1.

LIMITING FACTOR
The below illustration assumes a shortage of direct labour as the limiting resource constraint.
The details of the company three product lines are as follows:
Products
A
B
C
Selling price:
$50
$40
$30
Variable costs:
$20
$20
$20
Unit Contribution:
$30
$20
$10
Expected demand
1,000units;
500units;
600units
To produce 1 unit of product, the direct labour hours for each product is:
Product A : 10 hours;
Product B : 5 hour
Product C: 1 hour
Due to unavailability of labour supply, for the forthcoming period, it is assumed that the overall shortage of
labour hours is 1,100 hours.
Question: Determine the production mix to maximize the companys profit.
2. MAKE OR BUY
Company A has to decide whether to manufacture internally or to buy or contract from outsiders.
Company A is able to contract with another company to supply them ready make at $5 each.
The details of Company A internal production costs are as follows:
Direct material/unit
$2.00
Direct labour/unit
$3.00
Variable production overhead
$0.50
Fixed production overhead
$0.50
Total production per unit cost
$6.00
The company also need to pay for transport charges of $5,000 for the delivery of 3,000 units of the product.
Question: Should Company A make or buy the product?
3. SPECIAL ORDER
Say Company A has capacity to produce 100,000 units of product X. The cost estimate per unit based on
current capacity of 80% is as follows:
$ Per unit
Direct material
$2.00
Direct labour
$5.00
Variable production overhead
$3.00
Fixed production overhead
$4.00
Total
$14.00
The company sells the product X to its regular customer at $20.00. However, a non- regular customer has
approached the company to purchase the excess capacity at $18 each.
Question: Should Company A accept this special order?
4. Woody Company, which manufactures sneakers, has enough idle capacity available to accept a
special order of 20,000 pairs of sneakers at $6.00 a pair. The normal selling price is $10.00 a pair
variable manufacturing cost are $ 4.50 a pair, and fixed manufacturing costs are $1.50 a pair. Woody
will not incur any selling expenses as a result of the special order. What would the effect on
operating income be if the special order could be accepted without affecting normal sales?
5. Dixon Company manufactures part 347 for use in one of its main products.
Normal annual production for part 347 is 100,000 units. The costs per 100 units is as follows
Direct material...
Direct labor.......
Manufacturing overhead:
Variable ............
Fixed ................
Total costs per 100 units..

$260
100
120
160
$640

Cext Company has offered to sell Dixon all 100,000 units it will need during the coming year for
$600 per 100units. If Dixon accepts the often from Cext, the facilities used to manufacture part 347
could be used in the production of part 483. This change would save Dixon $90,000 in relevant costs.
Also, a $100,000 cost item included in the fixed factory overhead that is specifically related to part
347 would be eliminated. Should Dixon Company accept the offer from Cext Company?
6. Rice Corporation currently operates two divisions whish had operating results for the year ended
December 31, 19X2, as follows:
Sales
Variable costs
Contribution margin
Fixed costs for the division
Margin over direct costs
Allocated corporate costs
Operating income (loss)

WEST
DIVISION
$600,000
310,000
$290,000
110,000
$180,000
90,000
$ 90,000

TROY
DIVISON
$300,000
200,000
$100,000
70,000
$ 30,000
45,000
$(15,000)

Since the troy division also sustained an operating loss during 19X1, rice president is considering the
elimination of this division. Assume that the troy division fixed cots could be avoided if the division
were eliminated. If the troy division had been eliminated on January 1,19x2, rice corporation19X2
operating income would have been equal to what amount?
7. The production department of Cronin manufacturing company must make a product mix decision in
light of a shortage of pound of direct material. The following data are available for product x and y:

Selling price per unit

Direct materials
Direct labor
Variable factory overhead
Contribution margin per unit
Contribution margin ratio (CM/ Sales)
30%
Number of pounds of direct material
Require per unit
Maximum sales (in units)

PRODUCT X
$ 12
$4
1
3

PRODUCT Y
$ 10
$2
3
2

$4
=====
331/3%
2
2.000

$3
=====

1
5,000

Determine the number of units of products x and products y to be produced if only 8000 pounds of direct
material are available.
8. Brike Company, which manufactures robes, has enough idle capacity available to accept a special
order of 10,000 robes at $8 a robe. A robe predicted income statement for the year without this
special order is as follows:
Sales
Manufacturing costs:
Variable
Fixed
Total manufacturing costs
Gross profit
Selling Expenses:
Variable
Fixed
Total Selling Expenses

PER UNIT
$ 12.50
$ 6.25
1.75
$ 8.00
$ 4.50
$ 1.80
1.45
$ 3.25

TOTAL
$1,250,000
$ 625,000
175,000
$ 800,000
$ 450,000
$ 180,000
$ 145,000
$ 325,000

Operating Income

$ 1.25
======

$ 125,000
========

Assuming no additional selling expenses, what would be the effect on operating income if the special
order was accepted?
9. Lincoln Company, a glove manufacturer, has enough idle capacity available to accept a special order
of 20,000 pairs of gloves at $12.00 a pair. The normal selling price is $20.00a pair. Variable
manufacturing costs are $9.00 a pair, and fixed manufacturing costs are $3.00 a pair. Lincoln will not
incur any selling expenses as a result of the special order. What would be the effect on operating
income if the special order could be accepted without affecting normal sales?
10. Boyer Company manufactures basketballs. The forecasted income statement for the year before any
special orders is as follows:
AMOUNT
Sales
Manufacturing cost of goods sold
Gross profit
Selling Expenses
Operating income

PER UNIT

$ 4,000,000
$ 10.00
$ 3,200,000
$ 800,000
$ 2.00
300,000
$ .75
$ 500,000
$1.25

=========

8.00

======

Fixed costs included in the above forecasted income statement are $1,200,000 in manufacturing cost of
goods sold and $100,000 in selling expenses.
A special order offering to buy 50,000 basketballs for $7.50 each was made to Boyer. There will be no
additional selling expenses if the special order is accepted. Assuming Boyer has sufficient capacity to
manufacture 50,000 more basket balls, by what amount would operating income be increased or decreased
as a result of accepting the special order?
11. The manufacturing capacity of Jordan Company's facilities is 30,000 writs of product a year. A
summary of operating results for the year ended December 31, 19X2, is as follows:
Sales (18,000 units @ $100)
Variable Manufacturing and selling costs
Contribution Margin
Fixed costs
Operating Income

$
$

$ 1,800,000
990,000
$ 810,000
495,000
315,000

A foreign distributor has offered to buy 15,000 units at $90 per unit during 19X3. Assume that all of
Jordan's costs would be at the same levels and rates in 19X3 as in 19X2. If Jordan accepted this offer and
rejected some business from regular customers so as not to exceed capacity, what would be the total relevant
income from accepting the special offer?
12. Blade Division of Dana Company produces hardened steel blades. One-third of the Blade's Division
output is sold to the Lawn Products Division of Dana: the remainder sold to outside customers. The
Blade Division's estimated sales and standard cost data-for the fiscal year ending June 30, 19X1, are
as follows:
LAWN PRODUCTS
Sales
Variable costs
Fixed costs
Gross margin

$ 15,000
(10,000)
(3.000)
$ 2,000

Unit sales

10,000

OUTSIDERS
$40,000
(20,000)
(6.000)
$14,000
20,000

The Lawn Products Division has an opportunity to purchase 10,000 identical qualify blades from an outside
supplier at a cost of $1.25 per unit on continuing basis. Assume that the Blade Division cannot sell any
additional products to outside the customer. Should Dana allow its Lawn Products Division to purchase the
blades from the outside supplier, and why?
13. Plainfield Company manufactures part G for use in its production cycle. The costs units for 10,000
units of part G are as follows:
Direct material. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Direct labor. . . .. . . .. .. . .. .. .. . .. . .. . . .. .. . .. ..........
Variable factory overhead.... .. .. .. .. ..
Fixed Factory overhead
--------

