1. The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
| Total | Dirt Bikes | Mountain Bikes | Racing Bikes | |
|---|---|---|---|---|
| Sales | $ 919,000 | $ 264,000 | $ 401,000 | $ 254,000 |
| Variable manufacturing and selling expenses | 472,000 | 118,000 | 194,000 | 160,000 |
| Contribution margin | 447,000 | 146,000 | 207,000 | 94,000 |
| Fixed expenses: | ||||
| Advertising, traceable | 69,600 | 8,400 | 40,800 | 20,400 |
| Depreciation of special equipment | 44,200 | 20,500 | 7,800 | 15,900 |
| Salaries of product-line managers | 114,500 | 40,300 | 38,200 | 36,000 |
| Allocated common fixed expenses*Footnote asterisk | 183,800 | 52,800 | 80,200 | 50,800 |
| Total fixed expenses | 412,100 | 122,000 | 167,000 | 123,100 |
| Net operating income (loss) | $ 34,900 | $ 24,000 | $ 40,000 | $ (29,100) |
*Footnote asteriskAllocated on the basis of sales dollars.
Management is considering discontinuing the racing bikes. The special equipment used to produce racing bikes has no resale value and does not wear out.
Required:
Should the production and sale of racing bikes be discontinued?
What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
2. Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $34 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows:
| Per Unit | 21,000 Units Per Year | |
|---|---|---|
| Direct materials | $ 14 | $ 294,000 |
| Direct labor | 12 | 252,000 |
| Variable manufacturing overhead | 2 | 42,000 |
| Fixed manufacturing overhead, traceable | 9*Footnote asterisk | 189,000 |
| Fixed manufacturing overhead, allocated | 12 | 252,000 |
| Total cost | $ 49 | $ 1,029,000 |
*Footnote asteriskOne-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Required:
Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?
If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
Should the outside supplier’s offer be accepted?
Suppose if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product with a segment margin of $210,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
3. Imperial Jewelers manufactures and sells a gold bracelet for $409.00. The company’s accounting system says the unit product cost for this bracelet is $269.00, as shown below:
| Direct materials | $ 145 |
|---|---|
| Direct labor | 88 |
| Manufacturing overhead | 36 |
| Unit product cost | $ 269 |
A wedding party has approached Imperial Jewelers about buying 23 gold bracelets for the discounted price of $369.00 each. The wedding party would like special filigree applied to the bracelets that would increase the direct materials cost per bracelet by $13. Imperial Jewelers would have to buy a special tool for $453 to apply the filigree to the bracelets. The special tool would have no other use once the special order is completed.
To analyze this special order, Imperial Jewelers determined most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party’s order using existing manufacturing capacity.
Required:
Should the company accept the special order?
What is the financial advantage (disadvantage) of accepting the wedding party’s special order?
4. Outdoor Luggage, Incorporated, makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below:
| Ski Guard | Golf Guard | Fishing Guard | ||||
|---|---|---|---|---|---|---|
| Selling price per unit | $ 230 | $ 330 | $ 265 | |||
| Variable cost per unit | $ 90 | $ 150 | $ 105 | |||
| Plastic injection molding machine processing time required to produce one unit | 4 | minutes | 10 | minutes | 5 | minutes |
| Pounds of plastic pellets per unit | 5 | pounds | 11 | pounds | 12 | pounds |
Required:
Which product has the largest contribution margin per unit?
If the total time available on the plastic injection molding machine is the constraint, how much contribution margin per minute of the constrained resource is earned by each product?
Which product offers the most profitable use of the plastic injection molding machine?
If a severe shortage of plastic pellets required the company to cut back production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product?
Which product offers the most profitable use of the plastic pellets?
5. Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the company’s products far exceeds its manufacturing capacity. The bottleneck (or constraint) in the production process is upholstery labor-hours. Information concerning three of Portsmouth’s products appears below:
| Recliner | Sofa | Love Seat | ||||
|---|---|---|---|---|---|---|
| Selling price per unit | $ 1,340 | $ 1,950 | $ 1,190 | |||
| Variable cost per unit | $ 800 | $ 1,300 | $ 850 | |||
| Upholstery labor-hours per unit | 9 | hours | 13 | hours | 4 | hours |
Required:
Should Portsmouth hire the nearby upholstering company?
Portsmouth is considering paying its upholstery laborers hourly compensation, in addition to their usual salaries, to work overtime. Assuming this extra time would be used to produce sofas, up to how much of an overtime rate per hour should the company be willing to pay to keep the upholstery shop open after normal working hours?
A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $46 per hour. The management of Portsmouth is confident this upholstering company’s work is high quality, and its craftsmen can work as quickly as Portsmouth’s own craftsmen on the simpler upholstering jobs such as the Love Seat. How much additional contribution margin per hour can Portsmouth earn if it supplies the direct material and hires the nearby upholstering company to upholster Love Seats?
6. Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $315,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products based on their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:
| Product | Selling Price | Quarterly Output | ||
|---|---|---|---|---|
| A | $ 13.00 | per pound | 11,600 | pounds |
| B | $ 7.00 | per pound | 18,200 | pounds |
| C | $ 19.00 | per gallon | 2,800 | gallons |
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:
| Product | Additional Processing Costs | Selling Price | |
|---|---|---|---|
| A | $ 54,640 | $ 17.40 | per pound |
| B | $ 77,580 | $ 12.40 | per pound |
| C | $ 29,360 | $ 26.40 | per gallon |
Required:
Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which should be processed further?
What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?
7. Bill just returned from a duck hunting trip with eight ducks. Bill’s friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John presented him with the following cost estimate per duck:
| Camper and equipment: | |
|---|---|
| Cost, $12,000; usable for eight seasons; 10 hunting trips per season | $ 150 |
| Travel expense (pickup truck): | |
| 100 miles at $0.31 per mile (gas, oil, and tires—$0.21 per mile; depreciation and insurance—$0.10 per mile) | 31 |
| Shotgun shells (two boxes per hunting trip) | 20 |
| Boat: | |
| Cost, $2,320, usable for eight seasons; 10 hunting trips per season | 29 |
| Hunting license: | |
| Cost, $30 for the season; 10 hunting trips per season | 3 |
| Money lost playing poker: | |
| Loss, $24 (Bill plays poker every weekend whether he goes hunting or stays at home) | 24 |
| Bottle of whiskey: | |
| Cost, $15 per hunting trip (used to ward off the cold) | 15 |
| Total cost | $ 272 |
| Cost per duck ($272 ÷ 8 ducks) | $ 34 |
Required:
Suppose Bill gets lucky on his next hunting trip and shoots 10 ducks using the same amount of shotgun shells he used on his previous hunting trip to bag 8 ducks. How much would it have cost him to shoot the last two ducks?
Assuming the duck hunting trip Bill just completed is typical, what costs are relevant to a decision as to whether Bill should go duck hunting again this season?
