Costs of producing the part at this level of activity

A)

Rama Corporation is presently making part J56 that is used in one of its products. A total of 4,000 units of this part are produced and used every year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

  

 

Per Unit

Direct materials

$1.80

Direct labor

$7.80

Variable overhead

$7.90

Supervisor’s salary

$2.30

Depreciation of special equipment

$6.90

Allocated general overhead

$6.60


An outside supplier has offered to produce and sell the part to the company for $30.80 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally.

In addition to the facts given above, assume that the space used to produce part J56 could be used to make more of one of the company’s other products, generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company’s overall net operating income of buying part J56 from the outside supplier and using the freed space to make more of the other product?

Net operating income would decline by $31,000 per year.

Net operating income would decline by $23,000 per year.

Net operating income would increase by $3,000 per year.

Net operating income would increase by $13,000 per year.

B)

Lusk Corporation produces and sells 20,000 units of Product X each month. The selling price of Product X is $30 per unit, and variable expenses are $21 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $50,000 of the $250,000 in fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the company’s overall net operating income would:

decrease by $70,000 per month.

increase by $70,000 per month.

increase by $20,000 per month.

decrease by $20,000 per month.

C)

Tillison Corporation makes three products that use the current constraint which is a particular type of machine. Data concerning those products appear below:

  

 

TC

KA

PA

Selling price per unit

$373.86

$82.29

$78.26

Variable cost per unit

$304.42

$60.97

$64.22

Minutes on the constraint

6.20

1.30

1.30


Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

$10.80 per minute

$69.44 per unit

$16.40 per minute

$14.04 per unit

D)

Ramon Corporation makes 18,000 units of part E44 each year. This part is used in one of the company’s products. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

 

Per Unit

Direct materials

$2.20

Direct labor

$5.40

Variable manufacturing overhead

$8.00

Supervisor’s salary

$7.30

Depreciation of special equipment

$6.60

Allocated general overhead

$1.80

An outside supplier has offered to make and sell the part to the company for $23.30 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $5,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part E44 would be used to make more of one of the company’s other products, generating an additional segment margin of $21,000 per year for that product.
What would be the impact on the company’s overall net operating income of buying part E44 from the outside supplier?

Net operating income would increase by $21,000 per year.

Net operating income would increase by $18,800 per year.

Net operating income would decrease by $123,000 per year.

Net operating income would decrease by $165,000 per year.

E)

Tish Corporation produces a part used in the manufacture of one of its products. The unit product cost is $26, computed as follows:

Direct materials

$10

Direct labor

7

Variable manufacturing overhead

1

Fixed manufacturing overhead

       8

Unit product cost         

   $26

An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each. The company estimates that 75% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:

$1 disadvantage

$5 advantage

$3 advantage

$4 disadvantage

F)

The following are the Jensen Corporation’s unit costs of making and selling an item at a volume of 1,000 units per month (which represents the company’s capacity):

  

Manufacturing:

 

    Direct materials

$1.00

    Direct labor

$2.00

    Variable overhead

$0.50

    Fixed overhead

$0.40

Selling and Administrative:

 

      Variable

$2.00

      Fixed

$0.80

Present sales amount to 700 units per month. An order has been received from a customer in a foreign market for 100 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 700 units and 1,000 units. The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales. Direct labor is a variable cost.

How much will the company’s profits be increased or (decreased) if it prices the 100 units at $7 each?

($30)

$150

$0

$310

 

 

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