LO 10.1Variety Artisans has a bottleneck in their production that occurs within the engraving department. Arjun Naipul, the COO, is considering hiring an extra worker, whose salary will be $45,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,500 more units per year. Currently, the selling price per unit is $18 and the cost per unit is $5.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.
LO 10.1Mortech makes digital cameras for drones. Their basic digital camera uses $80 in variable costs and requires $1,500 per month in fixed costs. Mortech sells 200 cameras per month. If they process the camera further to enhance its functionality, it will require an additional $45 per unit of variable costs, plus an increase in fixed costs of $1,000 per month. The current price of the camera is $200. The marketing manager is positive that they can sell more and charge a higher price for the improved version. At what price level would the upgraded camera begin to improve operational earnings?
LO 10.2Cinnamon Depot bakes and sells cinnamon rolls for $1.75 each. The cost of producing 500,000 rolls in the prior year was:
At the start of the current year, Cinnamon Depot received a special order for 18,000 rolls to be sold for $1.50 per roll. The company estimates it will incur an additional $1,000 in total fixed costs in order to lease a special machine that forms the rolls in the shape of a heart per the customer’s request. This order will not affect any of its other operations. Should the company accept the special order? (Show your work.)
LO 10.2Myrna White is a mobile housekeeper. The price for a standard house cleaning is $150 and takes 5 hours. Each worker is paid $25/hour, uses $15 of materials and $0.50 per mile to use their own vehicle to travel from job to job. The average job is 5 miles. Arniz Meyroyan has a family reunion at her house and needs her house freshened up. She offers $75 for this emergency tidy-up service. This service includes vacuuming and cleaning floors, dusting, and cleaning the bathrooms. Only $5 of materials would be used.
- Prepare an Excel spread sheet to determine the differential income if the emergency tidy-up service is priced at $75. The tidy-up service will take 2 hours.
- If a $25 surcharge was included to make the price of $100 how would the differential income change?
- If the hourly worker rate increased to $30/hour, how would net income change?
- What other issue would you need to consider?
LO 10.2Blake Cohen Painting Service specializes in small paint jobs. His normal charge is $350/day plus materials. Moesha needs her basement painted. Blake has produced a bid for $1500 to complete the basement painting. Blake completed a cost estimate for his service as shown.
- Moesha mentions that she can’t pay the $1500. She is a widow and you feel an obligation to take care of widows but can’t lose money. How much would you charge and still be able to make a profit?
- Moesha has asked you to paint the rest of her house. Could you continue to give her the same deal?
LO 10.3Regal Executive, Inc., produces executive motor coaches and currently manufactures the tent awnings that accompany them at these costs:
The company received an offer from Saied Tents to produce the awnings for $3,200 per unit and supply 1,000 awnings for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased.
The specialized equipment cannot be used and has no market value. However, the space occupied by the awning production can be used by a different production group that will lease it for $60,000 per year. Should the company make or buy the awnings?
LO 10.3Remarkable Enterprises requires four units of part A for every unit of A1 that it produces. Currently, part A is made by Remarkable, with these per-unit costs in a month when 4,000 units were produced:
Variable manufacturing overhead is applied at $1.60 per unit. The other $0.50 of overhead consists of allocated fixed costs. Remarkable will need 8,000 units of part A for the next year’s production.
Altoona Corporation has offered to supply 8,000 units of part A at a price of $8.00 per unit. If Remarkable accepts the offer, all of the variable costs and $2,000 of the fixed costs will be avoided. Should Remarkable accept the offer from Altoona Corporation?
LO 10.3Colin O’Shea has a carpentry shop that employs 4 carpenters. Colin received an order for 1,000 coffee tables. The coffee tables have a round table top and four decorative legs. An offer for $500 per table was received. Colin found an unfinished round table top that he could buy for $50 each.
- Using this quantitative cost data to make the table top, should Colin buy the table top or make it?
- What qualitative factors would be included in your decision.
B. Can the vendor make it to the same quality standards? Can it be completed on time? Is there idle capacity in the factory that could be used?
LO 10.4ZZOOM, Inc., has decided to discontinue manufacturing its Z Best model. Currently, the company has 4,600 partially completed Z Best models on hand. The government has put a recall on a particular part in the Z Best model, so each base model must now be reworked to accommodate the style of the new part. The company has spent $110 per unit to manufacture these Z Best models to their current state. Reworking each Z Best model will cost $22 for materials and $25 for direct labor. In addition, $9 of variable overhead and $34 of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be allocated per unit. If ZZOOM completes the Z Best models, it can sell them for $180 per unit. On the other hand, another manufacturer is interested in purchasing the partially completed units for $105 each and converting them into Z Plus models. Prepare a differential analysis per unit to determine if ZZOOM should complete the Z Best models or sell them in their current state.
