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Integrative Exercise
Relevant Costing, Cost-Based Pricing, Cost Behavior, and Net Present Value Analysis for NoFat

Special Sales Offer Relevant Analysis

NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFat's controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)—a toxic waste cleanup company—offered to buy 10,000 pounds of olestra from NoFat during December for a price of $2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that "This is another way to use our expensive olestra plant!"

The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows:

In addition, Allyson met with several of NoFat's key production managers and discovered the following information:

The special order could be produced without incurring any additional marketing or customer service costs.

NoFat owns the aging plant facility that it uses to manufacture olestra.

NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year.

NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra.

PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the $1,000 cost of the inspection team.

Required:

1. Conduct a relevant analysis of the special sales offer by calculating the following:

a. The relevant revenues associated with the special sales offer
$

b. The relevant costs associated with the special sales offer
$

c. The relevant profit associated with the special sales offer (Enter loss, if any, as negative amount.)
$

2. Based solely on financial factors, explain why NoFat should accept or reject PU's special sales offer.

The relevant cost is than the relevant revenue offered by PU, making the relevant (or incremental) profit —so,

3. Describe at least one qualitative factor that NoFat should consider, in addition to the financial factors, in making its final decision regarding the acceptance or rejection of the special sales offer.

A potentially important qualitative factor is , namely the public’s perception of olestra’s safety. In particular, some (possibly large) percentage of NoFat’s customers might be concerned that olestra is not a safe ingredient for human ingestion, given its apparent effectiveness in cleaning up toxic waste sites. As a result, the acceptance of PU’s special sales offer might significantly decrease NoFat’s regular sales of olestra.

Cost-Based Pricing

Assume for this question that NoFat rejected PU’s special sales offer because the $2.20 price suggested by PU was too low. In response to the rejection, PU asked NoFat to determine the price at which it would be willing to accept the special sales offer. For its regular sales, NoFat sets prices by marking up variable costs by 10%.

4. If Allyson decides to use NoFat’s 10% markup pricing method to set the price for PU’s special sales offer,

a. Calculate the price that NoFat would charge PU for each pound of olestra. Round your answer to the nearest cent.
$ per unit

b. Calculate the relevant profit that NoFat would earn if it set the special sales price by using its mark-up pricing method. Enter loss, if any, as negative amount. (Hint: Use the estimate of relevant costs that you calculated in response to Requirement 1b.)
$

c. Explain why NoFat should accept or reject the special sales offer if it uses its mark-up pricing method to set the special sales price.

NoFat should the special sales offer if PU will agree to pay the price of $ per unit that results from NoFat’s cost-plus pricing formula.

Incorporating a Long-Term Horizon into the Decision Analysis

Assume that Allyson's relevant analysis reveals that NoFat would earn a positive relevant profit of $10,000 from the special sale (i.e., the special sales alternative). However, after conducting this traditional, short-term relevant analysis, Allyson wonders whether it might be more profitable over the long-term to downsize the company by reducing its manufacturing capacity (i.e., its plant machinery and plant facility). She is aware that downsizing requires a multiyear time horizon because companies usually cannot increase or decrease fixed plant assets every year. Therefore, Allyson has decided to use a 5-year time horizon in her long-term decision analysis. She has identified the following information regarding capacity downsizing (i.e., the downsizing alternative):

The plant facility consists of several buildings. If it chooses to downsize its capacity, NoFat can immediately sell one of the buildings to an adjacent business for $30,000.

If it chooses to downsize its capacity, NoFat's annual lease cost for plant machinery will decrease to $9,000.

Therefore, Allyson must choose between these two alternatives: Accept the special sales offer each year and earn a $10,000 relevant profit for each of the next 5 years or reject the special sales offer and downsize as described above.

5. Assume that NoFat pays for all costs with cash. Also, assume a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Use an NPV approach to discount future cash flows to present value. To determine NPV, use the Exhibit to locate the present value of $1 to be multiplied by the cash inflow in Year 1.

a. Calculate the NPV of accepting the special sale with the assumed positive relevant profit of $10,000 per year (i.e., the special sales alternative). Round your answer to the nearest dollar.
$

b. Calculate the NPV of downsizing capacity as previously described (i.e., the downsizing alternative). Round your answer to the nearest dollar.
$

c. Based on the NPV of Calculations a and b, identify and explain which of these two alternatives is best for NoFat to pursue in the long term.

Based on the NPV of Requirements 5a and 5b, the alternative (i.e., Requirement 5b) appears to be the best long-term alternative for NoFat to pursue because it is estimated to provide a .

For a perfectly competitive firm, total cost TC=300Q-20Q²+0.5Q³

a. Determine the firm's marginal cost(MC) and Average Total Cost(ATC):

b. Determine the firm's long-run profit maximizing output and price:

c.If Price=146, what quantity will the perfect competitor produce at this price?

d. If Price=146, what is the perfect competitor's economic profit?

