Chapter 3 Exercises

Step-by-Step Exercises

First, make a column for each decision alternative.

Question 1

Vreeland Corporation is trying to decide whether to eliminate a segment of their business that has shown a loss for the last seven quarters.

Make a column header for each decision alternative.

Question 2

Kimber Company is trying to decide whether to accept an order from Kline Corporation for a special batch of their products with Kline Corporation’s logo printed on each.

Make a column header for each decision alternative.

Question 3

Moreland, Inc. currently outsources the production of most of the parts they assemble into tractors. However, they were recently able to hire a former employee of the company that manufactures the steering mechanism, and they are wondering if they can use her expertise to begin manufacturing this part themselves.

Make a column header for each decision alternative.

Next, place the relevant costs and benefits of each alternative in the columns.

Question 4

Grenda Company has received a special order for 300 units from Jordan Company, which requires that their logo be placed on each unit at an extra cost of $20 per unit. Apart from that modification, the units would be identical to Grenda’s regular units, which they manufacture at a cost of $75 ($40 in materials, $20 in labor, $5 in other variable costs, and $10 in fixed costs) and sell to customers for $100. Grenda currently operates at full capacity, so if they were to fill the special order, they would have to give up regular sales to do so. Jordan has offered $115 per unit for the order. The decision alternatives are to accept or reject the order.

Place the relevant costs and benefits of each alternative in the columns.

Question 5

Robotechnology Corporation currently manufactures all parts of their product. The firm is trying to decide whether to purchase circuitry from an outside manufacturer instead of making the circuitry. Current monthly costs to manufacture the circuitry are as follows:

The outside supplier would charge $75,000 for the circuitry. If Robotechnology did not manufacture the circuitry, they could use the current manufacturing space for storage that currently costs the company $10,000 offsite. Decision alternatives are to make or buy the circuitry.

Place the relevant costs and benefits of each alternative in the columns.

Question 6

Pearly Whites sells toothbrushes, toothpaste, and floss. The floss line has shown a loss each quarter for the last two years, and Pearly Whites is trying to decide whether to drop the product. If they do so, sales of toothbrushes and toothpaste should not be affected. The fixed costs include $500,000 of avoidable costs associated with the machinery used to manufacture the floss, which Pearly Whites could sell if the line is discontinued. Decision alternatives are to keep or drop the floss line. The latest quarterly income statement for Pearly Whites shows the following:

	Toothbrushes	Toothpaste	Floss
Revenue	3,264,100	2,795,000	576,000
Variable Costs	1,791,000	957,000	380,000
Fixed Costs	1,100,000	920,000	700,000
Income	373,100	918,000	(504,000)

Place the relevant costs and benefits of each alternative in the columns.

Finally, find the net benefit of the decision and determine which alternative results in higher profit.

Question 7

Noble Company identified the following relevant costs and benefits of a decision whether to keep or drop an unprofitable customer:

	Keep	Drop
Revenue	240,000	180,000
Variable cost	(230,000)	(100,000)
Avoidable fixed cost	(15,000)	0

Find the net benefit of the decision and determine which alternative results in higher profit.

Question 8

Norman Corporation identified the following relevant costs and benefits of a decision whether to accept or reject a special order:

	Accept	Reject
Revenue	17,000	15,000
Additional cost	(3,000)	0

Find the net benefit of the decision and determine which alternative results in higher profit.

Question 9

Moore Inc. identified the following relevant costs and benefits of a decision whether to make or buy a part of their product:

	Make	Buy
Purchase cost	0	24,000
Direct labor cost	4,000	0
Direct material cost	14,000	0
Variable MOH cost	3,000	0

Find the net benefit of the decision and determine which alternative results in higher profit.

Complete Problems

Question 10

Rosewood Company, which regularly sells 40,000 units per year, is trying to decide whether to accept a special order for 4,000 units from Teak Corporation. Rosewood usually charges $50 per unit for their product, which includes $10 in direct materials, $15 in direct labor, $12 in variable overhead, and $8 in fixed overhead. The order from Teak Corporation would require modifications that would cost $7 per unit, but Teak is only willing to pay the normal $50 price per unit.

Rosewood has the capacity to produce 45,000 units per year.

Determine whether it would be financially beneficial to accept the order and calculate the net benefit.

Rosewood has the capacity to produce 40,000 units per year.

Determine whether it would be financially beneficial to accept the order and calculate the net benefit.

Question 11

Mentina Corporation has three divisions, one of which has consistently shown a loss for the last five years. Mentina is trying to decide whether to close that division. Income consolidated over the last five years is as follows:

	Division A	Division B	Division C
Revenues	1,400,000	2,600,000	1,750,000
Variable costs	1,000,000	2,300,000	1,300,000
Fixed costs	219,130	461,739	273,913
Incomes	180,870	(161,739)	176,087

Variable costs are specific to each division. Fixed costs include $800,000 in corporate central costs that are allocated to each division in proportion to revenue. Other fixed costs are specific to each division and would not be incurred if the division were shut down.

