Decision Making Paper 5

1

Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $2000
Materials handling (20% of direct materials cost) 400
Direct labor 16000
Manufacturing overhead (150% of direct labor) 24000
Total manufacturing cost 42400
Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed Simpson Castings one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000. If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit of T305 would






2

Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $2000
Materials handling (20% of direct materials cost) 400
Direct labor 16000
Manufacturing overhead (150% of direct labor) 24000
Total manufacturing cost 42400
Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed Simpson Castings one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000. Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to purchase the 10 units from Simpson Castings Richardson’s monthly cost for T305 would






3

Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $2000
Materials handling (20% of direct materials cost) 400
Direct labor 16000
Manufacturing overhead (150% of direct labor) 24000
Total manufacturing cost 42400
Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed Simpson Castings one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000. Assume the rental opportunity does not exist and Richardson Motors could use the idle capacity to manufacture another product that would contribute $104,000 per month. If Richardson chooses to manufacture the ten T305 units in order to maintain quality control, Richardson’s opportunity cost is






4

Aril Industries is a multiproduct company that currently manufactures 30,000 units of Part 730 each month for use in production. The facilities now being used to produce Part 730 have fixed monthly overhead costs of $150,000 and a theoretical capacity to produce 60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the facilities would be idle and 40% of fixed costs would continue to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730 are $11 per unit. Fixed overhead is allocated based on planned production levels. If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit price is less than






5

GiantCo has received an offer from PatriotCo to produce units that GiantCo currently produces and sells The unit price quoted by PatriotCo is higher than GiantCo’s variable production cost per unit but lower than the price at which GiantCo can market the units. Under which circumstance would GiantCo’s profits increase by purchasing units from PatriotCo?






6

When a multiproduct plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the highest






7

Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000. Concerning AM-12, which one of the following alternatives is most advantageous?






8

Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000. Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is true?






9

In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold to maximize profits?






10

Copeland, Inc., produces X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade the product to become Xylene. The following information has been gathered:
I. Selling price per pound of X-547
II. Variable manufacturing costs of upgrade process
III. Avoidable fixed costs of upgrade process
IV. Selling price per pound of Xylene
V. Joint manufacturing costs to produce X-547
Which items should be reviewed when making the upgrade decision?






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