## [solution]: Assignment 3: Applying the P-O-L-C (Week 8) Purpose: The third

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I need help with these problems. I have started but I am stuck. It is hard to find the numbers to the problem in the book.

E25-10

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached

Hungry-Cardz with a special order. The Hall of Fame wishes to purchase 55,000

baseball card packs for a special promotional campaign and offers \$0.33 per pack, a

total of \$18,150. Hungry-Cardz?s total production cost is \$0.53 per pack, as follows:

Variable costs:

Direct materials \$ 0.13

Direct labor 0.04

Total cost \$ 0.53

Hungry-Cardz has enough excess capacity to handle the special order.

Requirements

1. Prepare a differential analysis to determine whether Hungry-Cardz should accept

the special sales order.

2.

Now assume that the Hall of Fame wants special hologram baseball cards.

Hungry-Cardz will spend \$5,000 to develop this hologram, which will be useless

after the special order is completed. Should Hungry-Cardz accept the special

order under these circumstances, assuming no change in the special pricing of

\$0.33 per pack?

Solution:

Requirement 1

pages 1381, 1387

Expected increase in revenue

Expected increase in variable manufacturing costs

Expected increase in operating income

(55,000 x \$0.33)

(55,000 x \$0.53)

(55,000 x \$0.20)

\$18,150

29,150

(\$11,000)

Hungry-Cardz should not accept the special sales order because it would put them in the negative

operating income.

Requirement 2

Expected increase in revenue

Expected increase in variable manufacturing costs

Expected increase in operating income

(5,000 x \$0.33)

(5,000 x \$0.53)

(5,000 x \$0.20)

\$1,650

2,650

(1,000)

Hungry-Cardz should not accept the special offer because it would decrease the operating income.

E25-13

Requirements

1. Prepare a differential analysis to show whether Best Video should drop the

DVD product line.

2. Will dropping DVDs add \$43,000 to operating income? Explain.

Solution:

Requirement 1

page 1391

Expected decrease in revenue

Expected decrease in total variable costs

Expected decrease in operating income

\$ 123,000

90,000

\$ 33,000

Best Video should not drop the DVD product line because it will increase their

operating income.

Requirement 2

If they drop DVDs, revenue will decrease but variable expenses will decrease

resulting in a net decrease in operating income.

Top managers of Best Video are alarmed by their operating losses. They are

considering dropping the DVD product line. Company accountants have

prepared the following analysis to help make this decision:

E25-15

Tread Mile produces two types of exercise treadmills: regular and deluxe. The exercise

craze is such that Tread Mile could use all its available machine hours to produce either

model. The two models are processed through the same production departments. Data

for both models are as follows:

Requirements

1. What is the constraint?

2. Which model should Tread Mile produce? (Hint: Use the allocation of fixe manufacturing overhead to

determine the proportion of machine hours used by each product.)

3. If Tread Mile should produce both models, compute the mix that will maximize operating income.

Sales Price

Costs:

Direct Materials

300

Direct Labor

78

276

120

Variable Operating Expenses

115

Total Costs

889

Operating Income

\$ 151.00 \$

*allocated on the basis of machine hours

Solution:

Requirement 1

pages 1389, 1393, 1394

The constraint is available machine hours.

Requirement 2

1040

\$889.00

\$151.00

14.52%

Per Unit

Deluxe

Regular

\$ 1,040.00 \$ 570.00

570

\$479.00

\$91.00

15.96%

90

190

92

40

67

479

91.00

Proportion of machine hours used:

Contribution margin per machine hour:

Contribution margin per machine hour

Available capacity - number of machine hours

Total contribution margin at full capacity

Requirement 3

E25-18

Prepare an outsourcing analysis to determine whether Eclipse Systems should make or

Solution:

pages 1397, 1399

Switch Cost

Make

Variable costs:

Direct materials

\$

11.00

Direct labor

4.50

6.00

\$8.00

Purchase cost ( )

Total differential cost of casings

Outsource

Difference

(Make ? Outsource)

\$

\$20.00

\$

11.00

4.50

6.00

8.00

(20.00)

-9.5

Exlipse Systems should make the switch versus buying from an outsource company.

Eclipse Systems manufactures an optical switch that it uses in its final product. The

switch has the following manufacturing costs per unit:

Direct Materials \$ 11.00

Direct Labor 4.50

Manufacturing Product Cost \$ 29.50

Another company has offered to sell Eclipse Systems the switch for \$20.00 per unit.

If Eclipse Systems buys the switch from the outside supplier, the idle manufacturing

facilities cannot be used for any other purpose, yet none of the fixed costs are

avoidable.

Prepare an outsourcing analysis to determine whether Eclipse Systems should

P25-33

This problem continues the Daniels Consulting situation from Problem P24-37 of

Chapter 24. Daniels Consulting provides consulting services at an average price of

Should Daniels sell the software as it is or develop it further?

\$150 per hour and incurs variable costs of \$75 per hour. Assume average fixed costs

Solution:

page 1402

are \$5,250 a month.

Daniels has developed new software that will revolutionize billing for companies.

Daniels has already invested \$300,000 in the software. It can market the software as is

Process

Software Costs

Sell

Furthur

Difference at \$40,000 per client and expects to sell to 12 clients. Daniels can develop the software

Expected revenue from selling (12 clients x \$40,000 each)

\$ 480,000

Expected revenue from selling (16 clients x \$49,000 each)

\$ 784,000 \$ 304,000 of \$150,000. The additional development will allow Daniels to sell the software for

150,000

150,000 \$49,000 each but to 16 clients.

Total net revenue

\$ 480,000 \$ 634,000 \$ 154,000

.

Daniels should develop the software further because it would put them in the positive.

This problem continues the Daniels Consulting situation from Problem P23-35 of

Chapter 23. Daniels Consulting reported 2018 sales of \$3,200,000 and operating

income of \$185,600. Average total assets during 2018 were \$640,000. Daniels?s target

rate of return is 17%.

Calculate Daniels?s profit margin ratio, asset turnover ratio, ROI, and RI for 2018.

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