Business Learning Center, AIS 211 Fall 2017 Exam 1 Review Check Figures
Note: These questions are provided ONLY to give students extra practice on chapters already covered. The topics covered here are not comprehensive and are not indicative of the breadth of coverage on the examinations for the course. Question 1: Jim sells steel clocks and steel stools. Fixed costs for his factory are 21,450. Jim has decided on a target mix of 25% clocks and 75% stools. Below is the cost information for the two products (assume Direct Labor is a variable cost): Product
Clock
Stool
Selling Price
$30
$50
Direct Materials
8
15
Direct Labor
4
6
a) Using, the target sales mix, determine the number of units that Jim just just sell of each item to breakeven for the month. (Round only your final answer for each item to the nearest whole number) 205 clocks and 613 stools
b) Using the target sales mix, determine the number of units of clocks and stools that Jim Jim must sell to make a (pretax) target profit of 15% of sales revenue. 275 clocks and 825 stools
c) Using the target sales mix, determine the sales revenue revenue required to earn (pretax) income equal to 15% of sales revenue. $49,500 Question 2: Gidgets Glassware Glassware Company makes and sells sets of glassware. Gidgets sells each glass for $15. There is no discount discount for buying buying a case. The following information information reflects a breakdown of costs at current production (Assume Direct Labor is a variable cost and round only your final answer for each part): Costs: Direct Materials Direct Labor Variable Manufacturing Overhead Variable Selling Costs Fixed Overhead
Total Costs $40,000 25,000 10,000 6,000 15,000
The glasses are sold in cases of 20. Each case requires 5 machine hours to manufacture. The plant has a practical capacity of 2,500 machine hours per month, but current monthly production consumes only about 80% of the capacity. A glass collectors catalog arranged a meeting with Gidgets sales team to place an order for 1600 glasses next month. It has requested a special stem that will cost Gidgets an additional $0.50 a glass. However, no variable selling costs will be incurred for fulfilling this special order. a) Determine the minimum (floor) price that Gidgets Glassware should charge for the order of 1,600 glasses. $15,800 b) Determine the minimum (floor) price, for the total order of glasses, if the order was for 2,600 glasses.cc $28,600
Question 3: Zinger Industries manufactures two products: YX56 and YZ83. The monthly practical capacity is 5,000 machine hours. The following data applies for the current month (all amounts are per unit): YX56
YZ83
Maximum sales units
4,000
4,500
Machine hours
1.1
.8
Selling price
$50
$40
10
8
Variable Manufacturing overhead
9
7
Variable selling overhead
5
3
Fixed overhead
10
10
Direct materials
a) How many units of each product should Zinger produce to maximize profits this month? 4500 of YX83 and 1272 of YX56
Question 4: McKinnon Company’s plant manager is considering buying a new machine to replace an old grinding machine or overhauling the old one to ensur e compliance with the plant’s high-quality standards. The following data are available: Old Grinding Machine Original cost $50,000 Accumulated Depreciation 40,000 Annual operating costs 18,000 Current salvage value 4,000 Salvage value at end of 5 years 0 New Grinding Machine Cost $70,000 Annual operating costs 13,000 Salvage value at end of 5 years 500 Overhaul of Old Grinding Machine Cost of overhaul $25,000 Annual operating costs after Overhaul 14,000 Salvage value at end of 5 years 200 a) What costs should the decision maker consider as sunk costs? b) List all relevant costs and when they are incurred. c) What should the plant manager do? Why? (a)
The original cost of $50,000 and accumulated depreciation of $40,000 are sunk, and therefore irrelevant, when the choice is between overhauling the old machine and replacing it with a new machine. Note that the annual operating costs (before overhaul) of $18,000 are not sunk costs, yet they are irrelevant. (b)
Relevant costs include the acquisition cost of the new machine, the cost of overhauling the old machine, current salvage of $4,000 for the old machine (all of which are up-front costs), salvage value at the end of five years for the new and overhauled machines, and the annual operating costs for both the new machine and the overhauled old machine.
Net acquisition cost
Replacement $66,000a
Salvage value at the end of 5 years
(500)
(200)
(300)
Operating costs for 5 years
65,000 b
70,000c
(5,000)
(c)
Overhauling $25,000
Difference $41,000
Total relevant costs a b c
$130,500
$94,800
$35,700
$70,000 – $4,000 = $66,000 $13,000 5 = $65,000 $14,000 5 = $70,000
It costs McKinnon Company $35,700 more with the new grinding machine than overhauling the old one. Therefore, the plant manager should overhaul the old grinding machine. However, this analysis is incomplete as it ignores the time value of money, considered in net present value analysis, which is covered in other courses.
Question 5: Kane Company is considering outsourcing a key component. A reliable supplier has quoted a price of $64.50 per unit. The following costs of the component when manufactured in-house are expressed on a per unit basis (assume Direct Labor is a variable cost): Direct Materials Direct Labor Variable Overhead Fixed Overhead Total costs
$23.40 16.10 26.70 6.90 $73.10
a) What assumptions need to be made about the behavior of overhead costs for Kane in order to analyze the outsourcing decision? b) Should Kane Company outsource the component? c) What other factors are relevant to this decision? Assumptions need to be made about the avoidability of the fixed overhead costs if Kane outsources the component. (b)
If the variable costs (direct materials, direct labor, and variable overhead) are all avoidable, then Kane will certainly reduce costs by outsourcing the component. Fixed overhead costs may be unavoidable if the facility cannot be converted to alternative uses when the component is outsourced. However, even if the fixed overhead costs are unavoidable, Kane would reduce costs by outsourcing. In this case, the cost savings per unit if the component is outsourced would be: Purchase price
(c)
$64.50
Avoidable costs ($73.10 – $6.90)
66.20
Savings per unit
$1.70
Other factors relevant to the decision are the supplier’s ability to live up to expected quality and delivery standards, and the likelihood of suppliers increasing prices of components in the near future.
