Decision Making Paper 2

1

Sunshine Corporation is considering the purchase of a new machine for $800,000. The machine is capable of producing 1.6 million units of product over its useful life. The manufacturer’s engineering specifications state that the machine-related cost of producing each unit of product should be $0.50. Sunshine’s total anticipated demand over the asset’s useful life is 1.2 million units. The average cost of materials and labor for each unit is $.40. In considering whether to buy the new machine, would you recommend that Sunshine use the manufacturer’s engineering specification of machine-related unit production cost?






2

Jack Blaze wants to rent store space in a new shopping mall for the 3-month holiday shopping season. Blaze believes he has a new product available that has the potential for good sales. The product can be obtained on consignment at the cost of $20 per unit, and he expects to sell the item for $100 per unit Due to other business ventures Blaze’s risk tolerance is low He recognizes that, as the product is entirely new, there is an element of risk. The mall management has offered Blaze three rental options: (1) a fixed fee of $8,000 per month, (2) a fixed fee of $3,990 per month plus 10% of Blaze’s revenue or (3) 30% of Blaze’s revenues Which one of the following actions would you recommend to Jack Blaze?






3

Sudden economic changes have forced Auto Facsimilie Co. to alter its business strategy. The company is considering eliminating product lines, laying off production workers, reducing advertising, and closing one of its factories. In taking these actions, which one of the following costs should be considered sunk costs?






4

Joe Cooper owns and operates an ice cream truck that he drives through residential neighborhoods to sell five different treats to the area’s children On average Cooper sells 100 of each type of treat per day for the 120 days per year when the weather is warm enough to generate sales. Four of his products are profitable, but the other, Creamy Delight, indicates a loss as follows:
Selling price/unit $1.75
Cost of each treat 0.80
Truck operating costs/unit 0.37
Joe’s salary/unit 0.60
Administrative costs/unit 0.08
Loss/unit $(0.10)
If Cooper cannot raise his selling price, he should






5

Teen Co recently reviewed the profitability of each of its segments The company’s Western Unit projected a loss for the coming period and was shut down. In which one of the following situations would the total company profits of Teen Co. decrease after shutting down the Western Unit?






6

Kator Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit:
Selling price $150
Direct materials 20
Direct labor 15
Variable manufacturing overhead 12
Fixed manufacturing overhead 30
Shipping and handling 3
Fixed selling and administrative 10
Total costs $90
Kator Co. has received a special, one-time order for 1,000 KB-96 parts. Kator Co. has received a special, one-time order for 1,000 KB-96 parts. Assume that Kator is operating at full capacity and that the contribution margin of the output that would be displaced by the special order is $10,000. Using the original data, the minimum price that is acceptable for this one-time special order is in excess of






7

The Sommers Company manufactures a variety of industrial valves. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers’ pressure valve; however a fire in Glascow Industries’ valve plant has shut down its manufacturing operations. Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves FOB shipping point Sommers’ product cost based on current attainable standards, for the pressure valve is as follows:
Direct materials $5.00
Direct labor 6.00
Manufacturing overhead 9.00
Total cost 20.00
Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This overhead rate is made up of the following components:
Variable factory overhead 6.00
Fixed factory overhead-direct 8.00
Fixed factory overhead-allocated 4.00
Applied manufacturing overhead rate 18.00
In determining selling prices, Sommers adds a 40% markup to product cost. This provides a $28 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $27 to maintain market share. Production management believes that it can handle the Glascow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glascow Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB shipping point. How many additional direct labor hours would be required each month to fill the Glascow order?






8

The Sommers Company manufactures a variety of industrial valves. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers’ pressure valve; however a fire in Glascow Industries’ valve plant has shut down its manufacturing operations. Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves FOB shipping point Sommers’ product cost based on current attainable standards, for the pressure valve is as follows:
Direct materials $5.00
Direct labor 6.00
Manufacturing overhead 9.00
Total cost 20.00
Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This overhead rate is made up of the following components:
Variable factory overhead 6.00
Fixed factory overhead-direct 8.00
Fixed factory overhead-allocated 4.00
Applied manufacturing overhead rate 18.00
In determining selling prices, Sommers adds a 40% markup to product cost. This provides a $28 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $27 to maintain market share. Production management believes that it can handle the Glascow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glascow Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB shipping point. What is the incremental profit (loss) before tax associated with the Glascow order?






9

The Sommers Company manufactures a variety of industrial valves. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers’ pressure valve; however a fire in Glascow Industries’ valve plant has shut down its manufacturing operations. Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves FOB shipping point Sommers’ product cost based on current attainable standards, for the pressure valve is as follows:
Direct materials $5.00
Direct labor 6.00
Manufacturing overhead 9.00
Total cost 20.00
Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This overhead rate is made up of the following components:
Variable factory overhead 6.00
Fixed factory overhead-direct 8.00
Fixed factory overhead-allocated 4.00
Applied manufacturing overhead rate 18.00
In determining selling prices, Sommers adds a 40% markup to product cost. This provides a $28 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $27 to maintain market share. Production management believes that it can handle the Glascow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glascow Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB shipping point. What is the minimum unit price that Sommers could accept without reducing net income?






10

Panyer Co. is a producer of a tank component. This product, J-5, has the following selling price and costs per unit:
Selling price $300
Direct materials 125
Direct labor 25
Variable manufacturing overhead 50
Shipping and handling 5
Fixed manufacturing overhead 15
Fixed selling and administrative 10
Total costs $230
Panyer has recently received a special, one-time order for 2,000 units of J-5. Panyer currently has enough excess capacity for this order. What should be the minimum price charged by Panyer?






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