Determine whether it would be financially beneficial to shut down Division B and calculate the net benefit.

Question 12

Filberton Enterprises manufactures machinery, but one key component must be purchased at a cost of $120 per unit. Filberton is considering manufacturing that component as well. To do so, they would need to free up some factory space by moving some items into off-site storage, which would cost $50,000 per year. It would take direct labor one hour to manufacture each unit, at a cost of $30 per hour. Direct materials would cost $60 per unit. Variable manufacturing overhead is $20 per unit, and fixed manufacturing overhead is allocated to production at a rate of $25 per direct labor hour. Filberton sells 4,000 units per year, and each requires one of the components.

Determine whether it would be financially beneficial to manufacture the components and calculate the net benefit.

Question 13

Caterwaul Company manufactures cat toys. They have just received a special order for 2,000 Fishing Sticks, which ordinarily sell for $4.50 each, from Bargain PetStore (BPS). BPS is willing to pay $5.50 for the sticks if the order can be filled by Monday. However, Caterwaul does not have extra capacity to fill the order in addition to regular sales. Caterwaul could give up regular sales to fill the order, which they estimate will cost $1,300 in lost goodwill, or they could pay overtime (time-and-a-half) to their workers to manufacture the goods over the weekend. The regular costs to manufacture one Fishing Stick are as follows:

Direct materials	1.75
Direct labor	1.20
Variable overhead	0.60
Fixed overhead	0.65
Total	4.20

Determine whether it would be financially beneficial to accept the special order, and if so, which option (giving up regular sales or manufacturing over the weekend) would be best. Calculate the net benefit of the decision.

Question 14

Hot Doggy Dogg has three divisions. Revenues, variable costs, and fixed costs for each division are presented below. Hot Doggy Dogg is thinking of shutting down the Relish division, since it is unprofitable, and has been so for the past five years.

If the Relish division is shut down, all its fixed costs will be avoidable except $80,000 in allocated corporate costs. Also, hot dog and bun sales will decline by 1% if the Relish division is shut down, since some customers will not eat hot dogs if they cannot buy Hot Doggy Dogg’s relish.

Determine whether it would be financially beneficial to shut down the Relish division and calculate the net benefit.

Assignment Problem

Note: Check figures are not provided for assignment problems so your instructor may use them for homework.

Question 15

Millburg Corporation is trying to decide whether to continue making a component of their product or start purchasing it from an outside firm. Current per-unit manufacturing costs of the component are as follows:

Direct materials	3.00
Direct labor	4.50
Variable overhead	0.75
Fixed overhead	2.00
Total	10.25

Millburg can buy the component from another company for $9.50 per unit. Millburg plans to use 3,000 components this year.

Determine whether it would be financially beneficial for Millburg to purchase the component from the outside firm and calculate the net benefit.

Challenge Problem

Question 16

Bethany Corporation recently received an offer for a special order. Bethany usually charges $47 per unit, and has the following per-unit costs:

Direct materials	17
Direct labor	10
Overhead	15
Total	42

Overhead costs include fixed overhead, which is applied to production at 40% of direct labor costs. Variable overhead is applied based on direct materials.

The special order would bring in revenue of $50 per unit for 5,000 units. Bethany has the machine time available to fill the special order, but not the labor time; direct labor would have to work on the order during overtime, for which they are paid time-and-a-half. Bethany would need to purchase a special machine to make modifications to the customer’s specifications; the machine costs $10,000, and Bethany would not be able to use it again.

Determine whether it would be financially beneficial to accept the special order, and if so, which option (giving up regular sales or manufacturing over the weekend) would be best. Calculate the net benefit of the decision.

Pre-Assessment Problem

Use this problem to check whether you are fully prepared for the assessment. Work the problem under assessment conditions – don’t use any notes or other materials!

Question 17

Pursestrings, Inc. manufactures bags, and currently they purchase the clasps for the bags from an outside manufacturer for $2.00 per unit. Pursestrings is considering manufacturing the clasps themselves, using equipment that they already own. If they did so, the direct materials for each clasp would cost $0.50, and labor to make the clasps would work 5 minutes per unit at a rate of $12.00 per hour. Pursestrings also applies variable overhead to production at a rate of $3.00 per hour. Fixed overhead would be allocated to the clasps as well, at a rate of $12.00 per hour. Pursestrings currently manufactures 100,000 bags per year.

Determine whether it would be financially beneficial to manufacture the clasps and calculate the net benefit.