1. Exercise 10-2 Dropping or Retaining a Segment [LO2] Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow: Total Home Nursing Meals On Wheels Housekeeping Revenues $ 922,000 $ 262,000 $ 406,000 $ 254,000 Variable expenses 473,000 118,000 199,000 156,000 Contribution margin 449,000 144,000 207,000 98,000 Fixed expenses: Depreciation 69,500 8,900 40,300 20,300 Liability insurance 43,900 20,800 7,600 15,500 Program administrators salaries 115,500 40,600 38,600 36,300 General administrative overhead* 184,400 52,400 81,200 50,800 Total fixed expenses 413,300 122,700 167,700 122,900 Net operating income (loss) $ 35,700 $ 21,300 $ 39,300 $ (24,900) *Allocated on the basis of program revenues. The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization s finances and considers the net operating income of $35,700 last year to be too small. (Last year s results were very similar to the results for previous years and are representative of what would be expected in the future.) Therefore, she has asked for more information about the financial advisability of discontinuing the housekeeping program. The depreciation in housekeeping is for a van that transports housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. Depreciation charges assume zero salvage value. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided. 1a. What is the impact on net operating income by discontinuing housekeeping program? (Input the amount as a positive value.) (Click to select) in net operating income by $ 1b. Should the housekeeping program be discontinued? Yes No 2. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services. Yes No Exercise 10-2 Dropping or Retaining a Segment [LO2] Learning Objective: 10-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped.
2. Exercise 10-3 Make or Buy a Component [LO3] Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $22 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: 15,900 Per Unit Units per year Direct materials $ 5 $ 79,500 Direct labor 7 111,300 Variable manufacturing overhead 1 15,900 Fixed manufacturing overhead, traceable 10* 159,000 Fixed manufacturing overhead, common, but allocated 9 143,100 Total cost $ 32 $ 508,800 *40% supervisory salaries; 60% depreciation of special equipment (no resale value). 1a. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to nearest dollar amount.) Make Buy Total relevant cost (15,900 units) $ $ 1b. Should the outside supplier's offer be accepted? Reject Accept 2a. Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $88,500 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to nearest dollar amount.) Make Buy Total relevant cost (15,900 units) $ $ 2b. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $22 each? Reject Accept Exercise 10-3 Make or Buy a Component [LO3] Learning Objective: 10-03 Prepare a make or buy analysis. 3. Exercise 10-4 Evaluating a Special Order [LO4] Miyamoto Jewelers is considering a special order for 16 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $404 and its unit product cost is $260 as shown below:
Direct materials $ 149 Direct labor 81 Manufacturing overhead 30 Unit product cost $ 260 Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $13 per bracelet and would also require acquisition of a special tool costing $470 that would have no other use once the special order is completed. This order would have no effect on the company s regular sales and the order could be fulfilled using the company s existing capacity without affecting any other order. a. What effect would accepting this order have on the company's net operating income if a special price of $364 is offered per bracelet for this order? (Input the amount as a positive value.) Net operating income (Click to select) by $ b. Should the special order be accepted at this price? Yes No Exercise 10-4 Evaluating a Special Order [LO4] Learning Objective: 10-04 Prepare an analysis showing whether a special order should be accepted. 4. Exercise 10-5 Utilizing a Constrained Resource [LO5] Sport Luggage Inc. makes high-end hard-sided luggage for sports equipment. Data concerning three of the company s most popular models appear below. Ski Vault Golf Caddy Fishing Quiver Selling price per unit $310 $320 $265 Variable cost per unit $110 $150 $145 Plastic injection molding machine processing time required to produce one unit 8 minutes 10 minutes 10 minutes Pounds of plastic pellets per unit 7 pounds 16 pounds 6 pounds 1a. The total time available on the plastic injection molding machine is the constraint in the production process. What is contribution margin per unit of the constrained resources for, Golf Caddy and? (Round your answers to 2 decimal places.) Golf Caddy Contribution margin $ per minute $ per minute $ per minute 1b. Which product would be the most profitable use of this constraint? Golf Caddy 1c. Which product would be the least profitable use of this constraint?
Golf Caddy a. Should management accept this offer? 2a. A severe shortage of plastic pellets has required the company to cut back its production so much that the plastic injection molding machine is no longer the bottleneck. Instead, the constraint is the total available pounds of plastic pellets. What is contribution margin per unit of the constrained resources for, Golf Caddy and? (Round your answers to 2 decimal places.) Golf Caddy Contribution margin $ per pound $ per pound $ per pound 2b. Which product would be the most profitable use of this constraint? Golf Caddy 2c. Which product would be the least profitable use of this constraint? Golf Caddy 3. Which product has the largest unit contribution margin? Golf Caddy Exercise 10-5 Utilizing a Constrained Resource [LO5] Learning Objective: 10-05 Determine the most profitable use of a constrained resource. 5. Exercise 10-6 Managing a Constrained Resource [LO6] Georgian Ambience Ltd. makes fine colonial reproduction furniture. Upholstered furniture is one of its major product lines and the bottleneck on this production line is time in the upholstery shop. Upholstering is a craft that takes years of experience to master and the demand for upholstered furniture far exceeds the company s capacity in the upholstering shop. Information concerning three of the company s upholstered chairs appears below: Gainsborough Armchair Leather Library Chair Chippendale Fabric Armchair Selling price per unit $ 1,178 $ 2,060 $ 1,330 Variable cost per unit $ 800 $ 1,400 $ 850 Upholstery shop time required to produce one unit 7 hours 12 hours 6 hours 1. More time could be made available in the upholstery shop by asking the employees who work in this shop to work overtime. Assuming that this extra time would be used to produce Leather Library Chairs, up to how much should the company be willing to pay per hour to keep the upholstery shop open after normal working hours? Maximum amount payable per hour $ 2. A small nearby upholstering company has offered to upholster furniture for Georgian Ambience at a fixed charge of $53 per hour. The management of Georgian Ambience is confident that this upholstering company s work is high quality and their craftsmen should be able to work about as quickly as Georgian Ambience s own craftsmen on the simpler upholstering jobs such as the Chippendale Fabric Armchair.