LO 10.4Cable paper company produces many colors of paper. The current popular color is grey. To increase the production of grey paper, a decision must be made to determine what color must be dropped. The following information is available to make the decision.
- What is the total income if all colors were produced?
- If Peach was dropped, what would be the effect on Net Income?
- How much did Peach paper contribute to Fixed Costs?
- Determine the cost and the amount that will remain even if Peach is dropped?
- Which costs and amount will be eliminated if Peach is dropped?
LO 10.5Strawberry Sweet Company makes a variety of jams and jellies. During June, 55,000 gallons of strawberry mash was processed at a joint cost of $40,000. This produced 42,000 gallons of preserve-grade mix and 4,000 gallons of strawberry juice for jelly. The juice could be processed further into energy drinks, and the preserve mix could be processed further into ice cream flavoring. Information on these items is shown:
- Assume that the joint cost is allocated to the products based on the physical quantity of output of each product. How much joint cost should be assigned to each product?
- How much joint cost should be assigned to each product if the relative sales value allocation method is used?
- Which products should be processed further?
LO 10.5Laramie Industries produces two joint products, H and C. Prior to the split-off point, the company incurred costs of $66,000. Product H weighs 44 pounds and product C weighs 66 pounds. Product H sells for $250 per pound and product C sells for $295 per pound.
Based on a physical measure of output, allocate joint costs to products H and C.
LO 10.5Jamboree Outfitters, Inc., produces pocket knives and fillet knives for outdoor sporting. In the process of making the knives, some irregularities occur and no further work is performed on the blades. Jamboree has been selling these irregular blades to scrap dealers for $5.00 per pound. Last year, the company sold 50,000 lbs. of scrap. The company found that Amazon will buy the irregular knives for $12 each provided Jamboree finishes producing the knives into sellable form and also assuming there are enough irregular blades to make 50,000 completed knives. Jamboree’s processes would not need reprogramming, particularly in the shaping and sharpening processes. However, this would require one additional worker, and new packaging would be needed. The total variable cost to produce the irregulars is $4.85. Fixed costs would increase by $175,000 per year for the lease of the packaging equipment and the new worker. Jamboree estimates it could produce and sell 50,000 knives per year. Should Jamboree continue to sell the scrap blades or should Jamboree process the irregulars to sell to Amazon?
LO 10.5Daisy Hernandez sells girls christening dresses through the online store, Etsy. Her customers have asked if she has necklaces that could be included with the dress. Daisy found white glossy ceramic hearts from another Etsy vendor for $20. Daisy has the talent and already has a fully depreciated kiln to make these hearts.
- Using the provided quantitative cost data to make the heart, should Daisy buy from her fellow Etsy vendor or make it herself?
- What qualitative factors would be included in your decision.
LO 10.5Dr. Detail is a mobile car wash. The price for a standard wash is $35 and takes half an hour. Each worker is paid $20/hr, uses $5 of materials and $0.50 per mile to use their own vehicle to travel from job to job. The average job is 5 miles.
Ernest Kuhn’s son got sick in the car, and Ernest Kuhn has asked Dr. Detail to detail his car instead of doing a simple wash and vacuum.
- Determine the differential income if $100 was charged to detail the car. Each car detail will take 2 hours. The materials used by the worker is three times that of a standard car wash.
- If the price is raised to $150, what is the differential income change?
- Keeping the price at $150, if the worker rate per hour would increase to $20/hr how would the differential income change? Prepare an Excel spreadsheet.
- What other issues would you need to consider?
LO 10.6At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The company is considering hiring an extra worker, whose salary will be $67,000 per year, to ease the problem. Using the extra worker, the company will be able to produce and sell 9,000 more units per year. The selling price per unit is $20. The cost per unit currently is $15.85 as shown:
What is the annual financial impact of hiring the extra worker for the bottleneck process?
LO 10.6Sports Buffs makes basketballs and footballs in a three-step process. Unfortunately, the stem insertion process has been identified as a bottleneck. Each basketball has a contribution margin of $15.00 and each football has a contribution margin of $4.00. The stem insertion equipment can make 10 basketballs or 30 footballs in one hour.
- If demand for both products is unlimited and the stem insertion machine capacity cannot be expanded, which product should be produced?
- If demand for each ball is limited to 30,000 balls and there are 4,000 hours available on the machine, how many of each product should be produced?