ACCT 2101 : Exam 2 Review Problems

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azuremammoth471

15 Mar 2019

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It costs pineda company per unit ( variable and fixed) to produce its product, which normally sells for per unit. A foreign wholesaler offers to purchase 4,000 units at each. Pineda would incur special shipping costs of per unit if the order were accepted. Pineda has sufficient unused capacity to produce the 4,000 units. Geis company produces 40,000 printers per month, which is 80% of plant capacity. Variable manufacturing costs are per unit and fixed manufacturing costs are. The printers are normally sold directly to retailers at each. Geis has an offer from a foreign wholesaler to purchase an additional 4,000 printers at per unit. Acceptance of the offer would not affect normal sales of the product and the additional units can be manufactured without increasing plant capacity. What is the amount of increase (decrease) to net income if geis accepts the offer? (,000) (,000)

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Tactical decision making

Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.

1.	Recognize and define theproblem.
2.	Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives.
3.	Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision.
4.	Compare the relevant costsand benefits for each alternative.
5.	Assess qualitative factors.
6.	Select the alternative with thegreatest overall benefit.

Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.

Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):

Accept the special order.	- Select your answer -YesNoItem1
Reject the special order.	- Select your answer -YesNoItem2
Sell normal sales for $25 perunit.	- Select your answer -YesNoItem3

Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)

$25 price.	- Select your answer -YesNoItem4
$30 normal price.	- Select your answer -YesNoItem5
Variable cost of making the unitsin the special order.	- Select your answer -YesNoItem6
Depreciation on factory equipmentused in making the special order units.	- Select your answer -YesNoItem7
Increased property taxes on thefactory building which are due while the special order would bemade.	- Select your answer -YesNoItem8

While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.

goldmoose557

Members of the board of directors of Safety Step have receivedthe following operating income data for the year ended May 31,2012:

Safety Step

income statement

For the year ended May 31, 2012

Sales Revenue: Product line industrial systems ($350000),product line household systems ($360,000), total ($710,000)

cost of goods sold:

variable: product line industrial systems (34000), product linehousehold systems (47,000), total (81,000)

fixed: product line industrial systems (230,000), product linehousehold systems (69,000), total (299,000)

total cost of goods sold: product line industrial systems($264000), product line household systems(116,000), total(380000)

gross profit: product line industrial systems ($86,000), productline household systems (244,000), total (330,000)

marketing and administrative expenses:

variable: product line industrial systems (69,000), product linehousehold systems (76,000), total (145000)

fixed: product line industrial systems (41000), product linehousehold systems (24,000), total (65,000)

total marketing administrative exp.: product line industrialsystems (110,000), product line household systems (100,000),Total($210,000)

operating income (loss): product line industrial systems(-$24,000), product line household systems ($144,000), total$120,000

Members of the board are surprised that the industrial systemsproduct line is losing money. They commission a study to determinewhether the company should drop the line. Company accountantsestimate that dropping industrial systems will decrease fixed costof goods sold by $81,000 and decrease fixed marketing andadministrative expenses by $14,000.

1. prepare an incremental analysis to show whether Safety Stepshould drop the industrial systems product line. fill in theblanks.

Safety Step

incremental analysis of dropping a product line

expected decrease in revenues--

dropping industrial systems sales ________

expected decrease in expenses:

variable expenses:

cost of goods sold ________

marketing and administrative expenses _________

fixed expenses:

cost of goods sold _________

marketing and administrative expenses __________

expected decrease in total expenses __________

__________(expected decrease or expected increase) in operatingincome _____________

2. Prepare contribution margin income statements to show SafetyStep's total operating income under the two alternatives: (a) withthe industrial systems line and (b) without the line . Compare thedifference between the two alternatives' income numbers to youranswer to requirement 1.