Yes No Exercise 10-6 Managing a Constrained Resource [LO6] Learning Objective: 10-06 Determine the value of obtaining more of the constrained resource. 6. Exercise 10-7 Sell or Process Further [LO7] Solex Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $91,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. These sales values are as follows: product X, $53,000; product Y, $95,000; and product Z, $62,000. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities. The additional processing costs and the sales value after further processing for each product (on an annual basis) are shown below: Product Additional Processing Costs Sales Value after Further Processing X $ 40,000 $ 79,000 Y $ 40,000 $ 158,000 Z $ 10,000 $ 77,000 a. Compute the incremental profit (loss) for each product. (Loss amounts should be indicated with a minus sign.) Product X Product Y Product Z Incremental profit (loss) $ $ $ b. Which product or products should be sold at the split-off point? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Product X Product Y Product Z c. Which product or products should be processed further? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Product X Product Y Product Z Exercise 10-7 Sell or Process Further [LO7] Learning Objective: 10-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further.
7. Exercise 10-11 Identification of Relevant Costs [LO1] Samantha Ringer purchased a used automobile for $31,250 at the beginning of last year and incurred the following operating costs: Depreciation ($31,250 5 years) $6,250 Insurance $3,200 Garage rent $1,700 Automobile tax and license $850 Variable operating cost 7 per mile The variable operating costs consist of gasoline, oil, tires, maintenance, and repairs. Samantha estimates that at her current rate of usage the car will have zero resale value in five years, so the annual straight-line depreciation is $6,250. The car is kept in a garage for a monthly fee. 1. Samantha drove the car 30,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your intermediate and final answer to 2 decimal places.) Average cost per mile $ 2. Samantha is unsure about whether she should use her own car or rent a car to go on an extended cross-country trip for two weeks during spring break. What costs above are relevant in this decision? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Variable operating costs Depreciation Automobile tax License costs Insurance costs Exercise 10-11 Identification of Relevant Costs [LO1] Learning Objective: 10-01 Identify relevant and irrelevant costs and benefits in a decision. 8. Problem 10-18A Dropping or Retaining a Tour [LO2] Blueline Tours, Inc., operates tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours to improve the company s overall operating performance. One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from a typical Historic Mansions tour is given below: Ticket revenue (110 seat capacity 40% occupancy $80 ticket price per person) $3,520 100% Variable expenses ($14.00 per person) 616 17.5 Contribution margin 2,904 82.5% Tour expenses: Tour promotion $ 730 Salary of bus driver 340
Fee, tour guide 740 Fuel for bus 170 Depreciation of bus 390 Liability insurance, bus 210 Overnight parking fee, bus 80 Room and meals, bus driver and tour guide 200 Bus maintenance and preparation 200 Total tour expenses 3,060 Net operating loss $ (156) The following additional information is available about the tour: a. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. b. The "Bus maintenance and preparation" cost is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company s fleet of buses in good operating condition. c. Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible. d. Liability insurance premiums are based on the number of buses in the company s fleet. e. Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff. By how much will the profits increase or decrease if this tour is discontinued? (Input the amount as a positive value.) Profits would (Click to select) by $ Worksheet Difficulty: Hard Problem 10-18A Dropping or Retaining a Tour [LO2] Learning Objective: 10-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped. 9. 11.12 Exercise 10-1 Identifying Relevant Costs [LO1] A number of costs are listed below that may be relevant in decisions faced by the management of Poulsen & Sonner A/S, a Danish furniture manufacturer: Requirement 1 relates to Case 1, and requirement 2 relates to Case 2. Consider the two cases independently. 1.The company chronically runs at capacity and the old Model A3000 machine is the company s constraint. Management is considering the purchase of a new Model B3800 machine to use in addition to the company s present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before, with the new Model B3800 being used to expand production. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead.. 2.The old Model A3000 machine is not the company s constraint, but management is considering replacing it with a new Model B3800 machine because of the potential savings in direct materials cost with the new machine. The Model A3000 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste. Indicate whether each item is relevant or not relevant in the above situations. Item Case 1 Case 2 a. Sales revenue (Click to select) (Click to select) b. Direct materials (Click to select) (Click to select) c. Direct labor (Click to select) (Click to select)
d. Variable manufacturing overhead (Click to select) (Click to select) e. Book value Model A3000 machine (Click to select) (Click to select) f. Disposal value Model A3000 machine (Click to select) (Click to select) g. Depreciation Model A3000 machine (Click to select) (Click to select) h. Market value Model B3800 machine (cost) (Click to select) (Click to select) i. Fixed manufacturing overhead (general) (Click to select) (Click to select) j. Variable selling expense. (Click to select) (Click to select) k. Fixed selling expense (Click to select) (Click to select) l. General administrative overhead (Click to select) (Click to select) Exercise 10-1 Identifying Relevant Costs [LO1] Learning Objective: 10-01 Identify relevant and irrelevant costs and benefits in a decision.