit	$104.90	$528.08	$558.04
Variable cost per unit	$ 82.10	$429.75	$420.07
Centiliters of compound W	1.50	8.50	8.70

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. (Round your intermediate calculations to 2 decimal places.)

QR,BJ,XS

BJ,QR,XS

QR,XS,BJ

XS,BJ,QR

The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below:

Sales	$924,000
Variable expenses	$403,000
Fixed manufacturing expenses	$338,000
Fixed selling and administrative expenses	$245,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $205,000 of the fixed manufacturing expenses and $116,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued.

According to the company's accounting system, what is the net operating income earned by product V41B? Include all costs in this calculation—whether relevant or not.

$62,000

$521,000

$(521,000)

$(62,000)

Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 12,800 of the components each year. The unit product cost of the component according to the company's absorption cost accounting system is given as follows:

Direct materials	$ 8.60
Direct labor	5.60
Variable manufacturing overhead	1.40
Fixed manufacturing overhead	3.40
Unit product cost	$19.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 25% is avoidable if the component were bought from the outside supplier, the remainder is not avoidable. In addition, making the component uses 3 minutes on the machine that is the company's current constraint. If the component were bought, time would be freed up for use on another product that requires 6 minutes on this machine and that has a contribution margin of $5.00 per unit.

When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? (Round your intermediate calculations and final answer to 2 decimal places.)

$21.10

$16.45

$18.95

$21.50

Answer 1

Solution 1:

Ranking of the products in order of their Current profitability
	BJ	XS	QR
Selling Price Per unit	$104.90	$528.08	$558.04
Variable Cost per unit	$82.10	$429.75	$420.07
Contribution Margin per unit (a)	$22.80	$98.33	$137.97
Centiliters of Compound W per unit (b)	1.5	8.5	8.7
Contribution margin per unit of Compound W, i.e. Constrained Resource (a) / (b)	$15.20	$11.57	$15.86
Ranking	2	3	1

Hence Correct answer is QR,BJ,XS

Solution 2:

Net operating income earned by product V41B = Sales - Variable expenses - Fixed manufacturing expenses - fixed selling & administrative expenses

= $924,000 - $403000 - $338000 - $245000 = -$62000

Hence $(62,000) is the correct answer.

Solution 3:

Computation of Relevant Cost of making the component To be compared with buying price
Particulars	Amounts
Direct Material	$8.60
Direct labor	$5.60
Variable Manufacturing Overhead	$1.40
Avoidable Fixed Manufacturing Overhead ($3.4*25%)	$0.85
Total Relevant manufacturing Costs	$16.45
Add: Contribution margin Lost [($5/6)*3]	$2.50
Total Relevant Cost of Making the component	$18.95

Hence, $18.95 is the correct answer.