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Set A - Problems On Relevant Decision Making

Sutherland manufactures laser printers and their paper feed drives. They have received an offer to buy 20,000 additional drives from another company. The summary calculates: (1) the average cost to produce drives for their printers; (2) the incremental cost to produce an additional drive; and (3) the sale price needed to earn $500k profit from selling drives to the other company.

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Nitin Khare
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217 views

Set A - Problems On Relevant Decision Making

Sutherland manufactures laser printers and their paper feed drives. They have received an offer to buy 20,000 additional drives from another company. The summary calculates: (1) the average cost to produce drives for their printers; (2) the incremental cost to produce an additional drive; and (3) the sale price needed to earn $500k profit from selling drives to the other company.

Uploaded by

Nitin Khare
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Problems on Relevant Costs for Decision Making

Problem no: 1: Accepting a Special Order

Sutherland manufactures and sells 110,000 laser printers each


month. A principal component part in each printer is its paper feed
drive. Sutherland’s plant currently has the monthly capacity to
produce 150,000 drives. The unit costs of manufacturing these
drives (up to 150,000 per month) are as follows:

Variable costs per unit:


Direct materials ………….. $ 45
Direct labor ………………. 25
Variable M.O.H …………. 5

Fixed costs per month:


Fixed M.O.H …………….. $1,430,000

Desk-Mate Printers has offered to buy 20,000 paper feed drives


from Sutherland to be used in its own printers. Compute the
following:

a. The average unit cost of manufacturing each paper feed drive


assuming that Sutherland manufactures only enough drives
for its own laser printers
b. The incremental unit cost of producing an additional paper
feed drive.
c. The per-unit sales price that Sutherland should charge Desk-
Mate to earn $500,000 in monthly pretax profit on the sale of
drives to Desk-mate
Problem no: 2: Accepting a Special Order

Dover Rubber Company has been offered a contract to supply


500,000 premium automobile tires to a large automobile
manufacturer at a price of $41.65 per tire. Dover’s full cost of
producing the tire is $51.80. The normal sales price for the tire is
$73.50 to both distributors and some selected retailers. Variable
costs per tire amount to $34.30; however, in order to meet the
needs of the auto manufacturer, Dover will have to cut its sales to
regular customers by 100,000 tires annually. The automaker has
clearly indicated that it will enter into the agreement only if Dover
will agree to supply all 500,000 of the tires requested.

Should Dover accept the offer?


Problem no : 3 : Dropping the product line.

Vulcan Swimsuit Company is considering dropping its line of


women’s beach robes. A recent product income statement for the
robe line follows:

Particulars Amount
Revenue $950,760
Cost of goods sold 861,840
Gross margin 88,920
Selling and administrative 136,800
expenses
Net loss (47,880)

Factory overhead accounts for 35% of the cost of the goods sold
and is one third fixed. These data are believed to reflect conditions
in the immediate future.

Should the line be dropped?


Problem no: 4: Scarce Resources/Constraint
Factor
Texteriles Company creates different types of bolts of
cloth. These bolts of cloth are made on the same
machine. The textile machines have the capacity of
3,600 hours per month. Texteriles is considering
producing three different types of cloth: denim,
chenille, and gauze with contribution margins per
bolt of $14, $22, and $9 respectively. Texteriles
knows they can sell only a total of 6,000 bolts of
denim, 2,000 bolts of chenille, and/or 1,200 bolts of
gauze. A bolt of each type of cloth requires a
different amount of machine time as follows: denim
takes 0.5 machine hours, chenille takes 1 machine-
hour, and gauze takes 0.3 machine-hours. What
combination of products will maximize the profits of
Texteriles?
Problem no: 5: Make or Buy Decision

Bacrometer, Inc., makes part no. 566 on one of its


production lines. Each month Bacrometer makes 60,000 of
part no. 566 at a variable cost of $2.50 per part. The fixed
costs for the production line are $180,000 or $3.00 per part.
Bacrometer has been provided a bid for part no. 566 from
another manufacturer who will make the part for $2.65 per
part. Bacrometer knows the production line could be rented
to another manufacturer for $5,000 per month. Should
Bacrometer continue to make part no. 566 or should they
buy the part and rent the production line?
Problem no: 6: Joint Products
Treadwell Pharmaceuticals produces two medications in a
joint process: Amoxiphore and Benidrate. With each
production run, Treadwell incurs $4,000 in common costs
up to the split-off point.
Amoxiphore can be sold for $2,700 at the split-off point or
be processed further at a cost of $1,600 at which time it can
be sold for $4,200. However, if Amoxiphore is sold at the
split-off point, its side effects include nausea and
headaches. If it is processed further, these side effects are
diminished. Demand for Amoxiphore far exceeds
Treadwell’s production capacity.Benidrate can be sold for
$2,400 at the split-off point or be processed further at a cost
of $3,700 at which time it can be sold for $6,000.
a. Determine which product is more profitable to process
beyond the split-off point?
b. What nonfinancial issues should the company consider
regarding its processing decisions?

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