ACCOUTING ACC Structuring a Make­or­Buy Problem Fresh Foods, a large restaurant chain

1.
Structuring a Make­or­Buy Problem
Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of
its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each.
Cost information on internal production includes the following:
Total Cost


Direct materials

$25,000

Direct labor

15,000

Variable manufacturing overhead

7,500

Variable marketing overhead

8,500

Fixed plant overhead

30,000

Total

$86,000

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional
costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the
nearest whole number.
Required:
2. List the relevant cost(s) of internal production and of external purchase.
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
????

3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
_______make__________

$ _________?________

4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally.
Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
_________buy________

$ _________?________

2.
Structuring a Special­Order Problem
The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of
its model F80 at a price of $4.20 each. The new customer is geographically separated from the company's

other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of
F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12
per unit. Unit cost information for the normal level of activity is as follows:

Fixed overhead will not be affected by whether or not the special order is accepted.
Required:
1. What are the relevant costs and benefits of the two alternatives?
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
??????

Should the company accept or reject the special order?
_______reject__________
2. By how much will operating income increase or decrease if the order is accepted?
_______decrease__________ by $ _______?__________

4
Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint
Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit
contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a
stitching machine to affix the appropriate university logo. The firm leases seven machines that each
provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time,
and each Rufus sweatshirt requires 30 minutes of machine time.
Assume that a maximum of 47,650 units of each sweatshirt can be sold.
Required:

If required, round your answers to the nearest whole number.
1. What is the contribution margin per hour of machine time for each type of sweatshirt?


Contribution Margin

Swoop

$ _______50__________

Rufus

$ ________30_________

2. What is the optimal mix of sweatshirt?


Optimal Mix

Swoop

____________?_____ units

Rufus

___________?______ units

3. What is the total contribution margin earned for the optimal mix?
$ ________?_________

5.
Special Order
Smooth Move Company manufactures professional paperweights and has been approached by a new
customer with an offer to purchase 15,000 units at a per­unit price of $9.00. The new customer is
geographically separated from Smooth Move's other customers, and existing sales will not be affected.
Smooth Move normally produces 89,000 units but plans to produce and sell only 65,000 in the coming
year. The normal sales price is $13 per unit. Unit cost information is as follows:
Direct materials

$3.10

Direct labor

2.50

Variable overhead

1.15

Fixed overhead

1.80

Total

$8.55

Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth
Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be
able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead
activities will be incurred. In addition, each special logo requires additional direct materials of $0.20.
Required:
Conceptual Connection: Should Smooth Move accept the special order?

 ________yes_________
By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter
negative value.
_________increase________ $ __________?_______

6.
Keep or Buy, Sunk Costs
Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she
has spent the following amounts on parts and labor:

Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission.
Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather
estimates that the needed repairs include the following:

In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has
advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay
cash, but she would need to sell the Grand Am.
Required:
1. Conceptual Connection: In trying to decide whether to restore the Grand Am or to buy the Neon,
Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too
much to give up. How would you react to her concern?
The input in the box below will not be graded, but may be reviewed and considered by your instructor.

???????????

2. Conceptual Connection: Assuming that Heather would be equally happy with the Grand Am or the
Neon, should she buy the Neon, or should she restore the Grand Am?
________?_________

7.
Sell or Process Further, Basic Analysis
Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint
costs for a typical quarter follow:

The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and
Delta, $40,000.
Management is considering processing Delta beyond the split­off point, which would increase the sales
value of Delta to $75,000. However, to process Delta further means that the company must rent some
special equipment that costs $15,400 per quarter. Additional materials and labor also needed will cost
$8,500 per quarter.
Required:
1. What is the operating profit earned by the four products for one quarter?
$ ________?_________
2. Conceptual Connection: Should the division process Delta further or sell it at split­off?
________company should process delta further_________
What is the effect of the decision on quarterly operating profit?
Gross profit would _______increase__________ by $ _________________ .

8.
Target Costing
H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market.

The toaster will have four slots that adjust in thickness to accommodate both slim slices of bread and
oversized bagels. The target price is $65. Banks requires that new products be priced such that 24% of the
price is profit.
Required:
If required, round your answers to two decimal places.
1. Calculate the amount of desired profit per unit of the new toaster.
$ ________?_________
2. Calculate the target cost per unit of the new toaster.
$ ________?_________

9.
Cost­Based Pricing Decision
Jeremy Costa, owner of Costa Cabinets Inc., is preparing a bid on a job that requires $2,250 of direct
materials, $2,025 of direct labor, and $1,238 of overhead. Jeremy normally applies a standard markup
based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of
other factors (e.g., competitive pressure). Last year’s income statement is as follows:
Sales

$136,500

Cost of goods sold


Gross margin

80,535
$55,965

Selling and administrative expenses

46,300



$9,665

Operating income

Required:
1. Calculate the markup that Jeremy will use.
________?_________ %
2. What is Jeremy's initial bid price?
$ _______?__________