Management Accounting –2
Module 2
Making Short-run Decisions
Paul Jeyakumar, M.Sc., CGA
Question 1.
A company manufactures 3 types of desktop computers. The income
statement for the 3 products and the whole company is shown below:
Sales
Variable costs
Fixed costs
Operating inc.
Product A
$ 50,000
25,000
16,000
$ 9,000
Product B
$ 60,000
40,000
12,000
$ 8,000
Product C
$ 65,000
60,000
8,000
$ (3,000)
Total
$ 175,000
125,000
36,000
$ 14,000
The company produces 1,000 units of each product. The capacity of the
company consists of 9,000 labour hours. The labour required for each
product is 4 hours for Product A, 3 hours for Product B, and 2 hours for
Product C.
Fixed costs are allocated on labour hours.
Required:
a.
Only for this part, assume that there is no capacity constraint on
labour hours. In other words, the firm has unlimited number of
labour hours. Also assume that the firm wants to sell only one
product, and that the firm could sell unlimited quantities of any of the
3 products. Which product should be produced?
b.
If the firm can sell unlimited quantities of any of the 3 products.
which product should be produced?
c.
The company has a contract that requires the supply of 500 units of
each product to a customer. The total market demand for a single
product is limited to 1,500 units. How many units of each product
should the company manufacture in order to maximize the
company’s total contribution margin?
MA2 2007 - 2008 Module 2
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Paul Jeyakumar, M.Sc., CGA
Question 2:
A company manufactures 3 types of desktop computers. The income
statement for the 3 products and the whole company is shown below:
Sales
Variable costs
Fixed costs
Operating inc.
Product A
$ 50,000
25,000
16,000
$ 9,000
Product B
$ 60,000
40,000
12,000
$ 8,000
Product C
$ 65,000
60,000
8,000
$ (3,000)
Total
$ 175,000
125,000
36,000
$ 14,000
The company produces 1,000 units of each product. The capacity of the
company consists of 9,000 labour hours. The labour required for each
product is 4 hours for Product A, 3 hours for Product B, and 2 hours for
Product C.
Fixed costs are allocated on labour hours.
Required:
Suppose the company can sell unlimited quantities of any of the 3
products. If a customer wanted to purchase 500 units of Product C,
what would the minimum sale price per unit be for this order?
MA2 2007 - 2008 Module 2
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Paul Jeyakumar, M.Sc., CGA
Question 3:
Axia Inc. manufactures two products, widgets and gadgets, and
has a capacity of 1,000 machine hours. Prices and costs for each
product are:
Widget
Selling price per unit
Gadget
$200
$280
Variable costs per unit:
Direct materials
$25
Other direct costs
$6
1
Indirect manufacturing costs $30
$30
$10
$44
1
Variable indirect manufacturing costs are applied at a rate of
$40 per machine hour.
Bromont Industries, a potential client, offered $240/unit to Axia to
produce 250 special units. These 250 units would incur the
following production costs and time:
Direct materials
Other direct costs
Machine hours
$7,000
$2,000
200
Required
a. Assume that Axia has enough excess capacity to produce the
special order. Calculate what the total contribution would be if
the special order from Bromont were accepted.
b. Assume that Axia is currently operating at full capacity.
Determine if Axia should produce the units for the special
order instead of widget or gadget units, and state your
conclusion. Show your calculations.
c. Assume that Axia is actually operating at 95% of full capacity.
Calculate what the opportunity cost would be if Bromont’s
special order were accepted. Show your calculations.
d. Assume that Axia is actually operating at 95% of full capacity,
and additional machines can be rented at a cost of $33,000 to
produce Bromont’s special order. If the special order is
accepted, calculate its effect on Axia’s profit. Show your
calculations.
MA2 2007 - 2008 Module 2
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Paul Jeyakumar, M.Sc., CGA
Question 4:
Quincy Inc. manufactures and sells bakery products and has decided to
put a new product on the market: an ice cream cake. The product will be
sold in boxes of 24. The price of each box will be $8. The company will use
its excess capacity to manufacture the product. The accounting
department has decided that $100,000 worth of fixed overhead costs
should be allocated to the product.
The accounting department has budgeted the following costs (based on
production of 100,000 boxes):
Direct materials (per box)
Direct labour (per box)
Fixed and variable overhead (per box)
Total
3.00
2.00
1.50
$6.50
Quincy can purchase ice cream units, one of the ingredients, from a dairy
company. The dairy company would sell the ice cream units for $0.90 for 24
units. If Quincy buys the ice cream from the dairy company, direct labour
and variable overhead costs would be reduced by 10%. Direct material cost
would be 20% lower than the original budgeted amount and would not
include the cost of the ice cream purchased from the dairy company.
a.
