Question

1.Sheffield Corp. can produce 100 units of a component part with the following costs: Direct Materials $20000 Direct Labor 4500 Variable Overhead 14000 Fixed Overhead 11000 If Sheffield Corp. can purchase the component part externally for $45000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

2.Sheffield Corp. reported the following information for the current year: Sales (56000 units) $1120000, direct materials and direct labor $560000, other variable costs $56000, and fixed costs $360000. What is Sheffield’s contribution margin ratio?

3.Sunland Company has the following costs when producing 100000 units: Variable costs $600000 Fixed costs 900000 An outside supplier has offered to make the item at $4.50 a unit. If the decision is made to purchase the item outside, current production facilities could be leased to another company for $166000. The net increase (decrease) in the net income of accepting the supplier’s offer is

4.A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $14 and takes two machine hours to make and Product B has a unit contribution margin of $39.0 and takes three machine hours to make. If there are 5000 machine hours available to manufacture a product, income will be $30000 more if Product A is made. $30000 less if Product B is made. $30000 less if Product A is made. the same if either product is made

5.An increase in the level of activity will have the following effects on unit costs for variable and fixed costs: Unit Variable Cost Unit Fixed Cost Remains constant Remains constant Increases Decreases Decreases Remains constant Remains constant Decreases

6.For Bramble Corp., sales is $2500000, fixed expenses are $900000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $400000? 7.Which of the following is not a mixed cost? Electricity Depreciation Telephone Expense Car rental fee

7.Marigold Corp. uses 25000 units of Part A in producing its products. A supplier offers to make Part A for $5. Max Company has relevant costs of $7 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of not buying Part A from the supplier is $125000. $0. $175000. $50000.

8.In a retain or replace equipment decision, trade-in allowance available on old equipment increases the cost of the new equipment. reduces the cost of the old equipment. is relevant because it will not be realized if the old equipment is retained. is not relevant to the decision.

Answer 1

1. (a) Making Cost

Direct Material 20000

Direct Labour 4500

Variable o/h 14000

Fixed o/h - Avoidable 4000*

Total Cost 42500

*7000 out of 11000 is unavoudable fixed cost which is to be incurred either you have to purchased or Buy.

(b) BUY

Buying Cost (Given) 45000

Making cost is less than buying, Company should make make the product

2. Income Statement

Sales 1120000

Direct Material & Labour 560000

Other Variable Cost 56000

Contribution 504000

Contribution Margin Ratio = Contribution/ Sales*100

= 504000/1120000*100

= 45%

3.(a) Production Cost P.u. = 600000/ 100000 = $6 P.u.

(b) Buy Cost = $4.50

Less: Benefit due to Buy = $1.66 [166000/100000]

Net Buying Cost = $2.84

We should purchase the goods from outside market

Net Income increase if purchase from market = (6 - 2.84)*100000 = $316000

Note: 900000 is unavoudable fixed cost which is to be incurred either you have to purchased or Buy.

4. Product A

Contribution per machine hours = Contribution per product/ Machine hrs required in 1 unit

= $14 / 2 = $7

Product B

Contribution per machine hours = Contribution per product/ Machine hrs required in 1 unit

= $39 / 3 = $13

we have limited machine hours, Product B is given higher Contribution per machine hours in this case we have to utilise all the machine hours in Product B

Profit in case of Product A: 5000 hours * $7 (Contribution per machine hours) = $35000

Profit in case of Product B: 5000 hours * $13 (Contribution per machine hours) = $65000

$ 30000 less profit if product A is made.