$3
15
6
$ 32

Verona Company has offered to sell Plainfield 10,000 units of part G for $30 per unit. If Plainfield accepts
Verona's offer, the released facilities could be used to save $45,000 in relevant costs in the manufacture of
part H. In addition $5 per unit of the fixed factory overhead applied to part G would be totally eliminated.
Which alternative is more desirable and by what amount is it more desirable?
14. Bawling Company manufactures footballs and has enough idle capacity to accept a special order for
20,000 footballs to be sold for $14 each. The footballs normally sell for $20 each. The variable
manufacturing costs are $10 per balls, and fixed manufacturing overhead is $5 per ball. There will be no
additional selling or administrative costs related to the special order, and the special order will not affect
normal sales.
Required:
Calculated the effect on net income if the special order is accepted.
15. Clean-it Company produces cleaning kits for shotguns. The production capacity available will enable the
firm to produce 500,000 kits annually. A projected income statement for next year shows
Sales (460,000 kits)
Costs of goods sold
Gross profit
Selling and administrative expenses
Net income

$4,600,000
2,960,000
1,640,000
1,250,000
$ 390,000

Fixed manufacturing overhead costs included in the cost of goods sold are $ 1,120,000. A 10% sales
commission is paid to sales representatives for each kit sold. The purchasing department of a large discount
chain has offered to purchase 30,000 kits at $6 each. The Clean-it Company sales managers initial response
is to refuse the offer because he concludes that the $6 price is below the firms average cost
2,960,000/460,000. The sales commission would not be paid on the special order.
Required:
A. Should the special offer be accepted? What would be the impact on net income?
B. Assume that the offer was for 50,000 kits. Should it be accepted? Show your
calculations.
C. Ignore part B. What is the lowest price the firm could accept if it wants to earn annual
net income of $480,000?
16. Evaluating a Make-Buy Situation
A manufacturer of television sets is considering ways to increase the firms plant capacity utilization because
it has recently been operating at 70% of capacity. One proposal is to make a component which is currently

being purchased for $75 per unit. Based on a study by the firms controller, the cost to produce the
component is as follows:
Direct materials
$24.00
Direct labor(3 hours@ $11.20 per hr)
33.60
Manufacturing overhead(applied based on direct labor hrs)
24.00
Total
$81.60
The anticipated work activity for the year is 250,000 direct labor hours. Fixed manufacturing overhead for
the year is budgeted at $1.75 million.
Required:
You have been asked by the controller to determine if the component should be built internally or purchased.
Calculate the per unit cost differential between making and buying the component.
17. Determining the Best Product Mix with Constraints
Koy Company produces three types of stereo headphones, K-11, K-12 and K-13. The production of all three
types required the use of a special machine, which can only be operated 300 hours each month. The
following data are provided by the controller:

Selling price per unit

Variable cost per unit
Machine time required in minutes

K-11
$84
49
6

K-12
$112
50
10

K-13
$147
70
15

The demand for all three types has been very strong, and the firm can sell as many headphones as it can
produce.
Required:
A. Given the capacity constraint imposed by the special machine, which type should be made?
B. If all types required the same amount of machine time, which style should be produced?
18. Choice of Products with Constraints
Foss Company produces three products in a highly automated manufacturing process. During a month, only
600 machine hours are available for production of the three products. Relevant financial and production data
for the three products are:

Selling price
Variable costs
Contribution margin
Machine time required-in minutes

Product
A
$12
7
$ 5
12

Product
B
$16
8
$8
20

Product
C
$22
10
$12
30

The firm can sell as much of any product as it can manufacture.

Required:
A. Which product should be manufactured? How much total contribution margin will be earned?
B. How much would the selling price of the second most profitable product have to increase to be as
profitable as the answer to A?

19. Evaluating a Special Order

Driftwood Company produces flower vases. The operating results of the preceding year were:
Sales(77,000 units@ $8)
Cost of goods sold
Direct materials
Direct labor
Manufacturing overhead
Total
Gross profit
Selling expenses
Administrative expenses
Total operating expenses
Net income

$616,000
115,500
154,000
92,400
361,900
254,100
38,500
23,100
61,600
$192,500

The company has received a special order to buy 10,000 vases at a unit cost of $6.80. Materials cost per unit
would not change, but the labor costs for the special order would be 20% greater than normal since some
overtime wages would be incurred. Fixed manufacturing overhead is 50% of the variable manufacturing
overhead at the present level of production. Fixed manufacturing overhead would not change and there
would be no additional variable or fixed selling expenses. The administrative expenses, which are all fixed,
would increase $2,000 if the special order is accepted. Current variable selling expenses are $0.20 per unit.
The company has a maximum capacity of 85.000 vases, so the company would have to reduce its regular
sales by 2,000 units if it accepts the special order.
Required:
A. Should the company accept the special order? Why?
B. What would be the effect on the firms profits?
20. Evaluating a Special Order
Flame Company manufactures gas grills and is considering expanding production. A distributor has asked
the company to produce a special order of 8,000 grills to be sold overseas. The grills would be sold under a
different brand name and would not influence Flame Companys current sales. The plant is currently
producing 95,000 units per year. The companys maximum capacity is 100,000 units per year, so the
company would have to reduce the production of units sold under its own brand name by 3,000 units if the
special order is accepted. The companys income statement for the previous year is presented below:

Sales(95,000 units)
Cost of goods sold:
Direct materials
Direct labor
Manufacturing overhead
Gross Profit
Selling expenses
Administrative expenses
Net income

$7,125,000
$2,375,000
1,900,000
1,425,000
575,000
237,500

5,700,000
1,425,000
812,500
$ 612,500

The companys variable manufacturing overhead is $ 10 per unit and the variable selling expense is $5
per unit. The administrative expense is com0pletely fixed and would increase by $5,000 if the special order

is accepted. There would be no variable selling expense associated with the special order, and variable
manufacturing overhead per unit would remain constant.
The companys direct labor cost per unit for the special order would increase 20% while direct materials
cost per unit for the special order would increase 10%. Fixed manufacturing overhead and fixed selling
expense would not change.
Required:
If the distributor has offered to pay $65 per unit for the special order, should the company accept the offer?
Justify your answer.

FURTHER PRACTICE QUESTIONS:

Q.1 Special Order Marshall Company recently approached Johnson Corporation regarding manufacturing
a special order of 4,000 units of product CRB2B. Marshall would reimburse Johnson for all variable
manufacturing costs plus 35%. The per-unit data follow:
Unit sales price
$28
Variable manufacturing costs 13
Variable marketing costs
5
Fixed manufacturing costs
4
Fixed marketing costs
2
Johnson would have a retooling cost of $12,000 for the special order. Johnson has no alternative use of
capacity.
Required Should the special order be accepted?
Q.2 Special Order Alton Inc. is working at full production capacity producing 20,000 units of a unique
product. Manufacturing costs per unit for the product are
Direct materials
$9
Direct labor
8
Manufacturing overhead
10
Total manufacturing cost
$27
The unit manufacturing overhead cost is based on a $4 variable cost per unit and $120,000 fixed costs. The
nonmanufacturing costs, all variable, are $8 per unit, and the sales price is $45 per unit.
Sports Headquarters Company (SHC) has asked Alton to produce 5,000 units of a modification of the new
product. This modification would require the same manufacturing processes. SHC has offered to share the
nonmanufacturing costs equally with Alton. Alton would sell the modified product to SHC for $35 per unit.
Required
1. Should Alton produce the special order for SHC? Why or why not?
2. Suppose that Alton Inc. had been working at less than full capacity to produce 16,000 units of the product
when SHC made the offer. What is the minimum price that Alton should accept for the modified product
under these conditions?
Q.3 Make or Buy; Calista Company manufactures electronic equipment In 2009, it purchased the special
switches used in each of its products from an outside supplier. The supplier charged Calista $2 per switch.
Calistas CEO considered purchasing either machine X or machine Y so the company could manufacture its
own switches. The CEO decided at the beginning of 2010 to purchase Machine X, based on the following
data:
Machine X Machine Y
Annual fixed cost
$135,000
$204,000
Variable cost per switch
0.65
0.30
Required
1. For machine X, what is the indifference point between purchasing the machine and purchasing from the
outside vendor?
2. At what volume level should Calista consider purchasing Machine Y?
Q.4 Special Order Grant Industries, a manufacturer of electronic parts, has recently received an invitation
to bid on a special order for 20,000 units of one of its most popular products. Grant currently manufactures

