Case Study Gamma Company manufactures soft drinks. Its manufacturing plant has the capacity to produce 10,000 cases each month; current production and sales are 7,500 cases per month. The company normally charges $150 per case. Cost information for the current activity level is as follows:

Variable costs that vary with units produced

Direct materials ---------------------------------------------$ 262,500

Direct manufacturing labour -------------------------------- 300,000

Variable costs (for setups, materials handling, quality control, and so on) that vary with number of batches, 150 batches x $500 per batch ---------------------------------------75,000 Fixed manufacturing costs ------------------------------------275,000

Fixed marketing costs -----------------------------------------175,000

Total costs ---------------------------------------------------$ 1,087,500

Gamma Company has just received a special one-time-only order for 2,500 cases at $100 per case. Gamma Company usually makes its soft drinks for its existing customers in batch sizes of 50 case (150 batches x 50 cases per batch = 7,500 cases). The special order requires them to make the cases in 25 batches of 100 each. Required:

(a) Should Gamma Company accept this special order? Why? Explain briefly.

(b) Suppose plant capacity was only 9,000 cases instead of 10,000 cases each month. The special order must either be taken in full or rejected totally. Should Gamma Company accept the special order?

(c) As in requirement (a) assume that monthly capacity is 10,000 cases. Gamma Company is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $10 in the month in which the special order is being filled. They would argue that Gamma Company capacity costs are now being spread over more units, and that existing customers should get the benefit of these lower costs. Should Gamma Company accept the special order under these conditions? Show all calculations

Gamma Company manufactures soft drinks. Its manufacturing plant has the capacity to produce 10,000 cases each month; current production and sales are 7,500 cases per month. The company normally charges $150 per case. Cost information for the current activity level is as follows:

Variable costs that vary with units produced

Direct materials ---------------------------------------------$ 262,500

Direct manufacturing labour -------------------------------- 300,000

Variable costs (for setups, materials handling, quality control, and so on) that vary with number of batches, 150 batches x $500 per batch ---------------------------------------75,000

Fixed manufacturing costs ------------------------------------275,000

Fixed marketing costs -----------------------------------------175,000 T

otal costs ---------------------------------------------------$ 1,087,500

Gamma Company has just received a special one-time-only order for 2,500 cases at $100 per case. Gamma Company usually makes its soft drinks for its existing customers in batch sizes of 50 case (150 batches x 50 cases per batch = 7,500 cases). The special order requires them to make the cases in 25 batches of 100 each.

Required:

(a) Should Gamma Company accept this special order? Why? Explain briefly.

(b) Suppose plant capacity was only 9,000 cases instead of 10,000 cases each month. The special order must either be taken in full or rejected totally. Should Gamma Company accept the special order?

(c) As in requirement (a) assume that monthly capacity is 10,000 cases. Gamma Company is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $10 in the month in which the special order is being filled. They would argue that Gamma Company capacity costs are now being spread over more units, and that existing customers should get the benefit of these lower costs. Should Gamma Company accept the special order under these conditions? Show all calculations.

Case Study

Gamma Company manufactures soft drinks. Its manufacturing plant has the capacity to produce 10,000 cases each month; current production and sales are 7,500 cases per month.

The company normally charges $150 per case. Cost information for the current activity level is as follows:

Variable costs that vary with units produced

Direct materials ---------------------------------------------$ 262,500

Direct manufacturing labour -------------------------------- 300,000

Variable costs (for setups, materials handling, quality control, and so on) that vary with number of batches, 150

batches x $500 per batch ---------------------------------------75,000

Fixed manufacturing costs ------------------------------------275,000

Fixed marketing costs -----------------------------------------175,000

Total costs ---------------------------------------------------$ 1,087,500

Gamma Company has just received a special one-time-only order for 2,500 cases at $100 per case. Gamma Company usually makes its soft drinks for its existing customers in batch sizes of 50 case (150 batches x 50 cases per batch = 7,500 cases). The special order requires them to make the cases in 25 batches of 100 each.

Required:

(a) Should Gamma Company accept this special order? Why? Explain briefly. (For this question, I'm assuming that comparative table is required).

(b) Suppose plant capacity was only 9,000 cases instead of 10,000 cases each month. The special order must either be taken in full or rejected totally. Should Gamma Company accept the special order?

(c) As in requirement (a) assume that monthly capacity is 10,000 cases. Gamma Company is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $10 in the month in which the special order is being filled. They would argue that Gamma Company capacity costs are now being spread over more units, and that existing customers should get the benefit of these lower costs. Should Gamma Company accept the special order under these conditions? Show all calculations.