#7

Factory Overhead Cost Variance Report

Tannin Products Inc. prepared the following factory overhead cost budget for the Trim Department for July of the current year, during which it expected to use 16,000 hours for production:

Tannin has available 20,000 hours of monthly productive capacity in the Trim Department under normal business conditions. During July, the Trim Department actually used 15,000 hours for production. The actual fixed costs were as budgeted. The actual variable overhead for July was as follows:

Construct a factory overhead cost variance report for the Trim Department for July. Enter all amounts as positive numbers. If an amount box does not require an entry, leave it blank. Round your interim computations to the nearest cent, if required.

How can the long-run average cost (LRAC) curve be derived from the short-run average total cost (SRATC) curve?

Define cost-push inflation. Using the AS/AD model, explain how cost-push inflation affects the level of aggregate output and the price level in the economy. Suppose that the government uses expansionary fiscal policy to counter the effects of the cost-push inflation. Indicate using the AS-AD model the impact of this policy on the price level and level of aggregate output.

Jake’s Roof Repair has provided the following data concerning its costs: Fixed Cost per Month Cost per Repair-Hour Wages and salaries $ 21,400 $ 15.00 Parts and supplies $ 7.80 Equipment depreciation $ 2,780 $ 0.55 Truck operating expenses $ 5,720 $ 1.70 Rent $ 4,650 Administrative expenses $ 3,860 $ 0.40 For example, wages and salaries should be $21,400 plus $15.00 per repair-hour. The company expected to work 3,000 repair-hours in May, but actually worked 2,900 repair-hours. The company expects its sales to be $48.00 per repair-hour.

Required: Compute the company’s activity variances for May. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

A manufacturer uses process costing.  It has one direct material cost pool and one conversion cost pool.  Information for the month is as follows:

                                                                    Beginning of Month       End of Month

Work in process:                                           20,000 units                  8,000 units

Conversion (% of completion in WIP):             35%                                65%

Costs of Materials in WIP:                            $  81,000                             ?

Costs of Conversion in WIP:                         $115,000                             ?

During the month:

Units started during the month:           69,000 units

Costs incurred for Materials:           $300,000   

Costs incurred for Conversion:        $270,000

Total Spoiled Units detected:                  4,398 units

Other Income Statement Information:

Sales:                                                  $920,000

Admin expenses                                $200,000

92% of direct materials is added at the beginning of the process, and the remaining 8% of direct materials (for packaging) is added immediately after inspection.  

Inspection occurs when units are 75% converted, and inspection determines if the units are “acceptable” or “spoiled”.  Normal Spoilage is based on 6% of units started.

There were no finished goods or raw material inventories at any point of the process.

Required:

Part A: Prepare an Income Statement for the month, assuming that inventory is based on modified FIFO,

Part B:  Prepare an Income Statement for the month, assuming that inventory is based on Weighted Average.

Jake’s Roof Repair has provided the following data concerning its costs:

For example, wages and salaries should be $20,700 plus $16.00 per repair-hour. The company expected to work 2,700 repair-hours in May, but actually worked 2,600 repair-hours. The company expects its sales to be $45.00 per repair-hour.

Required:

Compute the company’s activity variances for May. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

PROBLEM 2–24 Schedule of Cost of Goods Manufactured; Income Statement; Cost Behaviour [LO1, LO2, LO3, LO4, LO5]
Carlton Manufacturing Company provided the following details about operations in February

Purchases of raw materials. . . . . . . ........................................... 130 000

Maintenance, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 37,000

Direct labour. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 32,500

Depreciation, factory equipment . ........................................... 55,000

Indirect materials, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3,000

Selling and administrative salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,500

Utilities, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26,000

Sales commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17,500

Insurance, factory equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Depreciation, sales equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Advertising expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107

Rent, factory building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .???

The company also provided details regarding the balances in the inventory accounts at the beginning and end of the month as follows:

Raw materials used in production cost $135,000, total overhead costs for the year were $170,000, the goods available for sale totalled $360,000, and the cost of goods sold totalled $317,500.

Required:

Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the company’s income statement for the year.

Assume that the dollar amounts given above are for the equivalent of 15,000 units pro- duced during the year. Compute the average cost per unit for direct materials used, and compute the average cost per unit for rent on the factory building.

Assume that in the following year the company expects to produce 20,000 units. What av- erage cost per unit and total cost would you expect to be incurred for direct materials, and for rent on the factory building? Direct materials are a variable cost and rent is a fixed cost.

As the manager in charge of production costs, explain to the president the reason for any difference in the average costs per unit between (2) and (3) above.

20) For the given cost function C(x)=22500+800x+x2,

First, find the average cost function. Use it to find:

a) The production level that will minimize the average cost?

21) Given the function f(t)=(t−3)(t+7)(t−6).

its f-intercept is  

its t-intercepts are

b) The minimal average cost?