Shaw Manufacturing, Inc. has just received an offer from a supplier to buy 3,000 units of a component used in its

Question 1:

Shaw Manufacturing, Inc. has just received an offer from a supplier to buy 3,000 units of a component used in its main product. The component is a gear that is currently produced internally. The supplier has offered to sell the gear for $22 per gear. Shaw is currently using a conventional, unit-based cost system that allocates overhead to jobs on the basis of direct labour hours. Accounting has estimated the full cost of producing the gear:

                                    Direct materials                                                  $10

                                    Direct labour                                                          5

                                    Variable overhead                                                  5

                                    Fixed overhead                                                    16

Prior to making a decision, the president of the company commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following:

1. Two setups—$2,500 each. (The setups would be avoided and total spending could be reduced by $2,500 per setup.)
2. One less inspector needed, $28,000.
3. Engineering work: 500 hours, $15 per hour (Although the work decreases by 500 hours, the engineer assigned to the gear line also spends time on other products.)

1. Ignore the special study and determine whether the gear should be produced internally or purchased from the supplier.
2. Now, using the special study data, repeat the analysis.
3. Consider this claim: The use of special cost studies is a symptom of an outmoded cost system. Comment on this observation and discuss the need for the special study if an ABC system had been in place.

Question 2:

Rimbaud Enterprises has developed DyeMonster, a popular children’s toy in which disappearing dye is shot from a plastic gun. Rimbaud currently sells DyeMonster to small toy stores throughout the country. Because Rimbaud is too small to have its own sales force, it uses independent brokers and manufacturers’ representatives who charge a 10 percent commission on sales. DyeMonster is priced at $15 each. Manufacturing costs consist of the following:

                                    Direct materials                                                  $2.50

                                    Direct labour                                                        1.10

                                    Variable overhead                                                1.50

                                    Fixed overhead                                                    5.00

                                    Full manufacturing cost                                   $10.10

Productive capacity is 200,000 units; currently, Rimbaud produces and sells 75,000 DyeMonsters.

Toyland, a national chain of discount toy stores, wants to buy 100,000 Dye Monsters at $8 each. Toyland wants to have its own logo imprinted on each one. Rimbaud believes this will add $.38 to direct materials cost and require the purchase of a special imprinting machine costing $50,000. The imprinting machine would be use only for this order and would be scrapped (with no salvage value) afterwards. No sales commission would be paid.

1. By how much will Rimbaud Enterprise’s net income change if the order is accepted?
2. Discuss three qualitative factors that might be considered in making the decision to accept or reject the special order.

Question 3:

AudioMart sells two portable sound systems. System A is of slightly higher quality than System B. With rare exceptions, the store also sells a headset whenever a sound system is sold. The headset can be used with either system. Variable-costing income statements for the three products are shown below:

* Fixed costs includes common fixed costs totalling $18,000, allocated to each product in proportion to its revenues.

The owner of the store is concerned about the profit performance of System B and is considering dropping it. If the product is dropped, sales of System A will increase by 30 percent and sales of headsets will drop by 25 percent.

1. Prepare proper segmented income statements for the three products and for the company.
2. Prepare proper segmented income statements for System A and the headsets, assuming that System B is dropped. Should System B be dropped?

Question 4:

Twombley Company manufactures three types of CD storage units. Each of the three types requires the use of a special machine that has total operating capacity of 10,000 hours per year. Information on the three types of storage units is as follows:

Twombley Company’s marketing director has assessed demand for the three types of storage units and believes that the firm can sell as many units as it can produce given its operating capacity.

1. How many of each type of unit should be produced and sold to maximize the company’s contribution margin? What is the total contribution margin for your selection?
2. Now suppose that Twombley Company believes that it can sell no more than 30,000 of each of the three types at the prices estimated. What product mix would you recommend and what would be the total contribution margin?