40,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50 percent capacity. There
will be no marketing costs on the special order. The sales manager of Grant wants to set the bid at $9
because she is sure that Grant will get the business at that price. Others on the executive committee of the
firm object, saying that Grant would lose money on the special order at that price.
Units
40,000
60,000
Manufacturing costs
Direct materials
$ 80,000
$120,000
Direct labor
120,000
180,000
Factory overhead
240,000
300,000
Total manufacturing costs
$440,000
$600,000
Unit cost
$ 11
$ 10
Required
1. Why does the unit cost decline from $11 to $10 when production level rises from 40,000 to 60,000 units?
2. Is the sales manager correct? What do you think the bid price should be?
3. List some additional factors Grant should consider in deciding how much to bid on this special order.
Q.5 Profitability Analysis Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech
products known for its excellent quality and innovation. Recently the firm conducted a relevant cost analysis
of one of its product lines that has only two products, T-1 and T-2. The sales for T-2 are decreasing and the
purchase costs are increasing. The firm might drop T-2 and sell only T-1.
Barbour allocates fixed costs to products on the basis of sales revenue. When the president of
Barbour saw the income statement, he agreed that T-2 should be dropped. If this is done, sales of T-1 are
expected to increase by 10 percent next year; the firms cost structure will remain the same.
T-1
T-2
Sales
$200,000
$260,000
Variable cost of goods sold
70,000
130,000
Contribution margin
$130,000
$130,000
Expenses
Fixed corporate costs
60,000
75,000
Variable selling and administration
20,000
50,000
Fixed selling and administration
12,000
21,000
Total expenses
$ 92,000
$146,000
Operating income
$ 38,000
$ (16,000)
Required
1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
2. What strategic factors should be considered?
Q.6 Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is
considering an offer from a subcontractor to provide 2,000 units of product OP89 for $120,000. If Terry does
not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:
Costs per Unit
Direct materials
$28
Direct labor
18
Variable overhead
16
Fixed overhead
4
Required Should Terry Inc. accept the offer from the subcontractor? Why or why not?
Q.7 Disposal of Assets A company has an inventory of 2,000 different parts for a line of cars that has been
discontinued. The net book value of inventory in the accounting records is $50,000. The parts can be either
re-machined at a total additional cost of $25,000 and then sold for $30,000 or sold as is for $2,500. What
should it do?
Q.8 Replacement of Asset An uninsured boat costing $90,000 was wrecked the first day it was used. It can
be either sold as is for $9,000 cash and replaced with a similar boat costing $92,000 or rebuilt for $75,000
and be brand new as far as operating characteristics and looks are concerned. What should be done?

Q.9 Profit from Processing Further Deaton Corporation manufactures products A, B, and C from a joint
process. Joint costs are allocated on the basis of relative sales value at the end of the joint process.
Additional information for Deaton Corporation follows:
A
B
C
Total
Units produced
12,000
8,000
4,000
24,000
Joint costs
$144,000
$ 60,000
$36,000
$240,000
Sales value before additional processing
240,000
100,000
60,000
400,000
Additional costs for further processing
28,000
20,000
12,000
60,000
Sales value if processed further
280,000
120,000
70,000
470,000
Required Which, if any, of products A, B, and C should be processed further and then sold?
Q.10 Make or Buy Eggers Company needs 20,000 units of a part to use in producing one of its products.
If Eggers buys the part from McMillan Company for $90 instead of making it, Eggers could not use the
released facilities in another manufacturing activity. Fifty percent of the fixed overhead will continue
irrespective of CEO Donald Mickeys decision. The cost data are
Cost to make the part
Direct materials
$35
Direct labor
16
Variable overhead
24
Fixed overhead
20
$95
Required: Determine which alternative is more attractive to Eggers and by what amount.
Q.11 Selection of the Most Profitable Product DVD Production Company produces two basic types of
video games, Flash and Clash. Pertinent data for DVD Production Company follows:
Flash
Clash
Sales price
$250
$140
Costs
Direct materials
50
25
Direct labor ($25/Hr)
100
50
Variable factory overhead *
50
25
Fixed factory overhead *
20
10
Marketing costs (all fixed)
10
10
Total costs
$230
$120
Operating profit
$ 20
$ 20
* Based on labor-hours.
The DVD game craze is at its height so that either Flash or Clash alone can be sold to keep the plant
operating at full capacity. However, labor capacity in the plant is insufficient to meet the combined demand
for both games. Flash and Clash are processed through the same production departments.
Required Which product should be produced? Briefly explain your answer.
Q.12 Special Order Pricing Barrys Bar-B-Que is a popular lunch-time spot. Barry is conscientious about
the quality of his meals, and he has a regular crowd of 600 patrons for his $5 lunch. His variable cost for
each meal is about $2, and he figures his fixed costs, on a daily basis, at about $1,200. From time to time,
bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat 700 diners in
the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour
operator generally pays for the entire group on a single check to save the wait staff and cashier the additional
time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price
to $3.50 per meal for each of the 50 bus tour members.
Required Should Barry accept the $3.50 price? Why or why not? What if the tour company were willing to
guarantee 200 patrons (or four bus loads) at least once a month for $3.00 per meal?

Q.13 Special Order Earth Baby Inc. (EBI) recently celebrated its tenth anniversary. The company produces
organic baby products for health-conscious parents. These products include food, clothing, and toys. Earth
Baby has recently introduced a new line of premium organic baby foods. Extensive research and scientific
testing indicate that babies raised on the new line of foods will have substantial health benefits. EBI is able
to sell its products at prices higher than competitors because of its excellent reputation for superior
products. EBI distributes its products through high-end grocery stores, pharmacies, and specialty retail baby
stores.
Joan Alvarez, the founder and CEO of EBI recently received a proposal from an old business school
classmate, Robert Bradley, the vice president of Great Deal Inc (GDI), a large discount retailer. Mr. Bradley
proposes a joint venture between his company and EBI, citing the growing demand for organic products and
the superior distribution channels of his organization. Under this venture EBI would make some minor
modifications to the manufacturing process of some of its best-selling baby foods and the foods would then
be packaged and sold by GDI. Under the agreement EBI would receive $3.10 per jar of baby food and
would provide GDI a limited right to advertise the product as manufactured for Great Deal by EBI. Joan
Alvarez set up a meeting with Fred Stanley, Earth Babys CFO, to discuss the profitability of the venture.
Mr. Stanley made some initial calculations and determined that the direct materials, direct labor, and other
variable costs needed for the GDI order would be about $2 per unit as compared to the full cost of $3
(materials, labor, and overhead) for the equivalent EBI product.
Required Should Earth Baby Inc. accept the proposed venture from GDI? Why or why not?
Q.14 Special Order; Strategy, International Williams Company, located in southern Wisconsin,
manufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states.
Currently, the company is operating at about 70 percent capacity and is earning a satisfactory return on
investment.
Glasgow Industries Ltd. of Scotland has approached management with an offer to buy 120,000 units of a
pressure valve. Glasgow Industries manufactures a valve that is almost identical to Williams pressure valve;
however, a fire in Glasgow Industries valve plant has shut down its manufacturing operations. Glasgow
needs the 120,000 valves over the next four months to meet commitments to its regular customers; the
company is prepared to pay $21 each for the valves.
Williams product cost for the pressure valve, based on current attainable standards, is
Direct materials
$6
Direct labor (0.5 hr per valve)
8
Manufacturing overhead (1/3 variable)
9
Total manufacturing cost
$23
Additional costs incurred in connection with sales of the pressure valve are sales commissions of
5 percent and freight expense of $1 per unit. However, the company does not pay sales commissions on
special orders that come directly to management. Freight expense will be paid by Glasgow.
In determining selling prices, Williams adds a 40 percent markup to product cost. This provides
a $32 suggested selling price for the pressure valve. The marketing department, however, has set the current
selling price at $30 to maintain market share.
Production management believes that it can handle the Glasgow 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, Williams will manufacture and ship 30,000 pressure valves to
Glasgow Industries each month for the next four months. Shipments will be made in weekly consignments,
FOB shipping point.
Required
1. Determine how many additional direct labor-hours will be required each month to fill the Glasgow order.
2. Prepare an analysis showing the impact on profit before tax of accepting the Glasgow order.
3. Calculate the minimum unit price that Williams management could accept for the Glasgow order without
reducing net income.
4. Identify the strategic factors that Williams should consider before accepting the Glasgow order.
5. Identify the factors related to international business that Williams should consider before accepting the
Glasgow order.

