Reference no: EM133088166
Question 1 - HMI Inc. is suffering from effects of increased competition for its product, a lawn mower that is sold is discount stores. The following table shows the results of its operations for 2020:
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Sales (12,500 units @ $84)
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$1,050,000
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Variable Cost (12,500 units @ $63)
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787,500
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Contribution Margin
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262,500
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Fixed Costs
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296,100
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Operating Profit (Loss)
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($33,600)
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Required -
1. Compute the break - even point in both units and dollars.
2. Compute the Contribution Margin ratio at the 12,500 units.
3. What would be the required sales in units and dollars to generate a target profit of $30,000.
4. The manager believes that a $60,000 increase in advertising would result in a $200,000 increase in annual sales. If this change is implemented, what would be the new annual profit or loss.
5. A 10% reduction in price per unit and an increase in advertising of $40,000 would cause the sales in unit to increase by 25% - if this change is implemented what would be the new operating profit (loss).
Question 2 - Autoshop Limited is currently manufacturing Part ZZZ. It produces 50,000 units of Part ZZZ annually.
This part is used in the manufacturing of many products produced by Autoshop Limited. The breakdown of the cost per unit for ZZZ is shown below.
Direct Materials $5.00
Direct Labour $1.50
Variable Overhead $3.00
Fixed Overhead $4.00
Unit Cost $13.50
The fixed overhead cost (at $4/unit) would still remain with the company even if Autoshop stops manufacturing Part ZZZ. An outside supplier has offered to sell the same part to Autoshop for $12 per unit.
Currently, there is no alternative use for the capital assets used to produce Part ZZZ. These capital assets will not be sold if the firm chooses to buy Part ZZZ.
Required -
1. Should Autoshop Limited make or buy Part ZZZ?
2. If Autoshop buys the part for $12 instead of making it, by how much will income from operations increase or decrease?
Question 3 - Restoration Hardware Corp. manufacturers household furniture, and currently makes a kitchen table that can be customized. Kyle, the firm's production manager, asked the finance department to compile a breakdown of costs for producing the customizable table:
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Annual production costs for Customizable Kitchen Table
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Per Unit
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Direct Materials
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$8.30
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Direct Labour
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$5.00
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Variable Overhead
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$2.65
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Production Supervisor's Salary
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$13.50
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Manufacturing Equipment Depreciation
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$2.00
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Allocated Fixed Overhead
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$4.00
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Total Costs
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$35.45
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An external supplier has offered to provide Restoration Hardware 5,000 units of the same table per year at a price of $25 each.
Additional information:
The manufacturing equipment has no salvage value and cannot be used for any other purpose. It also cannot be sold as there is no market for the equipment.
The fixed overhead costs allocated to the cabinets are common to all items produced in the factory.
All current fixed costs on a per unit basis are expressed for production of 5,000 units. These costs will not change if more or less units are produced.
Required - If Restoration Hardware decides to purchase the tables rather than making them, the production supervisor will take over duties in another department with a different salary based on new responsibilities. The new salary would be $50,000.
Should the company make or buy the tables?
Question 4 - Han Products manufactures 55,500 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is as follows:
Direct materials $6.66
Direct labour 18.50
Variable overhead 4.44
Fixed overhead 16.65
Total cost per part $46.25
An outside supplier has offered to sell 48,000 units of part S-6 each year to Han Products for $38.85 per part. If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $148,000. However, Han Products has determined that 30% of the fixed overhead being applied to part S-6 will be avoided if part S-6 is purchased from the outside supplier.
Required - Prepare computations to show the net dollar advantage or disadvantage of accepting the outside supplier's offer.
Question 5 - Imperial Jewellers is considering a special order for 20 handcrafted gold bracelets for a wedding. The gold bracelets are to be given as gifts to members of the wedding party. The normal selling price of a gold bracelet is $199.95 and its unit product cost is $169, as shown:
Materials $84.00
Direct labour 45.00
Manufacturing overhead 40.00
Unit product cost $169.00
The manufacturing overhead is largely fixed and unaffected by variations in how much jewellery is produced in any given period. However, 20% of the overhead is variable with respect to the number of bracelets produced. The customer interested in the special bracelet order would like special filigree applied to the bracelets. This would require additional materials costing $2 per bracelet and would also require acquisition of a special tool costing $250 that would have no other use once the special order was completed. This order would have no effect on the company's regular sales, and the order could be fulfilled using the company's existing capacity without affecting any other order.
Required - What effect would accepting this order have on the company's net operating income if a special price of $169.95 is offered per bracelet for this order? Should the special order be accepted at this price?