Homework #6

1.A company has a variable production cost of $2.28 per unit, a fixed production cost of $1,200,000 per year; variable selling and administrative cost of $1.00 per unit; and fixed selling and administrative cost of $600,000 per year. Assume sales equals production. If annual production is 1,500,000 units, what price would be charged if the company's policy is to mark up "full cost" (as defined in chapter 5) by 46%? Answer to the nearest cent (2 decimal places)

2.A company is considering making a component that it is currently buying from an outside supplier. If the component is made in house, equipment will have to be purchased, and 4,000 square feet of floor space in the factory that is currently sitting empty will be used to make the component. A manager will be hired to make the component. The direct labor used to make the component consists of union workers whose jobs have been eliminated in another part of the factory, but the contract requires that they receive their normal salary for the next five years. There are currently no alternative uses available for the workers' time. The materials to be used to make the component will have to be purchased, and it is estimated that variable overhead cost will be $3.00 per component for utilities and supplies. There are six blanks that appear below. Entire either relevant or not relevant in each blank depending on the cost listed. 1. The cost of the equipment to be purchased (enter answer in first blank). 2. The cost of the material to be purchased to make the component (enter answer in second blank). 3. The cost of the direct labor (enter answer in third blank). 4. The cost of the space to be used in the factory (enter answer in fourth blank). 5. The variable overhead for utilities and supplies (enter answer in fifth blank). 6. The salary of the manager (enter answer in the sixth blank).

3.A company has a variable production cost of $3.44 per unit, a fixed production cost of $1,200,000 per year; variable selling and administrative cost of $1.00 per unit; and fixed selling and administrative cost of $600,000 per year. Assume sales equals production. If annual production is 1,500,000 units, what price would be charged if the company's policy is to mark up total variable cost
by 32%? Answer to the nearest cent (2 decimal places)

4.A company has a variable production cost of $4.72 per unit, a fixed production cost of $1,200,000 per year; variable selling and administrative cost of $1.00 per unit; and fixed selling and administrative cost of $600,000 per year. Assume sales equals production. If annual production is 1,500,000 units, what price would be charged if the company's policy is to mark up total cost by 41%? Answer to the nearest cent (2 decimal places)

5. Chemco produces two compounds from a joint product. The joint cost is $597,422, and the following information is available about the amount and value of each product that is yielded from the process.

Product / Pounds yielded / Sales Value per Pound
Glolow / 30,000 / $10.00
Slolow / 40,000 / $8.41

Assuming that the joint cost is allocated based on the relative sales value, how much total joint cost should be assigned to Glolow?

6. Smith Company manufactures widgets. Newman Company has approached Smith with a proposal to sell the company one of the components used to make widgets at a price of $96,031 for 50,000 units. Smith is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced:
Direct material $44,000
Direct labor 20,000
Manufacturing overhead 60,000

Total cost $124,000

All direct material and direct labor as well as $26,748 of the manufacturing overhead consists of costs that will be eliminated if the components are no longer produced by Smith. The remaining manufacturing overhead will continue whether or not Smith makes the components. How much will Smith's income increase or decrease if the offer is accepted and the component manufacture is outsourced? Enter a positive number if profits will increase and a negative number if profits will decrease.

7. China Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped.

Bowling Shoes / Athletic Shoes / Boots
Sales / $120,000 / $420,000 / $360,000
Variable Costs / $64,000 / $220,000 / $140,000
Contribution Margin / $56,000 / $200,000 / $220,000
Direct Fixed Costs / $51,320 / $70,000 / $90,000
Allocated Common Fixed costs / $20,000 / $70,000 / $60,000
Net Income / ? / ? / ?

If bowling shoes are dropped, overall net income would increase or decrease by how much? Write an increase as a positive number and a decrease as a negative number.

8. China Shoe Company is trying to decide whether or not to continue making bowling shoes. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the bowling shoes were dropped.

Bowling Shoes / Athletic Shoes / Boots
Sales / $120,000 / $420,000 / $360,000
Variable Costs / $64,000 / $220,000 / $140,000
Contribution Margin / $56,000 / $200,000 / $220,000
Direct Fixed Costs / $58,643 / $70,000 / $90,000
Allocated Common Fixed costs / $20,000 / $70,000 / $131,009
Net Income / ? / ? / ?

What will overall profit be if bowling shoes are dropped?

Answer Key:

  1. 4.50
  1. 5.86
  2. 9.76
  3. 281,626
  4. -5,283
  5. 4,680
  6. 38,991