Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 20,000 cases of sauce each year but is currently only manufacturing and selling 18,000. The following costs relate to annual operations at 18,000 cases:
Total Cost Variable manufacturing cost $288,000 Fixed manufacturing cost $64,000 Variable selling and administrative cost $54,000 Fixed selling and administrative cost $46,000
Gwinnett normally sells its sauce for $35 per case. A local school district is interested in purchasing Gwinnett's excess capacity of 2,000 cases of sauce but only if they can get the sauce for $18 per case. This special order would not affect regular sales or total fixed costs or variable costs per unit. If this special order is accepted, Gwinnett's profits for the year will:
increase by $1,800
decrease by $2,000
decrease by $18,000
decrease by $12,000
Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 20,000 cases of sauce each year but is currently only manufacturing and selling 18,000. The following costs relate to annual operations at 18,000 cases: |
Total Cost | |
Variable manufacturing cost | $288,000 |
Fixed manufacturing cost | $64,000 |
Variable selling and administrative cost | $54,000 |
Fixed selling and administrative cost | $46,000 |
Gwinnett normally sells its sauce for $35 per case. A local school district is interested in purchasing Gwinnett's excess capacity of 2,000 cases of sauce but only if they can get the sauce for $18 per case. This special order would not affect regular sales or total fixed costs or variable costs per unit. If this special order is accepted, Gwinnett's profits for the year will: |
increase by $1,800
decrease by $2,000
decrease by $18,000
decrease by $12,000
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Related questions
9. | Johnson Company manufactures widgets. Old Ham Company has approached Jones with a proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000 units. Jones 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:
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Jones. The remaining manufacturing overhead will continue whether or not Jones makes the components. What is the amount of avoidable costs if Jones buys rather than makes the components? | |||||||||
A) | $60,000 | |||||||||
B) | $96,000 | |||||||||
C) | $124,000 | |||||||||
D) | $100,000 |
10. Below is a performance report that compares budgeted and actual profit of Famous Beer
for the month of April:
Budget | Actual | Difference | |
Sales | $200,000 | $202,000 | $2,000 |
Less: | |||
Cost of ingredients | $162,000 | $166,000 | $4,000 |
Salaries | $31,000 | $31,200 | $200 |
Controllable Profit | $47,000 | $44,800 | -$2,200 |
In evaluating the department in terms of its increase in sales and expenses, what will be
most important to investigate?
Sales
Cost of ingredients
Salaries
All three components have equal importance.
11. | Fatimaâs Diner has a contribution margin ratio of 17%. If fixed costs are $176,800, how many dollars of revenue must Fatimaâs generate in order to reach the break-even point? | |
A) | $282,880 | |
B) | $1,040,000 | |
C) | $1,060,800 | |
D) | $1,105,000 |
12. | New Visions, Inc. is looking to achieve a net income of 15 percent of sales. Hereâs the firmâs profile: Unit sales price is $10; variable cost per unit is $6; total fixed costs are $40,000. What is the level of sales in units required to achieve a net income of 15 percent of sales? | |
A) | 12,000 units | |
B) | 21,000 units | |
C) | 16,000 units | |
D) | 20,000 units |
13. | At Zikâs Apparel, the break-even point is 2,400 units. If fixed costs total $300,000 and variable costs are $25 per unit, what is the selling price per unit? | |
A) | $210 | |
B) | $180 | |
C) | $5 | |
D) | $150 |
14. Which of the following situations will most likely violate cost-volume-profit
assumptions about fixed costs?
A) | When production volume increases beyond the capacity of the plant, a second shift will be added instead of building a new plant. |
B) | The companyâs raw material supplier typically allows volume discounts when larger amounts of the raw material are purchased. |
C) | Fixed costs per unit decrease as volume increases. |
D) | As volume increases, per unit fixed manufacturing overhead remain constant. |
15. Neighborhood Grill Company is a start up with the following profile:
Unit selling price = $200; Variable cost per unit = $100; Fixed Costs = $36,000;
Tax rate = 25%. How many units should Neighborhood Grill sell to achieve an
after-tax target income of $6,000?
A) | 200 |
B) | 460 |
C) | 440 |
D) | 300 |
16. | Northern Apparel Company owns two stores and management is considering eliminating the South store due to declining sales. Segmented contribution income statements are as follows and common fixed costs are allocated on the basis of sales.
Northern feels that if they eliminate the South store, sales in the North store will decline by 20%. If they close the South store, overall company net income will: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A) | decline by $90,000. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
B) | decline by $85,625. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
C) | decline by $62,000. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
D) | decline by $20,000. |
17. | Forest Park, a best-selling toy has a selling price of $15. If the contribution margin ratio is 40% and if the fixed costs are $60,000, how many Forest Parks must the company sell to realize a profit of $450,000? | |
A) | 30,000 | |
B) | 34,000 | |
C) | 85,000 | |
D) | 100,000 |
Information for Questions 18
Anderson Manufacturing makes a single product. Budget information regarding the current period is given below:
| Revenue (100,000 units at $8.00) | $800,000 |
Direct materials | 150,000 | |
Direct labor | 125,000 | |
Variable manufacturing overhead | 235,000 | |
Fixed manufacturing overhead | 110,000 | |
Net income | $180,000 |
Dye Company approaches Anderson with a special order for 15,000 units at a price of $7.50 per unit. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Anderson is operating at capacity and will incur an additional $50,000 in fixed manufacturing overhead if the order is accepted.
