Reference no: EM132207066

Questions -

Q1. Han Products manufactures 20,000 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:

Direct materials $3.40

Direct labor 8.00

Variable manufacturing overhead 2.60

Fixed manufacturing overhead 9.00

Total cost per part $23.00

An outside supplier has offered to sell 20,000 units of part S-6 each year to Han Products for $19 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 $70,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier.

Required: What is the financial advantage (disadvantage) of accepting the outside supplier's offer?

Q2. Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows:

Total Hardware Linens

Sales $4,110,000 $3,090,000 $1,020,000

Variable expenses 1,243,000 838,000 405,000

Contribution margin 2,867,000 2,252,000 615,000

Fixed expenses 2,200,000 1,370,000 830,000

Net operating income (loss)$667,000 $882,000 $(215,000)

A study indicates that $375,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 20% decrease in the sales of the Hardware Department.

Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Q3. Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company's accounting system says that the unit product cost for this bracelet is $266.00 as shown below:

Direct materials $141

Direct labor 85

Manufacturing overhead 40

Unit product cost $266

The members of a wedding party have approached Imperial Jewelers about buying 16 of these gold bracelets for the discounted price of $366.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $453 and that would increase the direct materials cost per bracelet by $6. The special tool would have no other use once the special order is completed.

To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $7.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that 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 its existing manufacturing capacity.

Required:

1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

What is the financial advantage (disadvantage) of accepting the special order from the wedding party?

Q4. Julie has just retired. Her company's retirement program has two options as to how retirement benefits can be received. Under the first option, Julie would receive a lump sum of $138,000 immediately as her full retirement benefit. Under the second option, she would receive $25,000 each year for 6 years plus a lump-sum payment of $57,000 at the end of the 6-year period.

Required: Calculate the present value for the following assuming that the money can be invested at 12%.

Q5. Fraser Company will need a new warehouse in five years. The warehouse will cost $500,000 to build.

Required: What lump-sum amount should the company invest now to have the $500,000 available at the end of the five-year period? Assume that the company can invest money at: (Round your final answers to the nearest whole dollar amount.)

Q6. The Atlantic Medical Clinic can purchase a new computer system that will save $7,000 annually in billing costs. The computer system will last for eight years and have no salvage value.

Required: What is the maximum price (i.e., the price that exactly equals the present value of the annual savings in billing costs) that the Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic's required rate of return is: (Round your final answers to the nearest whole dollar amount.)