Q.15 Opening a New Restaurant; Use of Relevant Cost Analysis Brad and Judy Bailey both enjoy
preparing food and creating new recipes. So they are taking their passion to the workplace and plan to open
a new restaurant called Baileys. They have a two-year, renewable lease on a property that was previously
used as a fast food restaurant. You are a good friend of the couple. They know of your expertise in cost
management, so they have asked for your advice.
Required Give an example (no numbers necessary) of how the Baileys could use the following cost
management methods in planning and operating their new restaurant.
1. Special order analysis.
2. The make-or-buy decision.
3. Sell now or process further.
4. Profitability analysis for current and/or new products.
Q.16 Special Order; Use of Opportunity Cost Information Sharman Athletic Gear Inc (SAG) is
considering a special order for 15,000 baseball caps with the logo of East Texas University (ETU) to be
purchased by the ETU alumni association. The ETU alumni association is planning to use the caps as gifts
and to sell some of the caps at alumni events in celebration of the universitys recent national championship
by its baseball team. Sharmans cost per hat is $3.50 which includes $1.50 fixed cost related to plant
capacity and equipment. ETU has made a firm offer of $35,000 for the hats, and
Sharman, considering the price to be far below production costs, decides to decline the offer.
Required
1. Did Sharman make the wrong decision? Why or why not?
2. Consider the management decision-making approach at Sharman that resulted in this decision. How was
opportunity cost included or not included in the decision? What decision biases are apparent in this
decision?
Q.17. When Does Buying a Gas Guzzler Make Sense? Gasoline prices increased and also fluctuated
widely during 2007 and 2008, and car purchases fell, even for fuel-efficient cars. Many new cars were
selling for a discount and/or special promotions including reduced interest rates on car loans.
These discounts and promotions were especially prominent for SUVs and larger cars, those with the lowest
gas mileage. The discounts and promotions were also prominent for used cars; in the used car market it was
hard to find a fuel efficient vehicle, but SUVs and larger cars were in abundance.
Required You are shopping for a car for your youngest son who has just received his drivers license. By
clear agreement with your son, and because of local legal restrictions on new drivers such as those limiting
the time of day they can drive, you do not expect the car to be driven many miles in the average month. Your
son will be the only one allowed to use the car and he by agreement must purchase the gasoline for it. You
will pay for insurance and for any mechanical repairs. Your criteria for the purchase of the car are first safety
and then reliability and the cost of insurance. What type of car would you considera small fuel-efficient
car or a large car?
Q.18 Special Order Award Plus Co. manufactures medals for winners of athletic events and other contests.
Its manufacturing plant has the capacity to produce 10,000 medals each month; current monthly production
is 7,500 medals. The company normally charges $175 per medal. Variable costs and fixed costs for the
current activity level of 75 percent follow:
Current Product Costs
Variable costs
Manufacturing
Labor
$ 375,000
Material
262,500
Marketing
187,500
Total variable costs
$ 825,000
Fixed costs
Manufacturing
$ 275,000
Marketing
175,000
Total fixed costs
$ 450,000

Total costs
$1,275,000
Award Plus has just received a special one-time order for 2,500 medals at $100 per medal. For this particular
order, no variable marketing costs will be incurred. Cathy Senna, a management accountant with Award
Plus, has been assigned the task of analyzing this order and recommending whether the company should
accept or reject it. After examining the costs, Senna suggested to her supervisor,
Gerard LePenn who is the controller, that they request competitive bids from vendors for the raw materials
since the current quote seems high. LePenn insisted that the prices are in line with other vendors and told her
that she was not to discuss her observations with anyone else. Senna later discovered that LePenn is a
brother-in-law of the owner of the current raw materials supply vendor.
Required
1. Determine if Award Plus Co. should accept the special order and why.
2. Discuss at least three other considerations that Cathy Senna should include in her analysis of the special
order.
3. Explain how Cathy Senna should try to resolve the ethical conflict arising out of the controllers
insistence that the company avoid competitive bidding.
Q.19 Special Order Duvernoy Industries produces high-quality automobile seat covers. Its success in the
industry is due to its quality, although all of its customers, the automakers, are very cost conscious and
negotiate for price cuts on all large orders. Noting that the auto supply business is becoming increasingly
competitive, Duvernoy is looking for a way to meet the challenge. It is negotiating with Chen, Inc., a large
mail-order auto parts and accessories retailer, to purchase a large order of seat covers. Much of Duvernoys
business is seasonal and cyclical, fluctuating with the varying demands of the large automakers. Duvernoy
would like to keep its plants busy throughout the year by reducing these seasonal and cyclical fluctuations.
Keeping the flow of product moving through the plants at a steady level is helpful in keeping costs down;
extra overtime and machine setup and repair costs are incurred when production levels fluctuate. Chen has
agreed to a large order but only at a price of $30 per set. The special order can be produced in one batch with
available capacity. Duvernoy prepared these data:
Next months operating information without the special order (per unit, for 10,000 units, made in 10 batches
of 1,000 each)
Sales price
$80
Per unit costs
Variable manufacturing costs
20
Variable marketing costs
8
Fixed manufacturing costs
40
Fixed marketing costs
3
Special order information
Sales
2,000 units
Sales price per unit
$30
No variable marketing costs are associated with this order, but Marc Jones, the firms president, has spent
$6,000 during the past three months trying to get Chen to purchase the special order.
Required
1. How much will the special order change Duvernoy Industries total operating income?
2. How might the special order fit into Duvernoys competitive situation?
Q.20 Special Order: ABC Costing (Continuation of Problem 19) Assume the same information as for
Problem 19, except that the $40 fixed manufacturing overhead consists of $15 per unit batch related costs
and $25 per unit facilities level fixed costs. Also, assume that each new batch causes increased costs of
$15,000 per batch; the remainder of the fixed costs does not vary with the number of units produced or the
number of batches.
Required
1. Calculate the relevant unit and total cost of the special order, including the new information about batch
related costs.
2. If accepted, how would the special order affect Duvernoys operating income?

