Cost Accounting unit 2

After reading information on the use of cost analysis for decision-making in Chapter 4 of the Fundamentals of Cost Accounting text, complete the following problems. The problems will help you apply your knowledge of the application of cost analysis to special orders and closing a plant.

Complete the following problems:

· Problem 4-53, "Special Orders," page 148.

· Problem 4-61, "Closing a Plant," page 154.

4-53. Special Orders

(LO 4-1, 2)

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

	Custom Dresses	Standard Dresses	Total
Number of dresses	10	20	30
Sales revenue	$50,000	$30,000	$80,000
Materials	$10,000	$ 8,000	$18,000
Labor	20,000	9,000	29,000
Machine depreciation	600	300	900
Rent	4,200	2,800	7,000
Heat and light	1,000	600	1,600
Other production costs			2,800
Marketing and administration			7,700
Total costs			$67,000
Operating profit			$13,000

Page 149

Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 900 hours, of which 600 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied.

A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili’s company is working at capacity and would have to give up some other business to make this dress. She can’t renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $24,000 for the special order. Materials and labor for the order will cost $6,000 and $10,000, respectively. The special order would require 140 hours of machine time. Ms. Nili’s company would save 150 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Required

a. Should Ms. Nili take the order? Explain your answer.

b. What is the minimum price Ms. Nili should accept to take the special order?

c. What are the other factors, if any, besides price that she should consider?

4-61. Closing a Plant

(LO 4-4)

You have been asked to assist the management of Ironwood Corporation in arriving at certain decisions. Ironwood has its home office in Michigan and leases factory buildings in Wisconsin, Minnesota, and North Dakota, all of which produce the same product. Ironwood’s management provided you a projection of operations for next year follow:

	Total	Wisconsin	Minnesota	North Dakota
Sales revenue	$880,000	$440,000	$280,000	$160,000
Fixed costs
Factory	220,000	112,000	56,000	52,000
Administration	70,000	42,000	22,000	6,000
Variable costs	290,000	133,000	85,000	72,000
Allocated home office costs	100,000	45,000	35,000	20,000
Total	$680,000	$332,000	$198,000	$150,000
Operating profit	$200,000	$108,000	$ 82,000	$ 10,000

Page 155

The sales price per unit is $5.

Due to the marginal results of operations of the factory in North Dakota, Ironwood has decided to cease its operations and sell that factory’s machinery and equipment by the end of this year. Ironwood expects that the proceeds from the sale of these assets would equal all termination costs. Ironwood, however, would like to continue serving most of its customers in that area if it is economically feasible and is considering one of the following three alternatives:

· Expand the operations of the Minnesota factory by using space presently idle. This move would result in the following changes in that factory’s operations:

	Total	Wisconsin	Minnesota	North Dakota
Sales revenue	$880,000	$440,000	$280,000	$160,000
Fixed costs
Factory	220,000	112,000	56,000	52,000
Administration	70,000	42,000	22,000	6,000
Variable costs	290,000	133,000	85,000	72,000
Allocated home office costs	100,000	45,000	35,000	20,000
Total	$680,000	$332,000	$198,000	$150,000
Operating profit	$200,000	$108,000	$ 82,000	$ 10,000

· Under this proposal, variable costs would be $2 per unit sold.

· Enter into a long-term contract with a competitor that will serve that area’s customers. This competitor would pay Ironwood a royalty of $1 per unit based on an estimate of 30,000 units being sold.

· Close the North Dakota factory and not expand the operations of the Minnesota factory.

Total home office costs of $100,000 will remain the same under each situation.

Required

To assist the management of Ironwood Corporation, prepare a schedule computing Ironwood’s estimated operating profit from each of the following options:

a. Expansion of the Minnesota factory.

b. Negotiation of the long-term contract on a royalty basis.

c. Shutdown of the North Dakota operations with no expansion at other locations. (CPA adapted)