Posted: April 14th, 2016

Determine the maximum amount per unit James should pay an outside supplier???

1. The operations of Grant Corporation are divided into the Fix Division and the Roach Division. Projections for the next year are as follows:

Fix Roach
Division Division Total
Sales $60,000 $ 40,000 $100,000
Variable costs 20,000 15,000 35,000
Contribution margin $40,000 $ 25,000 $ 65,000
Direct fixed costs 12,500 30,000 42,500
Segment margin $27,500 $ (5,000) $ 22,500
Allocated common costs 10,000 7,500 17,500
Operating income (loss) $17,500 $(12,500) $ 5,000

Required:

a. Determine operating income for Grant Corporation as a whole if the Roach Division is dropped.
b. Should the Roach Division be eliminated?

2. The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A $200 cost per component was determined as follows:

Direct materials $ 15
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 35
Total $100

James Industries uses 4,000 components per year. After Light, Inc., submitted a bid of $80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light, Inc., James’s unused production facilities could be leased to another company for $50,000 per year.

Required:

a. Determine the maximum amount per unit James should pay an outside supplier.
b. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.
c. Assume the company could eliminate production supervisors with salaries totaling $30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.

3. Baker Company produced 30,000 units and sold 28,000 units in 2011. Beginning inventory was zero. During the period, the following costs were incurred:

Indirect labor $ 60,000
Indirect materials 30,000
Other (variable overhead) 90,000
Fixed manufacturing overhead 180,000
Fixed administrative expenses 150,000
Fixed selling expenses 120,000
Variable selling expenses, per unit 40
Direct labor, per unit 80
Direct materials, per unit 20

Required:

Compute the dollar amount of ending inventory using:

a. Absorption costing
b. Variable costing

4. Bert Corporation is considering an investment in equipment for $150,000.
Data related to the investment are as follows:

Income before
Year Depreciation and Taxes
1 $60,000
2 60,000
3 60,000
4 60,000
5 60,000

Cost of capital is 10 percent.

Bert uses the straight-line method of depreciation with mid-year convention for tax purposes. In addition, its tax rate is 40 percent and the depreciable life of the equipment is four years with no salvage value. The equipment is sold at the end of the fifth year.

Required:

Determine the following amounts using after-tax cash flows:

a. Payback period
b. Accounting rate of return on original investments for each year
c. Net present value

5. Cardinal Dry Cleaners has 400 hours a week available to use in dry cleaning or laundry. Four thousand inches of hanging space is available. The average item that is dry cleaned takes six inches of hanging space, whereas laundry items take up only three inches of hanging space. The contribution margin for laundry items averages $3.50; dry cleaned items average $6.50. Fifty items can be washed per hour, whereas only twenty can be dry cleaned.

Required:

a. Determine the objective function. Is it a minimization or maximization function?
b. Set up the constraint equations.