3. Suppose that Chen notifies Duvernoy it must reduce its order to 1,000 units because of changes in orders
it has received. How would this change affect your answer in Parts 1 and 2?
Q.21 Make or Buy Martens, Inc., manufactures a variety of electronic products. It specializes in
commercial and residential products with moderate to large electric motors such as pumps and fans. Martens
is now looking closely at its production of attic fans, which included 10,000 units in the prior year and had
the following costs. These costs included $100,000 of allocated fixed manufacturing overhead. Martens has
capacity to manufacture 15,000 attic fans per year.
Martens believes demand in the coming year will be 20,000 attic fans. The company has looked into the
possibility of purchasing the attic fans from another manufacturer to help it meet this demand. Harris
Products, a steady supplier of quality products, would be able to provide up to 9,000 attic fans per year at a
price of $46 per fan delivered to Martenss facility.
For each unit of product that Martens sells, regardless of whether the product has been purchased from
Harris or is manufactured by Martens, there is an additional selling and administrative cost of $20, which
includes an allocated $6 fixed overhead cost per unit. The following is based on the production of 10,000
units in the prior year.
Selling price per unit
$72.00
Costs per unit
Electric motor
$ 6.00
Other parts
8.00
Direct labor ($15/hr.)
15.00
Manufacturing overhead
15.00
Selling and administrative cost
20.00
64.00
Profit per unit
$ 8.00
Required
1. Assuming Martens plans to meet the expected demand for 20,000 attic fans, how many should it
manufacture and how many should it purchase from Harris Products? Explain your reasoning with
calculations.
2. Independent of Part 1 above assumes that Beth Johnson, Martenss product manager, has suggested that
the company could make better use of its fan department capacity by manufacturing marine pumps instead
of fans. Johnson believes that Martens could expect to use the production capacity to produce and sell
25,000 pumps annually at a price of $60 per pump. Johnsons estimate of the costs to manufacture the
pumps is presented below. If Johnsons suggestion is not accepted, Martens would sell 20,000 attic fans
instead. Should Martens manufacture pumps or attic fans? Information on the sales price and costs for the
marine pumps follows.
Selling price per pump
Costs per unit
Electric motor
Other parts
Direct labor ($15/hr.)
Manufacturing overhead
Selling and administrative cost
Profit per pump

$60.00
$ 5.50
7.00
7.50
9.00
20.00 49.00
$11.00

Q.22. Special Order BallCards Inc. sells baseball cards in packs of 15 in drugstores throughout the country.
It is the third leading firm in the industry. BallCards has been approached by Pennock Cereal Inc., which
would like to order a special edition of cards to use as a promotion with its cereal.
BallCards would be solely responsible for designing and producing the cards. Pennock wants to order
25,000 sets and has offered $23,750 for the total order. Each set will consist of 33 cards. Ball- Cards
currently produces cards in sheets of 132.
Production, marketing, and other costs (per sheet)
Direct materials
$ 1.20
Direct labor
0.20
Variable overhead
0.40
Fixed overhead
0.15

Variable marketing
0.10
Fixed marketing
0.35
Insurance, taxes, and administrative salaries
0.10
Costs for special order
Design
2,000
Other setup costs
5,500
BallCards would incur no marketing costs for the special order. It has the capacity to accept this order
without interrupting regular production.
Required
1. Should Ballcards accept the special order? Support your answer with appropriate computations.
2. What are the important strategic issues in the decision?
Q.23 Special Order Green Grow Inc. (GGI) manufactures lawn fertilizer and because of its very high
quality often receives special orders from agricultural research groups. For each type of fertilizer sold, each
bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGIs
operating capacity is 22,000 one-hundred-pound bags per month, and it currently is selling 20,000 bags
manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000
one-hundred-pound bags of fertilizer for $125,000 from APAC, a research organization. The production
costs would be the same, although delivery and other packaging and distribution services would cause a onetime $2,000 cost for GGI. The special order would be processed in two batches of 2,500 bags each. The
following information is provided about GGIs current operations:
Sales and production cost data for 20,000 bags, per bag
Sales price
$38
Variable manufacturing costs 15
Variable marketing costs
2
Fixed manufacturing costs
12
Fixed marketing costs
2
No marketing costs would be associated with the special order. Since the order would be used in research
and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags.
Required
1. Should GGI accept the special order? Explain why or why not.
2. What would be the change in operating income if the special order is accepted?
3. Suppose that after GGI accepts the special order, it finds that unexpected production delays will not allow
it to supply all 5,000 units from its own plants and meet the promised delivery date. It can provide the same
materials by purchasing them in bulk from a competing firm. The materials would then be packaged in GGI
bags to complete the order. GGI knows the competitors materials are very good quality, but it cannot be
sure that the quality meets its own exacting standards. There is not enough time to carefully test the
competitors product to determine its quality. What should GGI do?
Q.24 Special Order; ABC Costing (Continuation of Problem 23) Assume the same information as for
Problem 23, except that the $12 fixed manufacturing overhead consists of $8 per unit batch related costs and
$4 per unit facilities level fixed costs. Also, assume that each new batch causes increased costs of $5,000 per
batch; the remainder of the batch level costs consists of tools and supervision labor that do not vary with the
number of batches. The remainder of fixed costs does not vary with the number of units produced or the
number of batches.
Required
1. Calculate the relevant unit and total cost of the special order, including the new information about batch
related costs.
2. If accepted, how would the special order affect GGIs operating income?
Q.25. Profitability Analysis, Scarce Resources Santana Company has met all production requirements for
the current month and has an opportunity to produce additional units of product with its excess capacity.
Unit selling prices and costs for three models of one of its product lines are as follows:
No Frills
Standard Options
Super
Selling price
$30
$35
$50
Direct materials
9
11
11

Direct labor ($10/hour)

5
10
15
Variable overhead
3
6
9
Fixed overhead
3
6
6
Variable overhead is charged to products on the basis of direct labor dollars; fixed overhead is charged to
products on the basis of machine-hours.
Required
1. If Santana Company has excess machine capacity and can add more labor as needed (neither machine
capacity nor labor is a constraint), the excess production capacity should be devoted to producing which
product or products?
2. If Santana Company has excess machine capacity but a limited amount of labor time, the production
capacity should be devoted to producing which product or products?
Q.26 Profitability Analysis Im not looking forward to breaking the news, groaned Charlie Wettle, the
controller of Meyer Paint Company. He and Don Smith, state liaison for the firm, were returning from a
meeting with representatives of the Virginia General Services Administration (GSA), the agency that
administers bidding on state contracts. Charlie and Don had expected to get the specifications to bid on the
traffic paint contract, soon to be renewed. Instead of picking up the bid sheets and renewing old friendships
at the GSA, however, they were stunned to learn that Meyers paint samples had performed poorly on the
road test and the firm was not eligible to bid on the contract.
Meyers two main product lines are traffic paint, used for painting yellow and white lines on highways, and
commercial paints, sold through local retail outlets. The paint production process is fairly simple. Raw
materials are kept in the storage area that occupies approximately half of the plant space.
Large tanks that resemble silos are used to store the latex that is the main ingredient in their paint.
These tanks are located on the loading dock just outside the plant so that when a shipment of latex arrives, it
can be pumped directly from the tank truck into these storage tanks. Latex is extremely sensitive to cold. It
cannot be stored outside or even shipped in the winter without heated trucks, which are very expensive for a
small firm such as Meyer.
Currently, Meyer has the traffic paint contracts for the states of Pennsylvania, North Carolina, Delaware, and
Virginia. Of last years total production of 380,000 gallons, 90 percent was traffic paint. Of this amount,
88,000 gallons were for the Virginia contract. Each state has unique specifications for color, thickness,
texture, drying time, and other characteristics of the paint. For example, paint sold to Pennsylvania must
withstand heavy use of salt on roads during the winter. Paint for North Carolina highways must tolerate
extended periods of intense heat during summer months.
Due to the high cost of shipping paint, most paint producers can be competitive on price only in locations
fairly close to their production facilities. Accordingly, Meyer has enjoyed an advantage in bidding on
contracts in the eastern states close to Virginia. However, one of their biggest competitors,
Heron Paint Company of Houston, Texas, is building a new plant in North Carolina. With lower costs due to
their efficient new facility and their proximity, Heron will become a major competitive threat. Meyers
commercial paint line includes interior and exterior house paints in a wide range of colors formulated to
approximate authentic colonial colors. Because of the historical association, the line has been well received
in Virginia. Most of these paints are sold through paint and hardware stores as the stores second or third line
of paint. The large national firms such as Benjamin Moore or Sherwin Williams provide extensive services
to paint retailers such as computerized color matching equipment. Partly because they lack the resources to
provide such amenities and partly because they have always considered the commercial paint a sideline,
Meyer has never tried to market the commercial line aggressively. Meyer sells 38,000 gallons of commercial
paint per year.
Charlie is worried about the future of the company. The firms strategic goal is to provide a quality product
at the lowest possible cost and in a timely fashion. After absorbing the shock of losing the Virginia contract,
Charlie wondered whether the firm should consider increasing production of commercial paints to lessen the
companys dependence on traffic paint contracts. Carl Bunch, who manages the day-to-day operation of the
firm, believes the company can double its sales of commercial paint if it undertakes a promotional campaign
estimated to cost $60,000. The average price of traffic paint sold last year was $10 per gallon. For
commercial paint, the average price was $12.
Charlie Wettle has assembled the following data to evaluate the financial performance of the two lines of
paint. The primary raw material used in paint production is latex. The list price for latex is $16 per pound;

