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1. A customer has asked Clougherty Corporation to supply 4,000 units of product M97, with some...

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1. A customer has asked Clougherty Corporation to supply 4,000 units of product M97, with some modifications, for $40.10 each. The normal selling price of this product is $48.00 each. The normal unit product cost of product M97 is computed as follows:

- Direct Materials $18.50

- Direct labor $1.20

- Variable manufacturing Overhead $8.40

- Fixed manufacturing overhead $3.90

- Unit Product cost $32,000

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product M97 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required:

Determine the effect on the company's total net operating income of accepting the special order.

2. Veron Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $35 to buy from farmers and $19 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $24 or processed further for $14 to make the cocktail of nutrients that are sold for $48. The depeeled spuds can be sold as is for $34 or processed further for $29 to make frozen french fries that are sold for $55.

Required:

a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries?

b. Should each of the intermediate products, peels and depeeled spuds, be sold as-is or processed further into an end product? Explain.

3. The management of Drummer Corporation is considering dropping product D84L. Data from the company's accounting system appear below:

- Sales $800,000

- Variable Expense $4,400,000

- Fixed Manufacturing Expense $248,000

- Fixed Selling and Administrative $184,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $201,000 of the fixed manufacturing expenses and $156,000 of the fixed selling and administrative expenses are avoidable if product D84L is discontinued.

Required:

What would be the effect on the company's overall net operating income if product D84L were dropped? Should the product be dropped?

4. Closter Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below:

UX HV MG
selling 240.24 465.88 118.75
variable cost per unit 182.52 370.88 91.39
time on constraint (minutes) 3.90 7.60 1.90

Required:

a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized.

b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

Variable Cost:

Variable cost is a nature of cost that varies as there are changes in the level of activities. The total variable cost has direct relationship with the level activity which means that when activities are increasing, total variable cost will also be increasing, otherwise, it will decrease.

Answer and Explanation:

1. Determine the effect on the company's total net operating income of accepting the special order.

Selling Price 40.10
Product Cost (32+5.7) 37.7
Gross Margin per Unit 2.4
Units to be Sold 4,000
Total 9,600
Additional Investment Required -31,000
Net Decrease in Net Income -21,400


2.

a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries?

Cost to Peel 19
Processing it Further 14
Total-Cocktail of Nutrients 38
Selling Price 48
Gross Margin if Processed Further 10
Gross Margin if Sold as is (24-19) 5
Benefit When Process Further 5


Cost to Peel 19
Processing Further Cost-Frozen French Fries 29
Total Cost if Processed Further 58
Selling Price 55
Loss when Processed Further 8


Price when sold as is 34
Cost 19
Gross Margin if Sold as is 15


b. Should each of the intermediate products, peels and depeeled spuds, be sold as-is or processed further into an end product? Explain.

The peels should be processed further because it will provide a $5 increase in benefit as shown in the computation. When peels are sold as is, it will only provide $5 income for the company. However, when it is processed further, the cost of processing which amounts to (19+14) 38 can be covered by the 48 selling price. However for the depeeled spuds, processing it further will provide loss for the company. Therefore, the depeeled spuds should not be processed further.


3. What would be the effect on the company's overall net operating income if product D84L were dropped? Should the product be dropped?

Avoidable Fixed Manufacturing Expense 201,000
Fixed Selling Expense 156,000
Total Avoidable Cost 357,000


The total avoidable cost will serve as additional net income of the company, therefore, product D84L should be dropped.


4.

a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized.

UX HV MG
Selling 240.24 465.88 118.75
variable cost per unit 182.52 370.88 91.39
Contribution Margin 57.72 95 27.36
time on constraint (minutes) 3.90 7.60 1.90
Willing to Pay the Constrained Resource 14.8 12.5 14.4
Rank 1 3 2


b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

UX HV MG
Selling 240.24 465.88 118.75
variable cost per unit 182.52 370.88 91.39
Contribution Margin 57.72 95 27.36
time on constraint (minutes) 3.90 7.60 1.90
Willing to Pay the Constrained Resource 14.8 12.5 14.4

Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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