Should Quincy make or buy the ice cream? Explain your decision.
b.
Compute the maximum amount that Quincy should pay for the ice
cream.
c.
Suppose that sales projections are revised and that Quincy could
sell 125,000 boxes instead of 100,000. In such a case, to produce
ice cream, it would need to lease a new machine for $10,000 a
year. Under these conditions, should Quincy make the ice cream
or buy it from the dairy company? Assume that under the
purchase option, Quincy has to buy ice cream for all 125000
boxes. Explain your decision.
d.
Suppose that sales projections are revised and that Quincy could
sell 125,000 boxes instead of 100,000, and that it would need to
lease the machine. Would it be better off if it makes the ice cream
for the first 100,000 boxes and buys the remainder from the dairy
company? Explain your decision. Assume the $0.90 price is
available for any volume.
e.
List four qualitative factors that Quincy should consider when
determining whether to make or buy the ice cream.
MA2 2007 - 2008 Module 2
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Paul Jeyakumar, M.Sc., CGA
Question 5:
A company manufactures 3 types of desk-top computers. The income
statement for the 3 products and the whole company is shown below:
Product A Product B
Sales
$50,000
$60,000
Product C
Total
$65,000
$175,000
Variable costs
Fixed costs
Total costs
25,000 40,000
16,000 12,000
41,000 52,000
60,000
8,000
68,000
125,000
36,000
161,000
Operating income
$9,000 $8,000
(3,000)
$14,000
The company produces 1,000 units of each product. The capacity of the
company consists of 9,000 labour hours. The labour required for each
product is 4 hours for Product A, 3 hours for Product B, and 2 hours for
Product C. Fixed costs are allocated on labour hours.
a.
If the current production levels are maintained, should the company
eliminate Product C? Explain your rationale.
b.
If the current production levels can be changed and sales match the
production levels, should the company eliminate Product C? Explain
your rationale.
MA2 2007 - 2008 Module 2
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Paul Jeyakumar, M.Sc., CGA
Question 6:
The following information pertains to a company that produces four types
of microprocessors using the same production process. The common
costs of these products, up to the split-off point, are $550,000. Common
costs are allocated on the basis of the quantity of output. The following
information includes additional processing costs, the selling price of each
product at the split-off point, and the selling price of each product after
further processing:
Number of
Microprocessor Units Produced
Selling Price at
Split-off Point
1
2
3
4
$10.00
9.50
11.00
7.75
3,000
4,000
2,500
500
Selling Price
after Further
Processing
$15.00
12.25
15.70
10.25
Additional
Costs for
Further Processing
$14,800
8,500
12,000
1,250
a.
If only one product can be processed further, which one should the
company choose? Briefly explain why.
b.
Referring to your answer in part (a), identify which information is
relevant to the decision to process this product further.
c.
If common costs up to the split-off point were allocated on the basis of
the market values at the split-off point, would your decision in part (a)
be different? Briefly explain why.
MA2 2007 - 2008 Module 2
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Paul Jeyakumar, M.Sc., CGA
Assignment Check Figures
Question 2
a. Average cost = $14 per widget
b. Minimum acceptable price = $8 per widget
c. Minimum price = $13.00 per widget
Question 4
a.
Net income by product line, if both products are kept:
Product X
Product Y
Total
Sales revenue
$370,000
Less: Variable costs
(205,000)
Contribution margin
165,000
Less: Traceable fixed costs* (62,975)
Segment margin
102,025
Common fixed cost
(107,025)
Product line margin
$ (5,000)
$235,000
(130,000)
105,000
(26,025)
78,975
(67,975)
$ 11,000
$ 605,000
(335,000)
270,000
(89,000)
181,000
(175,000)
$ 6,000
*
Product X
Allocated common fixed costs:
$175,000 x 370,000/605,000
$175,000 x 235,000/605,000
Traceable fixed costs:
$170,000 - $107,025
$94,000 - $67,975
Product Y
$107,025
$67,975
$ 62,975
$26,025
b.
If both products are eliminated, the new loss is $175,000
c.
If Product X is eliminated, the operating loss is $33,025
d.
If Product Y is eliminated, the operating loss is $6,975
Question 5
a.
b.
Gross profit = $ 240,000
Product B Incremental profit/unit = $0.50
MA2 2007 - 2008 Module 2
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Paul Jeyakumar, M.Sc., CGA