450 pounds of latex are needed to produce 1,000 gallons of traffic paint. Commercial paint requires 325
pounds of latex per 1,000 gallons of paint. In addition to the cost of the latex, other variable costs are as
shown below.
Traffic
Commercial
Raw materials cost per gallon of paint:
Camelcarb (limestone)
0.38
0.54
Silica
0.37
0.52
Pigment
0.12
0.38
Other ingredients
0.06
0.03
Direct labor cost per gallon
0.46
0.85
Freight cost per gallon
0.78
0.43
Last year, fixed overhead costs attributable to the traffic paint totaled $85,000, including an estimated
$25,000 of costs directly associated with the Virginia contract; the $25,000 can be eliminated in
approximately two years. Fixed overhead costs attributable to the commercial paint are $13,000.
Other manufacturing overhead costs total $110,000. Charlie estimates that $40,000 of this amount is
inventory handling costs that will be avoided due to the loss of the Virginia contract. Both the remaining
manufacturing overhead and the general and administrative costs of $140,000 are allocated equally to all
gallons of paint produced.
Required
1. Calculate the contribution margin for each type of paint and total firm-wide contribution under each of the
following scenarios:
Scenario A, Current production, including the Virginia contract
Scenario B, without either the Virginia contract or the promotion to expand sales of commercial paint
Scenario C, Without the Virginia contract but with the promotion to expand sales of the commercial paint
2. Determine whether scenario B or C (per Part 1 above) should be chosen by Meyer and explain why,
including a consideration of the strategic context.
Q.27 Special Order New Life, Inc., manufactures skin creams, soaps, and other products primarily for
people with dry and sensitive skin. It has just introduced a new line of product that removes the spotting and
wrinkling in skin associated with aging. It sells these products in pharmacies and department stores at prices
somewhat higher than those of other brands because of New Lifes excellent reputation for quality and
effectiveness.
New Life currently has very low utilization of plant capacity. Two years ago, in anticipation of rapid growth,
the company opened a large new manufacturing plant, which has yet to be utilized more than 50 percent.
Partly for this reason, New Life has sought new partners and was able, with the help of financial analysts, to
locate suitable business partners. The first potential partner identified in this search was a large supermarket
chain, SuperValue, which is interested in the partnership because it wants New Life to manufacture an age
cream to sell in its stores. The product would be essentially the same as the New Life product but packaged
with the SuperValue brand name.
The agreement would pay New Life $2.00 per unit and would allow SuperValue a limited right
to advertise the product as manufactured for SuperValue by New Life. New Lifes CFO has made some
calculations and has determined that the direct materials, direct labor, and other variable costs needed for the
SuperValue order would be about $1.00 per unit as compared to the full cost of $2.50 (materials, labor, and
overhead) for the equivalent New Life product.
Required Should New Life accept the proposal from SuperValue? Why or why not?
Q.28 Project-Analysis, Sales Promotions Hillside Furniture Company makes outdoor furniture from
recycled products, including plastics and wood by-products. Its three furniture products are gliders, chairs
with footstools, and tables. The products appeal primarily to cost-conscious consumers and those who value
the recycling of materials. The company wholesales its products to retailers and various mass merchandisers.
Because of the seasonal nature of the products, most orders are manufactured during the winter months for
delivery in the early spring. Michael Cain, founder and owner, is dismayed that sales for two of the products
are tracking below budget. The following chart shows pertinent year-to-date data regarding the companys
products.

Certain that the shortfall was caused by a lack of effort by the sales force, Michael has suggested
to Lisa Boyle, the sales manager, that the company announce two contests to correct this situation before it
deteriorates. The first contest is a trip to Hawaii awarded to the top salesperson if incremental glider sales
are attained to close the budget shortfall. The second contest is a golf weekend, complete with a new set of
golf clubs, awarded to the top salesperson if incremental sales of chairs with footstools are attained to close
the budget shortfall. The Hawaiian vacation would cost $16,500 and the golf trip would cost $12,500.

Glider
Actual Budget
2,600
4,000
$80.00 $85.00

Chair with Footstool

Actual Budget
6,900
8,000
$61.00 $65.00

Number of units
Average sales price
Variable costs
Direct labor
Hours of labor
2.50
2.25
3.25
3.00
Cost per hour
$11.00 $10.00
$ 9.50
$ 9.25
Direct material
$16.00 $15.00
$11.00 $10.00
Sales commission
$15.00 $15.00
$10.00 $10.00
Required
1. Explain whether either contest is desirable or not.
2. Explain the strategic issues guiding your choice about these contests.

Table
Actual Budget
3,500
3,300
$24.00 $25.00
0.60
$ 9.00
$ 6.00
$ 5.00

0.50
$ 9.00
$ 5.00
$ 5.50

Q.29 Make or Buy Gian Auto Corporation manufactures parts and components for manufacturers and
suppliers of parts for automobiles, vans, and trucks. Sales have increased each year based in part on the
companys excellent record of customer service and reliability. The industry as a whole has also grown as
auto manufacturers continue to outsource more of their production, especially to cost-efficient manufacturers
such as GianAuto. To take advantage of lower wage rates and favorable business environments around the
world, Gian has located its plants in six different countries.
Among the various GianAuto plants is the Denver Cover Plant, one of Gian Autos earliest plants.
The Denver Cover Plant prepares and sews coverings made primarily of leather and upholstery fabric and
ships them to other GianAuto plants where they are used to cover seats, headboards, door panels, and other
GianAuto products.
Ted Vosilo is the plant manager for the Denver Cover Plant, which was the first GianAuto plant
in the region. As other area plants were opened, Ted was given the responsibility for managing them in
recognition of his management ability. He functions as a regional manager although the budget for him and
his staff is charged to the Denver Cover Plant.
Ted has just received a report indicating that GianAuto could purchase the entire annual output
of Denver Cover from suppliers in other countries for $60 million. He was astonished at the low outside
price because the budget for Denver Cover Plants operating costs for the coming year was set at $82
million. He believes that GianAuto will have to close operations at Denver Cover to realize the $22 million
in annual cost savings.
Denver Covers budget for operating costs for the coming year follows:
DENVER COVER PLANT
Budget for Operating Costs
For the Year Ending December 31, 2010
(000s omitted)
Materials
$ 32,000
Labor
Direct
$ 23,000
Supervision
3,000