3. What have you learned from the comparison in requirement2?

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Naturalmaid processes organic milk into plain yogurt.Naturalmaid sells plain yogurt to hospitals, nursing homes, andrestaurants in bulk, one-gallon containers. Each batch, processedat a cost of $880, yields 900 gallons of plain yogurt. Naturalmaidsells the one-gallon tubs for $6 each, and spends $0.16 for eachplastic tub. Naturalmaid has recently begun to reconsider itsstrategy. Naturalmaid wonders if it would be more profitable tosell individual-size portions of fruited organic yogurt at localfood stores. Naturalmaid could further process each batch of plainyogurt into 19200 individual portions (3/4 cup each) of fruitedyogurt. A recent market analysis indicates that demand for theproduct exists. Naturalmaid would sell each individual portion for$0.54. Packaging would cost $0.07 per portion, and fruit would cost$0.10 per portion. Fixed costs would not change.

a)Should naturalmaid continue to sell only the gallon- sizeplain yogurt (sell as is) , or convert the plain yogurt intoindividual- size portions of fruited yogurt (process further)? why?

calculate the net benefit per batch under each alternative. (Foraccounts with a $0 balance, make sure to enter $0 in theappropriate column.) Fill in the blanks.

Sales revenue per unit: sell as gallon-size containers_______,sell as individual portions ______

extra processing costs per unit- packaging: sell as gallon-sizecontainers______, sell as individual portions_______

extra processing costs per unit- adding fruit: sell asgallon-size containers_____, sell as individualportions________

net benefit per unit: sell as gallon-size containers_______,sell as individual portions_______

number of units produced per batch: sell as gallon-sizecontainers *_______, sell as individual portions*________

net benefit per batch: sell as gallon-size containers___________, sell as individual portions ___________

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San Jose sunglasses sell for about $154 per pair. Suppose thatthe company incurs the following average costs per pair:

direct materials: $41

direct labor: $13

variable manufacturing overhead: $10

variable marketing expenses: $2

fixed manufacturing overhead: $20

total cost: $86

*$2,350,000 total fixed manufacturing overhead/ 117,500 pairs ofsunglasses

San Jose has enough idle capacity to accept a one-time-onlyspecial order from Washington Shades for 23,000 pairs of sunglassesat $79 per pair. San Jose will not incur an variable marketingexpenses for the order.

a. How would accepting the order affect San Jose's Sunglassesoperating income? In addition to the special oder's effect onprofits, what other (longer-term, qualitative) factors should SanJose's Sunglasses managers consider in deciding whether to acceptthe order? Prepare the analysis to determine the effect onoperating income. Fill in the blanks

San Jose

Incremental Analysis of Special Sales Order

expected increase in revenues ________ sunglasses *_________________

expected increase in expenses ________sunglasses*_________________

expected _________ in operating income __________

b. San Jose's marketing manager, Peter Bing, argues againstaccepting the special order because the offer price of $79 is lessthan San Jose's $86 cost to make the sunglasses. Bing asks you, asone of San Jose's staff accountants, to explain whether hisanalysis is correct.

bluewombat276

1. Company has a capacity to produce 100,000units in a year. Usually the companyproduces and sells 80,000 units in any year. The selling price is $20.00; variableproduction cost is $8.00 per unit and total fixed cost is$400,000. This year company received arequest of special order for 15,000 units at a selling price of$15.00 per unit.

1.For eachitem below decide it is relevant or not relevant.

a. Selling price of $20.00

b. Special order price of $15.00

c. Variable production cost of $8.00

d. Fixed cost of $400,000

1.Should the company accept this specialorder? Why or why not? show calculations to support youranswer.

2.2. In makingbusiness decisions, management ordinarily considers only financialinformation. TRUE OR FALSE?

3. Theprocess used to identify which financial data changes underalternative courses of action is called incremental analysis. TRUEOR FALSE?

4. 4.Opportunity cost is a cost that cannot be changed by anypresent or future decision. TRUE OR FALSE?

5. Asell-or-process further decision compares the total revenue to beearned and all costs of producing the product. TRUE ORFALSE?

6. Sunkcosts are not relevant in incremental analysis. TRUE ORFALSE?

7.7. What is netpresent value?

a. Thedifference between the present value of net income and the capitalinvestment

b. Thedifference between the net cash flows and the capitalinvestment

c. Thedifference between the present value of net cash flows and thecapital investment

d. The difference between the net cash flows and thepresent value of the capital investment

8.8. To produce oneturkey platter, Jax Inc. uses $10 of variable and $1.50 of fixedcosts. A Peruvian wholesaler has offered to purchase 2,000 plattersat $12 each. Jax will incur special shipping costs of $0.75 perplatter if the order is accepted. Jax has sufficient unusedcapacity to produce the additional platters. What will be theeffect on net income if the special order is accepted?

a. $1000 increase

b. $2500 increase

c. $4000 increase

d. $500 decrease

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ACCT 2101 : Exam 2 Review Problems

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