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


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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

 

Variable overhead 0.11

 

Fixed overhead 0.25

 

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

 

Variable Manufacturing Overhead

 

276

 

Fixed Manufacturing Overhead*

 

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

 

Contribution margin per treadmill:

 


 

Sales price per treadmill

 

Variable cost per treadmill

 

Contribution margin per treadmill

 


 

Deluxe Threadmill

 

1040

 

$889.00

 

$151.00

 

14.52%

 


 

Per Unit

 

Deluxe

 

Regular

 

$ 1,040.00 $ 570.00

 


 

Regular Treadmill

 

570

 

$479.00

 

$91.00

 

15.96%

 


 

90

 

190

 

92

 

40

 

67

 

479

 

91.00

 


 

Proportion of machine hours used:

 

Deluxe Threadmill

 


 

Regular Treadmill

 


 

Deluxe Threadmill

 


 

Regular Treadmill

 


 

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

 

buy the switch.

 

Solution:

 


 

pages 1397, 1399

 


 

Switch Cost

 

Make

 

Variable costs:

 

Direct materials

 

$

 

11.00

 

Direct labor

 

4.50

 

Variable manufacturing overhead

 

6.00

 

Fixed manufacturing overhead costs

 

$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

 

Variable Overhead 6.00

 

Fixed Overhead 8.00

 

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

 

make or buy the switch.

 


 

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

 

further, adding integration to Microsoft products at an additional development cost

 

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

 

Additonal costs of processing

 

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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