Indirect plant
4,000
30,000
Overhead
Depreciationequipment
$ 5,000
Depreciationbuilding
3,000
Pension expense
4,000
Plant manager and staff
2,000
Corporate allocation
6,000
20,000
Total budgeted costs
$ 82,000
Additional facts regarding the plants operations are as follows:
Due to Denver Covers commitment to use high-quality fabrics in all its products, the purchasing
department placed blanket purchase orders with major suppliers to ensure the receipt of sufficient materials
for the coming year. If these orders are canceled as a result of the plant closing, termination charges would
amount to 15 percent of the cost of direct materials.
Approximately 400 plant employees will lose their jobs if the plant is closed. This includes all direct
laborers and supervisors as well as the plumbers, electricians, and other skilled workers classified as indirect
plant workers. Some would be able to find new jobs, but many would have difficulty doing so. All
employees would have difficulty matching Denver Covers base pay of $14.40 per hour, the highest in the
area. A clause in Denver Covers contract with the union could help some employees; the company must
provide employment assistance to its former employees for 12 months after a plant closing. The estimated
cost to administer this service is $1 million for the year.
Some employees would probably elect early retirement because GianAuto has an excellent plan.
In fact, $3 million of the 2010 pension expense would continue whether Denver Cover is open or not.
Ted and his staff would not be affected by closing Denver Cover. They would still be responsible for
managing three other area plants.
Denver Cover considers equipment depreciation to be a variable cost and uses the units-of production
method to depreciate its equipment and the customary straight-line method to depreciate its building.
Required
1. Explain GianAutos competitive strategy and how this strategy should be considered with regard to the
Denver Plant decision. Identify the key strategic factors that should be considered in the decision.
2. GianAuto Corporation plans to prepare a strategic analysis to use in deciding whether to close the Denver
Cover Plant. In your analysis, use the above information, and include consideration of global competition
and GianAutos competitive strategy.
Q.30. Make or Buy Bernards Specialty Manufacturing (BSM) produces custom vehicleslimousines,
buses, conversion vans, and small trucksfor special order customers. It customizes each vehicle to the
customers specifications. BSM has been growing at a steady rate in recent years in part because of the
increased demand for specialty luxury vehicles. The increased demand has also caused new competitors to
enter the market for these types of vehicles. BSM management considers its competitive advantage to be the
high quality of its manufacturing. Much of the work is handmade, and the company uses only the best parts
and materials. Many parts are made in-house to control for highest quality. Because of the increased
competition, price competition is beginning to become a factor for the industry, and BSM is becoming more
concerned about cost controls and cost reduction. It has controlled them by purchasing materials and parts in
bulk, paying careful attention to efficiency in scheduling and working different jobs, and improving
employee productivity.
The increased competition has also caused BSM to reconsider its strategy. Upon review with the help of a
consultant, BSM management has decided that it competes most effectively as a differentiator based on
quality of product and service. To reinforce the differentiation strategy, BSM has implemented a variety of
quality inspection and reporting systems. Quality reports are viewed at all levels of management, including
top management.
To decrease costs and improve quality, BSM has begun to look for new outside suppliers for certain parts.
For example, BSM can purchase a critical suspension part, now manufactured in-house, from Performance
Equipment Inc. for a price of $105. Buying the part would save BSM 10 percent of the labor and variable
overhead costs and $68 of materials costs. The current manufacturing costs for the suspension assembly are
as follows:
Materials
$192

Labor
75
Variable overhead
150
Fixed overhead
150
Total cost for suspension assembly $567
Required
1. How would total costs be affected if BSM chose to purchase the part rather than to continue to
manufacture it?
2. Should BSM purchase or manufacture the part? Include strategic considerations in your answer.
Q.31 Make or Buy, Review of Learning Curves Henderson Equipment Company has produced a pilot run
of 50 units of a recently developed cylinder used in its finished products. The cylinder has a one-year life,
and the company expects to produce and sell 1,650 units annually. The pilot run required 14.25 direct laborhours for the 50 cylinders, averaging 0.285 direct labor-hours per cylinder.
Henderson has experienced an 80 percent learning curve on the direct labor-hours needed to produce new
cylinders. Past experience indicates that learning tends to cease by the time 800 partsare produced.
Hendersons manufacturing costs for cylinders follows:
Direct labor
$12.00 per hour
Variable overhead
10.00 per hour
Fixed overhead
16.60 per hour
Materials
4.05 per unit
Henderson has received a quote of $7.50 per unit from Lytel Machine Company for the additional 1,600
cylinders needed. Henderson frequently subcontracts this type of work and has always been satisfied with
the quality of the units produced by Lytel.
Required
1. If Henderson manufactures the cylinders, determine
a. The average direct labor-hours per unit for the first 800 cylinders (including the pilot run) produced.
Round off calculations to three decimal places.
b. The total direct labor-hours for the first 800 cylinders (including the pilot run) produced.
2. After completing the pilot run, Henderson must manufacture an additional 1,600 units to fulfill the annual
requirement of 1,650 units. Without regard to your answer in requirement 1, assume that
The first 800 cylinders produced (including the pilot run) required 100 direct labor-hours.
The 800th unit produced (including the pilot run) required 0.079 hours.
Calculate the total manufacturing costs for Henderson to produce the additional 1,600 cylinders required.
3. Determine whether Henderson should manufacture the additional 1,600 cylinders or purchase them from
Lytel. Support your answer with appropriate calculations.
Q.32 CC Ltd manufactures four types of camera which all use lens, a component made only in one
factory. Each lens costs $50 to purchase. Due to a prolonged strike of workers in the lens factory, CC
Ltd will only be able to purchase 20 000 this year.
The following information relates to each type of camera manufactured by CC Ltd.
Digital
cameras