18. | What is the incremental income (loss) associated with accepting the special order? | |
A) | ($14,000) | |
B) | $36,000 | |
C) | ($23,500) | |
D) | $27,000 |
19. | Auto Zone believes it can sell 3,500,000 of a new vehicle charger for $8 each. There will be $3,000,000 in fixed costs associated with the charger. If the company desires to make a profit of $2,000,000 on the charger, what is the target variable cost per charger? | |
A) | $7.25 | |
B) | $9.00 | |
C) | $6.57 | |
D) | $9.40 |
20. | On July 26, 2012, Radio Shack announced disappointing 2nd quarter earnings that caused the stock to fall 29% to all time lows. Although sales were up 1.2% to $953.2 million gross profit fell 16.6% to $360.3 million. Assuming Radio Shackâs store count and fixed costs were the same in the 2nd quarter of 2011 and 2012, which of the following statements is the best explanation for the decrease in the firmâs profitability? | |
A) | Opportunity costs decreased. | |
B) | Margin of safety decreased. | |
C) | Contribution margin decreased. | |
D) | Selling price decreased. |
21 | Paul's Pizza produced and sold 2,000 pizzas last month and had fixed costs of $6,000. If production and sales are expected to increase by 10% next month, which of the following statements is true? | |
A) | Total fixed costs will decrease. | |
B) | Fixed cost per unit will decrease. | |
C) | Total fixed costs will increase. | |
D) | Fixed cost per unit will increase. |
22. | The Synergy Company uses cost-plus pricing with a 50% mark-up. The company is currently selling 100,000 units at $12 per unit. Each unit has a variable cost of $6. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 80,000 units and the company wants to continue to earn a 50% return, what price should the company charge? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A) | $13.50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
B) | $14.55 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
C) | $12.75 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
D) Use the following to answer question 23: Taylor's Treasures has collected the following information over the last six months.
| $10.95 |
Wesco Incorporatedâs only product is a combination fertilizer/weedkiller called GrowNWeed. GrowNWeed is sold nationwide to retail nurseries and garden stores. |
Zwinger Nursery plans to sell a similar fertilizer/weedkiller compound through its regional nursery chain under its own private label. Zwinger does not have manufacturing facilities of its own, so it has asked Wesco (and several other companies) to submit a bid for manufacturing and delivering a 32,000-pound order of the private brand compound to Zwinger. While the chemical composition of the Zwinger compound differs from that of GrowNWeed, the manufacturing processes are very similar. |
The Zwinger compound would be produced in 1,000-pound lots. Each lot would require 30 direct labor-hours and the following chemicals: |
Chemicals | Quantity in Pounds |
AG-5 | 340 |
KL-2 | 280 |
CW-7 | 140 |
DF-6 | 240 |
The first three chemicals (AG-5, KL-2, and CW-7) are all used in the production of GrowNWeed. DF-6 was used in another compound that Wesco discontinued several months ago. The supply of DF-6 that Wesco had on hand when the other compound was discontinued was not discarded. Wesco could sell its supply of DF-6 at the prevailing market price less $0.09 per pound selling and handling expenses. |
Wesco also has on hand a chemical called BH-3, which was manufactured for use in another product that is no longer produced. BH-3, which cannot be used in GrowNWeed, can be substituted for AG-5 on a one-for-one basis without affecting the quality of the Zwinger compound. The BH-3 in inventory has a salvage value of $590. |
Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below: |
Raw Material | Pounds in Inventory | Actual Price per Pound When Purchased | Current Market Price per Pound |
AG-5 | 23,000 | $0.73 | $0.83 |
KL-2 | 4,900 | $0.40 | $0.45 |
CW-7 | 8,900 | $1.31 | $1.51 |
DF-6 | 6,380 | $0.42 | $0.50 |
BH-3 | 5,700 | $0.58 | (Salvage) |
The current direct labor wage rate is $16 per hour. The predetermined overhead rate is based on direct labor-hours (DLH). The predetermined overhead rate for the current year, based on a two-shift capacity with no overtime, is as follows: |
Variable manufacturing overhead | $ | 5.10 | per DLH |
Fixed manufacturing overhead | 8.30 | per DLH | |
Combined predetermined overhead rate | $ | 13.40 | per DLH |
Wescoâs production manager reports that the present equipment and facilities are adequate to manufacture the Zwinger compound. Therefore, the order would have no effect on total fixed manufacturing overhead costs. However, Wesco is within 390 hours of its two-shift capacity this month. Any additional hours beyond the 390 hours must be done in overtime. If need be, the Zwinger compound could be produced on regular time by shifting a portion of GrowNWeed production to overtime. Wescoâs direct labor wage rate for overtime is $24 per hour. There is no allowance for any overtime premium in the predetermined overhead rate. |
Required: | |
1. | Wesco has decided to submit a bid for the 32,000 pound order of Zwingerâs new compound. The order must be delivered by the end of the current month. Zwinger has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Wesco could bid for the order without reducing its net operating income. (Round intermediate calculations and final answer to 2 decimal places.) |
2. | Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 32,000-pound lots of the new compound. Wesco expects the demand for GrowNWeed to remain strong. Therefore, the recurring orders from Zwinger would put Wesco over its two-shift capacity. However, production could be scheduled so that 60% of each Zwinger order could be completed during regular hours. As another option, some GrowNWeed production could be shifted temporarily to overtime so that the Zwinger orders could be produced on regular time. Current market prices are the best available estimates of future market prices. |
Wescoâs standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Wesco, Inc., would quote Zwinger Nursery for each 32,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed. Hint: Calculate the price considering the possibility of this order being regular. (Round intermediate calculations and final answer to 2 decimal places.) | |