Assignment 5

1.Problem 7-19 – Abilene Meat Processing

2.Problem 7-20 – Hallas Company

3.Problem 7-22 – Bronson Company

4.Problem 7-27 – Brandilyn Toy Company

5.Problem 8-24 – Nagoya Amusements Corporation

6.Problem 8-26 – Chateau Beaune

Examples: P7-18, P7-21, P7-23, P8-21, P8-27, P8-30

 

1.Problem 7-19 – Abilene Meat Processing

Sell or Process Further

 Abilene Meat Processing Corporation is a major processor of beef and other meat products. The company has a large amount of T-bone steaks as is or to process them further into filet mignon and New York cut steaks.

  Management believes that a 1-pound T-bone steak would yield the following profit:

 Wholesale selling price ($2.25 per pound)                               $2.25

  Less joint costs incurred up to the split-off point where

  T-bone steak can be identified as a separate product             1.70

  Profit per pound                                                                            $0.55

 As mentioned above, instead of being sold as is, the T-bone steaks could be further processed into filet mignon and New York cut steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut. One 16-ounce T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. The cost of processing the T-bone steaks into these cuts can be sold wholesale for $.20 per pound. The filet mignon can be sold for $3.60 per pound, and the New York cut can be sold wholesale $2.90 per pound.

Required:

  1. Determine the profit per pound from processing the T-bone steaks further into filet mignon and New York cut steaks.

 2. Would you recommend that the T-bone steaks be sold as is or processed further? Why?

 

 

2. Problem 7-20 – Hallas Company

7-20 Hallas Company manufactures fast-bonding glue in its Northwest plant

Shutting Down or Continuing to Operate a Plant – Hallas Company

Hallas Company manufactures fast-bonding glue in its Northwest plant. The company normally produces and sells 40,000 gallons of the glue each month. This glue, which is known as MJ-7, is used in the wood industry to manufacture plywood. The selling price of MJ-7 is $35 per gallon, variable costs are $21 per gallon, fixed manufacturing overhead costs in the plant total $230,000 per month, and the fixed selling costs total $310,000 per month.

Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Hallas Company’s sales to temporarily drop to only 11,000 gallons per month. Hallas Company’s management estimates that the strike will last for two months, after which sales of MJ-7 should return to normal. Due to the current low level of sales, Hallas Company’s management is thinking about closing down the Northwest plant during the strike.

If Hallas Company does close down the Northwest plant, fixed manufacturing overhead costs can be reduced by $60,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $14,000. Because Hallas Company uses lean production methods, no inventories are on hand.

Required:

1.      Assuming that the strikes continue for two months, would you recommend that Hallas Company close the Northwest plant? Explain. Show computations to support your answer.

2.      At what level of sales (in gallons) for the two-month period should Hallas Company be indifferent between closing the plant or keeping it open? Show computations.

Hint: This is a type of break-even analysis, except that the fixed cost portion of your break-even computation should include only those fixed costs that are relevant (i.e. avoidable) over the two-month period.

 

Problem 7-22 – Bronson Company 

Make or Buy Decision

Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company’s Zippo pen line, at a price of $0.48 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.

Bronson Company estimates that if the supplier’s offer were accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%.

Under present operations, Bronson Company manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $4 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total $50,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pens (one box) is given below:

 

Direct materials                                                               $1.50

Direct labor                                                                         1.00

Manufacturing overhead                                                  0.80*

Total cost                                                                           $3.30

*Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year.

 

Required:

1. Should Bronson Company accept the outside supplier’s offer? Show computations.

2. What is the maximum price that Bronson Company should be willing to pay the outside supplier per dozen cartridges? Explain.

3. Due to the bankruptcy of a competitor, Bronson Company expects to sell 150,000 boxes of produce the cartridges for only 100,000 boxes of Zippo pens annually. By incurring $30,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zippo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Bronson? Show computations to support your answer.

4. What qualitative factors should Bronson Company consider in determining whether it should make or buy the ink cartridges?

 

 

7-27 Utilization of a Constrained Resource

The Brandilyn Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls increasing, and management requests assistance from you in determining the best sales and production mix for the coming year. The company has provided the data:

 

Product           Demand next year       Selling price       Direct Materials      Direct Labor

                         Per Unit                         Per Unit 

                        

Marcy              26,000                            $35.00                $3.50                        $4.80

Tina                  42,000                            $24.00                $2.30                        $3.00

Carl                   40,000                           $22.00                 $4.50                        $6.40 

Lenny               46,000                            $18.00                $3.10                        $6.00      

Sewing kit     450,000                            $14.00                $1.50                        $2.40 

 

The following additional information is available:

a. The company’s plant has a capacity of 150,000 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

b. The direct labor rate of $12.00 per hour is expected to remain unchanged during the coming year.

c. Fixed costs total $356,000 per year. Variable overhead costs are $4.00 per direct labor-hour

d. All of the company’s nonmanufacturing costs are fixed.

e. The company’s finished goods inventory is negligible and can be ignored.