Cine
cameras

Maximum
demand(units)
Costs per camera

10 000

4 000

Closed
Circuit Medical
cameras cameras
3 000
500

Lens

50

100

200

350

Other direct
materials
Direct labour

40

90

98

300

20

30

30

55

Fixed costs

60

80

40

70

Profit per camera

50

70

52

490

Selling price per

camera

220

370

420

1 265

REQUIRED:
a) Calculate the numbers of each type of camera to be produced and sold that would maximise the
profit of CC Ltd.
b) Prepare a marginal cost statement showing the profit for the year.
c) Calculate the total annual sales revenue required by CC Ltd to break-even this year.
Q.33. Profitability Analysis; Review of Master Budget RayLok Incorporated has invented a secret
process to improve light intensity and manufactures a variety of products related to this process. Each
product is independent of the others and is treated as a separate profit/loss division. Product (division)
managers have a great deal of freedom to manage their divisions as they think best. Failure to produce target
division income is dealt with severely; however, rewards for exceeding ones profit objective are, as one
division manager described them, lavish.
The DimLok Division sells an add-on automotive accessory that automatically dims a vehicles headlights
by sensing a certain intensity of light coming from a specific direction. DimLok has had a new manager in
each of the three previous years because each manager failed to reach RayLoks target profit. Donna Barnes
has just been promoted to manager and is studying ways to meet the current target profit for DimLok.
DimLoks two profit targets for the coming year are $800,000 (20 percent return on the investment in the
annual fixed costs of the division) plus an additional profit of $20 for each DimLok unit sold. Other
constraints on division operations are
Production cannot exceed sales because RayLoks corporate advertising program stresses completely new
product models each year, although the models might have only cosmetic changes.
DimLoks selling price cannot vary above the current selling price of $200 per unit but may vary as much
as 10 percent below $200.
A division manager can elect to expand fixed production or selling facilities; however, the target objective
related to fixed costs is increased by 20 percent of the cost of such expansion. Furthermore, a manager
cannot expand fixed facilities by more than 30 percent of existing fixed cost levels without approval from
the board of directors.
Donna is now examining data gathered by her staff to determine whether DimLok can achieve its target
profits of $800,000 and $20 per unit. A summary of these reports shows the following:
Last years sales were 30,000 units at $200 per unit.
DimLoks current manufacturing facility capacity is 40,000 units per year but can be increased to 80,000
units per year with an increase of $1,000,000 in annual fixed costs.
Present variable costs amount to $80 per unit, but DimLoks vendors are willing to offer raw materials
discounts amounting to $20 per unit, beginning with unit number 60,001.
Sales can be increased up to 100,000 units per year by committing large blocks of product to institutional
buyers at a discounted unit price of $180. However, this discount applies only to sales in excess of 40,000
units per year.
Donna believes that these projections are reliable and is now trying to determine what DimLok must do to
meet the profit objectives that RayLoks board of directors assigned to it.
Required
1. Determine the dollar amount of DimLoks present annual fixed costs.
2. Determine the number of units that DimLok must sell to achieve both profit objectives. Be sure to
consider all constraints in determining your answer.
3. Without regard to your answer in Part 2, assume that Donna decides to sell 40,000 units at $200 per unit
and 24,000 units at $180 per unit. Prepare a master budget income statement for DimLok showing whether
her decision will achieve DimLoks profit objectives.
4. Assess DimLoks competitive strategy.
5. Identify the strategic factors that DimLok should consider.

Q.34 Motiwala Jewelers is considering a special order for 10 handcrafted gold bracelets to be given as gifts
to members of a wedding party. The normal selling price of a gold bracelet is $389.95 and its unit product
cost is $264.00 as shown below:
Direct materials . . . . . . . . . . . . . . $143.00
Direct labor . . . . . . . . . . . . . . . . . 86.00
Manufacturing overhead . . . . . . . 35.00
Unit product cost . . . . . . . . . . . . . $264.00
Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced
in any given period. However, $7 of the overhead is variable with respect to the number of bracelets
produced. The customer who is interested in the special bracelet order would like special filigree applied to
the bracelets. This filigree would require additional materials costing $6 per bracelet and would also require
acquisition of a special tool costing $465 that would have no other use once the special order is completed.
This order would have no effect on the companys regular sales and the order could be fulfilled using the
companys existing capacity without affecting any other order.
Required:
What effect would accepting this order have on the companys net operating income if a special price of
$349.95 is offered per bracelet for this order? Should the special order be accepted at this price?
Q.35 Profitability Analysis; Pricing Home Suites Inn is a national chain of high-quality hotels, which is
popular with business travelers. Many of Home Suites best customers will stay for a week or longer during
their business trip. Top management of the hotel chain made a strategic move in the prior year to raise
profitability by raising room rates an average of 10 percent, from an average of $80 to $88. Home Suites
main competitors (the total market for hotels that compete with Home- Suites is about 50,000,000 daily
room occupancy per year) responded by keeping their rates low, and as a result, Home Suites sales fell from
5,000,000 annual room occupancy to 4,000,000 rooms,
a 20 percent fall in room sales, and a new low in occupancy rate for the firm. The fall in room sales was
greater than expected, so Home Suites consulted a marketing expert who explained that customers in this
market are very sensitive to price changes, and furthermore, that while a reduction in price increases volume
and an increase in price reduces volume, the effect is not proportional; price decreases improve sales at a
faster rate than price increases reduce sales. Home Suites is now considering a reduction in price to $76,
with the expectation of increasing sales by as much as 50 percent over the current level of 4,000,000 rooms.
The consultant assures Home Suites that if it returned to the $80 price, sales would return to the 5,000,000
level. The table below shows the room costs per occupied rooms at various annual occupancy levels.
Room Occupancy (thousands)
4,000
4,500 5,000 5,500 6,000 6,500
Per Room Costs
Supplies
$ 3.30 $ 3.32 $ 3.28 $ 3.31 $ 3.31 $ 3.30
Direct labor
15.41
15.37 15.41 15.40 15.38
15.31
Overhead (see note)
Room level
10.55
10.48 10.46 10.44 10.59
10.48
Hotel level
23.35
21.01 19.12 18.01 16.33
15.11
Total operating cost
$52.61 $50.18 $48.27 $47.16 $45.64 $44.20
Selling and administrative
30.11
27.66 25.12
22.88 21.01
19.43
Total cost
$82.72 $77.84 $73.39 $70.04 $66.65 $63.63
Note: Room-level overhead costs are laundry, housekeeping, and supplies, which vary with the number of
rooms occupied; hotel-level overhead includes general maintenance, registration staff, pool expense, and
other expenses, which do not vary with the number of rooms occupied. Selling and administrative expense is
the cost of hotel management, the reservation network, and other fixed costs.
Required What do you think is the best strategy for Home Suites regarding room pricing? Develop a
spreadsheet analysis that shows what would be the effect on contribution of the different pricing policies
Home Suites has used or is considering.

Q.36 Make or Buy The Midwest Division of the Paibec Corporation manufactures subassemblies used in
Paibecs final products. Lynn Hardt of Midwests profit planning department has been assigned the task of
determining whether Midwest should continue to manufacture a subassembly component,
MTR-2000, or purchase it from Marley Company, an outside supplier. Marley has submitted
a bid to manufacture and supply the 32,000 units of MTR-2000 that Paibec will need for 2010 at a unit price
of $17.30. Marley has assured Paibec that the units will be delivered according to Paibecs production
specifications and needs. The contract price of $17.30 is applicable only in 2010, but Marley is interested in
entering into a long-term arrangement beyond 2010.
Lynn has submitted the following information regarding Midwests cost to manufacture 30,000 units of
MTR-2000 in 2009.
Direct material
$195,000
Direct labor
120,000
Factory space rental
84,000
Equipment leasing costs
36,000
Other manufacturing costs 225,000
Total manufacturing costs
$660,000
Lynn has collected the following information related to manufacturing MTR-2000:
Equipment leasing costs represent special equipment used to manufacture MTR-2000. Midwest can
terminate this lease by paying the equivalent of one months lease payment for each of the two years left on
its lease agreement.
Forty percent of the other manufacturing overhead is considered variable. Variable overhead changes with
the number of units produced, and this rate per unit is not expected to change in 2010. The fixed
manufacturing overhead costs are not expected to change whether Midwest manufactures or purchases
MTR-2000. Midwest can use equipment other than the leased equipment in its other manufacturing
operations.
Direct materials cost used in the production of MTR-2000 is expected to increase 8 percent in
2010.
Midwests direct labor contract calls for a 5 percent wage increase in 2010.
The facilities used to manufacture MTR-2000 are rented under a month-to-month rental agreement.
Midwest would have no need for this space if it does not manufacture MTR-2000. Thus,
Midwest can withdraw from the rental agreement without any penalty.
John Porter, Midwest divisional manager, stopped by Lynns office to voice his opinion regarding the
outsourcing of MTR-2000. He commented, I am really concerned about outsourcing MTR- 2000. I have a
son-in-law and a nephew, not to mention a member of our bowling team, who work on MTR-2000. They
could lose their jobs if we buy that component from Marley. I really would appreciate anything you can do
to make sure the cost analysis shows that we should continue making MTR-2000. Corporate is not aware of
materials cost increases and maybe you can leave out some of those fixed costs. I just think we should
continue making MTR-2000.
Required
Prepare a relevant cost analysis that shows whether the Midwest Division should make MTR-2000 or
purchase it from Marley Company for 2010.