Reference no: EM132253458

Question 1:

PEI Lighthouse Company makes 20,000 units per year of a specialty light used by lighthouses all around the world. The unit product cost of this part is computed as follows:

Direct Materials	$24.70
Direct Labour	$16.30
Variable Manufacturing Overhead	$2.30
Fixed Manufacturing Overhead	$13.40
Unit Product Cost	$56.70

An outside supplier has offered to sell the company the part that PEI Lighthouse Company needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year.

If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

Required:

1) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?

2) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

3) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year?

Question 2:

Cavendish Cheese Company makes three products within their single facility. Data concerning these products follow:

	Products
	A	B	C
Selling price per unit	$67.90	$57.70	$43.90
Direct materials	$12.10	$10.30	$8.60
Direct labour	$14.10	$8.00	$6.80
Variable manufacturing overhead	$2.60	$2.20	$1.80
Variable selling cost per unit	$2.50	$2.20	$2.50
Mixing minutes per unit	2.70	3.30	4.70
Monthly demand in units	1,000	3,000	3,000

The mixing machines are potentially a constraint in the production facility. A total of 25,800 minutes are available per month on these machines.

Direct labour is a variable cost in this company. Required:
1) How many minutes of mixing machine time would be required to satisfy demand for all three products?

2) How much of each product should be produced, rounded to the nearest whole unit, to maximize operating income?

3) Up to how much should the company be willing to pay, rounded to the nearest whole cent, for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Question 3:

Green Gables Company makes a product that has the following costs:

	Per unit	Per year
Direct materials	$17.30
Direct labour	12.90
Variable manufacturing overhead	4.20
Fixed manufacturing overhead		$916,800
Variable SG&A expenses	2.00
Fixed SG&A expenses		907,200

The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 48,000 units per year.

The company has invested $360,000 in this product and expects a return on investment of 15%. Required:
1) Compute the markup on absorption cost.

2) Compute the target selling price of the product using the absorption costing approach.

Question 4:

Cows Creamery Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

	Gooey Mooey	Wowie Cowie	Total
Allocated Joint processing costs	$22,000	$19,600	$41,600
Sales value at split-off point	$32,000	$28,000	$60,000
Costs of further processing	$11,600	$25,300	$36,900
Sales value after further processing	$40,800	$54,200	$95,000

Required:

1) What is the net monetary advantage (disadvantage) of processing Gooey Mooey beyond the split-off point?

2) What is the net monetary advantage (disadvantage) of processing Wowie Cowie beyond the split-off point?

3) What is the minimum amount the company should accept for Gooey Mooey if it is to be sold at the split-off point?

4) What is the minimum amount the company should accept for Wowie Cowie if it is to be sold at the split-off point?