AFM481 Study Guide - Final Guide: Spark Plug, Purchase Order, Opportunity Cost
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The Talbot Company makes wheels that it uses in the productionof bicycles. Talbot's costs to produce 100,000 wheels annuallyare:
Directmaterials............................. | $30,000 | |
Directlabor................................... | $50,000 | |
Variableoverhead.......................... | $20,000 | |
Fixedoverhead.............................. | $70,000 |
An outside supplier has offered to sell Talbot similar wheelsfor $1.25 per wheel. If the wheels are purchased from the outsidesupplier, $15,000 of annual fixed overhead could be avoided and thefacilities now being used could be rented to another company for$45,000 per year.
1)If Talbot chooses to buy the wheelfrom the outside supplier, then the change in annual net operatingincome due to accepting the offer is a:
A) $35,000 increase
B) $10,000 decrease
C) $45,000 increase
D) $70,000 increase
Regis Company makes the plugs it uses in one of its products ata cost of $36 per unit. This cost includes $8 of fixed overhead.Regis needs 30,000 of these plugs annually, and Orlan Company hasoffered to sell them to Regis at $33 per unit. If Regis decides topurchase the plugs, $60,000 of the annual fixed overhead will beeliminated, and the company may be able to rent the facilitypreviously used for manufacturing the plugs.
2) If Regis Company purchases theplugs but does not rent the unused facility, the company would:
A) save $3.00 per unit.
B) lose $6.00 per unit.
C) save $6.00 per unit.
D) lose $3.00 per unit.
3) If the plugs are purchased and thefacility rented, Regis Company wishes to realize $100,000 insavings annually. To achieve this goal, the minimum annual rent onthe facility must be:
A) $10,000
B) $40,000
C) $70,000
D) $190,000
Dockwiller Inc. manufactures industrial components. One of itsproducts, which is used in the construction of industrial airconditioners, is known as D53. Data concerning this product aregiven below:
Per Unit Data | ||
Sellingprice..................................................... | $150 | |
Directmaterials............................................... | $26 | |
Directlabor...................................................... | $3 | |
Variable manufacturingoverhead..................... | $1 | |
Fixed manufacturingoverhead......................... | $17 | |
Variable sellingexpense................................... | $2 | |
Fixed selling and administrativeexpense......... | $18 |
The above per unit data are based on annual production of 8,000units of the component. Direct labor can be considered to be avariable cost.
4)The company has received a special,one-time-only order for 300 units of component D53. There would beno variable selling expense on this special order and the totalfixed manufacturing overhead and fixed selling and administrativeexpenses of the company would not be affected by the order.However, assume that Dockwiller has no excess capacity and thisspecial order would require 30 minutes of the constrainingresource, which could be used instead to produce products with atotal contribution margin of $1,800. What is the minimum price perunit on the special order below which the company should notgo?
A) $73
B) $36
C) $53
D) $6
Polaski Company manufactures and sells a single product called aRet. Operating at capacity, the company can produce and sell 40,000Rets per year. Costs associated with this level of production andsales are given below:
| Unit | Total | ||||||
| Direct materials | $ | 20 | $ | 800,000 | |||
| Direct labor | 6 | 240,000 | |||||
| Variable manufacturingoverhead | 3 | 120,000 | |||||
| Fixed manufacturingoverhead | 9 | 360,000 | |||||
| Variable selling expense | 4 | 160,000 | |||||
| Fixed selling expense | 6 | 240,000 | |||||
| Total cost | $ | 48 | $ | 1,920,000 | |||
The Rets normally sell for $53 each. Fixed manufacturingoverhead is $360,000 per year within the range of 34,000 through40,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects tosell only 34,000 Rets through regular channels next year. A largeretail chain has offered to purchase 6,000 Rets if Polaski iswilling to accept a 16% discount off the regular price. There wouldbe no sales commissions on this order; thus, variable sellingexpenses would be slashed by 75%. However, Polaski Company wouldhave to purchase a special machine to engrave the retail chain’sname on the 6,000 units. This machine would cost $12,000. PolaskiCompany has no assurance that the retail chain will purchaseadditional units in the future. What is the financial advantage(disadvantage) of accepting the special order? (Round yourintermediate calculations to 2 decimal places.)
2. Refer to the original data. Assume again that Polaski Companyexpects to sell only 34,000 Rets through regular channels nextyear. The U.S. Army would like to make a one-time-only purchase of6,000 Rets. The Army would pay a fixed fee of $1.20 per Ret, and itwould reimburse Polaski Company for all costs of production(variable and fixed) associated with the units. Because the armywould pick up the Rets with its own trucks, there would be novariable selling expenses associated with this order. What is thefinancial advantage (disadvantage) of accepting the U.S. Army'sspecial order?
3. Assume the same situation as described in (2) above, exceptthat the company expects to sell 40,000 Rets through regularchannels next year. Thus, accepting the U.S. Army’s order wouldrequire giving up regular sales of 6,000 Rets. Given this newinformation, what is the financial advantage (disadvantage) ofaccepting the U.S. Army's special order?