 

Required:

1. Determine the contribution margin per direct labor-hour expended on each product.

2. Prepare a schedule showing the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year.

3. Examine the data you have computed in (1) and (2) above. How would you allocate the 150,000 direct labor-hours of capacity to Brandilyn Tom Company’s various products?

4. What is the highest price, in terms of rate per hour, that Brandilyn Toy Company should be willing to pay for additional capacity (that is, for added direct labor time)?

5. Identify ways in which the company might be able to obtain additional output so that it would not have to leave some demand for its products unsatisfied.

 


5.Problem 8-24 – Nagoya Amusements Corporation

Simple rate of return; payback

 Nagoya Amusements Corporation places electronic games and other amusement devices in super markets and similar outlets throughout Japan. Nagoya Amusements is investing the purchase of a new electronic game called Mystic Invaders. The manufacturer will sell 20 games to Nagoya Amusements for a total price of ¥180,000. (The Japanese currency is the yen, which is denoted by the symbol ¥.) Nagoya Amusements has determined the following additional information about the game:

 a. The game would have a five-year useful life and a negligible salvage value. The company uses straight-line depreciation.

 b. The game would replace other games that are unpopular and generating little revenue. These other games would be sold for a total ¥30,000.

 c. Nagoya Amusement estimates that Mystic Invaders would generate annual incremented revenues of ¥ 200,000 (total for all 20 games). Annual incremented out-of-pocket costs would be (in total): maintenance, ¥ 50,000; and insurance, ¥ 10,000. In addition, Nagoya Amusements would have to pay a commission of 40% of total revenues to the supermarkets and other outlets in which the games were placed.

Required:

1. Prepare a contribution format income statement showing the net operating income each year from Mystic Invaders.

2. Compute the simple rate of return on Mystic Invaders. Will the game be purchased if Nagoya Amusements accept any project with a simple rate of return greater than 14%?

3. Compute the payback period on Mystic Invaders. If the company accepts any investment with a payback period of less than three years, will the game be purchased?

 

 


6.Problem 8-26 – Chateau Beaune

Simple rate of return; payback; internal rate of return

Chateau Beaune is a family-owned winery located in the Burgundy region of France, which is headed by Gerard Despinoy. The harvesting season in early fall is the busiest part of the year for the winery, and many part-time workers are hired to help pick and process grapes. Mr. Despinoy is investigating the purchase of a harvesting machine that would significantly reduce the amount of labor required in the picking process. The harvesting machine is built to straddle grapevines, which are laid out in low-lying rows. Two workers are carried on the machine just above ground level, one on each side of the vine. As the machine slowly crawls through the vineyard, the worker cut bunches of grapes from the vines, which then fall into a hopper. The machine separates the grapes from the stems and other woody debris. The debris are then pulverized and spread behind the machine as a rich ground mulch. Mr. Despinoy has gathered the following information relating to the decision of whether to purchase the machine:

a. The winery would save €190,000 per year in labor costs with the new harvesting machine. In addition, the company would no longer have to purchase and spread ground mulch-at an annual savings of €10,000. (The French currency is the euro, which is denoted by the symbol €.)

b. The harvesting machine would cost €480,000. It would have an estimated 12-year useful life and zero salvage value. The winery uses straight-line depreciation.

c. Annual out-of-pocket costs associated with the harvesting machine would be insurance, €1,000; fuel, €9,000; and a maintenance contract, €12,000. In addition, two operators would be hired and trained for the machine, and they would be paid a total of €70,000 per year, including all benefits.

d. Mr. Despinoy feels that the investment in the harvesting machine should earn at least a 16% rate of return.

 

Required:

1. Determine the annual net savings in cash operating costs that would be realized if the harvesting machine were purchased.

2. Compute the simple rate of return expected from the harvesting machine.

3. Compute the payback period on the harvesting machine. Mr. Despinoy will not purchase equipment unless it has a payback period of five years or less. Under the criterion, should the harvesting machine be purchased?

4. Compute (to the nearest whole percent) the internal rate of return promised by the harvesting machine. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?

 

 

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