7. A newer theory of the corporation, based upon finance, is that the organization behaves in a way that is designed to maximize

1. number of jobs in their communities
2. profit (earnings)
3. total operating revenue from sales
4. market share
5. shareholder wealth maximization

8. Recent surveys of hundreds of CEOs have noted that most said the primary goal of their firm was to maximize

1. profit (earnings)
2. bonuses to senior managers
3. the well-being of a broad list of stakeholders including customers and the community
4. the financial value of the company (number of shares x share price)

9. An example of the “principal agent” problem is

1. hiring and listening to an expert who knows less than some current employees of the firm
2. outside experts are likely to disagree from one to another over any major decision
3. outside experts may be more interested in their own income than the company they are hired to serve
4. a contracting officer who tells hired experts in advance what conclusion their study should reach

10. An implicit cost often overlooked in Total Quality Management is

1. while mangers may do so, not all employees view the well-being of the organization as the same as their own well-being as highly related
2. recommending employees complete the job satisfactorily by putting in more of their own time is free to the firm but has an opportunity cost to the employees
3. many customers are swayed by lower price rather than higher quality
4. the “wow” factor and brand image imply that getting the product to market quickly is more important than solving minor quality problems.
5. Senior managers are likely to expect bonuses if the total quality management initiative works

11. The out of pocket costs of a firm are ________.

1. Sunk costs
2. Marginal costs
3. Explicit costs
4. Social costs

12. Under perfect competition, price is determined by the interaction of total demand and ________.

1. Total supply
2. Total cost
3. Total utility
4. Total production

Chapter 2, # 8

McGuire Corporation began operations in 2021. The company purchases computer equipment from manufacturers and then sells to retail stores. During 2021, the bookkeeper used a check register to record all cash receipts and cash disbursements. No other journals were used. The following is a recap of the cash receipts and disbursements made during the year.

You are called in to prepare financial statements at December 31, 2021. The following additional information was provided to you:

1. Customers owed the company $16,000 at year-end.
2. At year-end, $27,300 was still due to suppliers of merchandise purchased on credit.
3. At year-end, merchandise inventory costing $42,800 still remained on hand.
4. Salaries owed to employees at year-end amounted to $4,200.
5. On December 1, $2,100 in rent was paid to the owner of the building used by McGuire. This represented rent for the months of December through February.
6. The office equipment, which has a 10-year life and no salvage value, was purchased on January 1, 2021. Straight-line depreciation is used.

Required:

Prepare an income statement for 2021.

Prepare the balance sheet as of December 31, 2021. (Amounts to be deducted should be indicated by a minus sign.)

1. Galarus company had the following trial balance as of December 31, 2019

Galarus Company

Trial Balance

December 31, 2019

Additional information:

1. Supplies used during the month, $450
2. Prepaid insurance expired during the month, $300
3. Depreciation on equipment for the month, $550
4. Unearned service revenue earned during the month, $2,200
5. Accrued salary expense at the end of the month, $650

Based on the trial balance and the additional data, prepare financial statements for the year ended December 31, 2019

Kang Company was organized on April 1, 2020. The company prepares quarterly financial statements. The adjusted trial balance amounts at June 30 are shown below (amounts in millions).

1. Prepare Income Statement.
2. Prepare Retained Earnings Statement.
3. Prepare Statement of Financial Position.

Westerville Company reported the following results from last year’s operations:

At the beginning of this year, the company has a $175,000 investment opportunity with the following cost and revenue characteristics:

The company’s minimum required rate of return is 15%.

1-1.  What is last year’s margin?

1-2. What is last year’s turnover?

2. What is last year’s return on investment (ROI)?

3. What is the margin related to this year’s investment opportunity?

1. George sells pepperoni pizzas at $25 per pizza from a stall on the beach.   George’s pays $30 per hour to rent his stall and pays his worker $10 per hour to make and sell the pizzas. The ingredients cost $15 per pizza. These are George’s only costs.

NOTE: The hourly cost function (and table) are costs per hour. Note, however, that the total costs in any given hour depend on the number of pizzas sold that hour. The function and table should therefore only be a function of one variable, Q, the number of pizzas. But it should, of course, take into account any other hourly fixed costs.

1. (3 points) What is George’s (hourly) total cost function?

2. Fill in the following information in the table below:
   1. (3 points) Total (hourly) costs
   2. (3 points) Marginal costs
   3. (3 points) Total (hourly) revenue
   4. (3 points) Marginal revenue