Reference no: EM133065763

Question 1: Information for decisions: relevant costs and benefits

Waugh Ltd has a plant capacity of 30,000 units per month. Unit cost includes:

Direct labour                                      $1.60

Variable overhead                              $1.00

Fixed overhead                                  $0.90

Fixed selling expenses                       $1.80

Variable selling expenses                   $1.50

Currently monthly sales are 29,000 units at $5.30 per unit. Border Ltd has contacted Waugh Ltd about purchasing 1000 units at $5 each. Current sales would not be affected by the order.

Special order also requires 1000 Kg of raw materials. Firm has sufficient inventory of raw materials at book value of $1 per Kg. However, if the order is accepted, the firm will be forced to restock at a predicted cost of $1.2 per Kg.

Required
If the order is accepted what is the change in Waugh's profit for the month?

Question 2: Crystal Lattice (CL) produces mats for use in fitness centers. Production capacity is 20 000 mats per year. Due to a chain of fitness centers closing, CL now has spare capacity of 2000 mats per year. An international hotel chain, Resteasy, has recently contacted CL to place a one-off order for 3000 mats. The hotel chain has recently remodelled a number of its hotels to incorporate fitness centers for guests.

CL normally sell mats for $100/mat, and Resteasy has offered to pay $90 per mat. Resteasy has also requested that each mat be embossed with its company logo. An embossing machine costing $20 000 would therefore need to be purchased by CL. The machine could not be used for other products.
Questions:
1) From a financial perspective, should CL accept the special order?
2) What other factors should be considered before accepting the order?

Question 3: Spa Company produces plunge pools. Currently, the company uses internally manufactured pumps to power jets. Spa company has found that 40 % of the pumps have failed within their 12-month warranty period, causing huge warranty costs.

Because of the company's inability to manufacture high-quality pumps, management is considering buying pumps from a reputable outside supplier who will also bear any related warranty costs.

Spa Company's unit cost of manufacturing pumps is $83.75 per unit, including $17.25 of allocated fixed overhead. Also, the company has spent an average of $22 repairing each pump returned. Spa company can purchase pumps for $92.50 per pump. During 2011, Spa plans to sell 12 800 plunge pools (each pool requires one pump).

Required:
Determine whether Spa Company should make or buy the pumps?

Question 4: Burt Ltd has three divisions which are in competition with each other, selling slightly different products. Annual results appear below:

The company believes that if it drops Division B, sales of Division A will increase by 4000 units and sales of Division C by 2000 units. Analysis reveals that $24000 of fixed costs relating to Division B are avoidable for the company if Division B is closed. From financial perspective, should the division B be closed?

Question 5: ETA Ltd produces chemicals for cleaning graffiti. In one joint process, 30000 litres of GSP are processed into 17000 litres of Xenon and 13000 litres of Propile. The cost of the joint process, including the GSP, is $50000. ETA Ltd allocates $34000 of the joint cost to the Xenon and $16000 of the cost to Propile. The 13000 litres of Propile can be sold at split-off point for $8500, or they can be processed further into a product called Protite. The sales value of 13000 litres of Protite is $15000, and the additional processing cost is $7500.

Required:
Should ETA Ltd sell Propile at split-off point or process to produce Protite.