Chapter 23: Problem Set A

Problem 23-1A: Make or Buy Scenario: Haver Company pays $15/unit to buy a part. There are two internal methods to produce the part: • • Method 1: Direct Materials ($5), Direct Labor ($8), Incremental Overhead ($3). Method 2: Direct Materials ($5), Direct Labor ($2), Incremental Overhead ($7). Analysis: 1. Cost per Unit Calculations: o Method 1:  Direct Materials: $5  Direct Labor: $8  Incremental Overhead: $3  Total Cost per Unit: $5 + $8 + $3 = $16/unit o Method 2:  Direct Materials: $5  Direct Labor: $2  Incremental Overhead: $7  Total Cost per Unit: $5 + $2 + $7 = $14/unit 2. Decision: o Buy Cost: $15/unit. o Make Cost:  Method 1: $16/unit.  Method 2: $14/unit. o Decision: Haver should make the part using Method 2, as it costs $14, which is cheaper than buying for $15. Problem 23-2A: Scrap or Rework Scenario: Hip Manufacturing has 3,000 damaged denim jackets with three alternatives: 1. Sell as scrap for $18,000. 2. Disassemble for $6,000 and sell parts for $36,000. 3. Rework for $102,000 and sell for $135,000. Analysis: 1. Income Calculations: o Sell as Scrap: Revenue = $18,000. o Disassemble:  Revenue: $36,000 Cost: $6,000  Net Income: $36,000 - $6,000 = $30,000 o Rework:  Revenue: $135,000  Cost: $102,000  Net Income: $135,000 - $102,000 = $33,000 2. Decision: Choose the Rework option because it provides the highest net income ($33,000).  Problem 23-3A: Sales Mix Strategies Scenario: Edge Company produces two product models with a machine capacity of 176 hours per month. Requirements: 1. Contribution Margin per Machine Hour for Each Model: o Use contribution margin per unit and divide by the hours needed per unit. 2. Best Sales Mix: o Prioritize production based on the highest contribution margin per machine hour. 3. Revised Mix if Demand for Standard Model is 100 units: o Adjust the sales mix accordingly. Problem 23-4A: Pricing Using Total Cost, Target Cost, and Variable Cost Scenario: Techcom is designing a smartphone with the following costs: • • • • • • Direct Materials: $230 Direct Labor: $10 Variable Overhead: $22 Variable SG&A: $18 Fixed Overhead: $30 Fixed SG&A: $10 Requirements: 1. Total Cost Method with 180% Markup: o Total Cost: $230 + $10 + $22 + $18 + $30 + $10 = $320 o Markup: $320 × 180% = $576 o Selling Price: $320 + $576 = $896/unit 2. Target Cost Method for 60% Profit: o Target Profit: 60% of $800 = $480. o Target Cost: $800 - $480 = $320/unit 3. Variable Cost Method with 200% Markup: o o o Variable Costs: $230 + $10 + $22 + $18 = $280 Markup: $280 × 200% = $560 Selling Price: $280 + $560 = $840/unit Problem 23-5A: Special Offer Pricing Scenario: JART receives a special offer for 50,000 units at $3.20 each. The regular contribution margin per unit remains unchanged, but direct labor cost increases to $0.54/unit. Additional incremental fixed general costs are $5,000. Analysis: 1. Special Offer Income: o Revenue from Special Order: 50,000 × $3.20 = $160,000. o Additional Costs:  Direct Labor: 50,000 × $0.54 = $27,000.  Incremental Fixed Costs: $5,000. o Total Costs: $27,000 + $5,000 = $32,000. o Net Income: $160,000 - $32,000 = $128,000. 2. Decision: Accept the special offer, as it generates $128,000 additional income. Problem 23-6A: Special Offer Pricing Scenario: FURY has a special offer for 10,000 units at $42. Variable costs remain constant, and additional fixed costs are $10,000 (overhead) + $15,000 (SG&A). Analysis: 1. Special Offer Income: o Revenue: 10,000 × $42 = $420,000. o Incremental Fixed Costs: $10,000 + $15,000 = $25,000. o Subtract from contribution margin to determine net effect. 2. Decision: Based on calculations, if incremental costs do not exceed the revenue increase, the special offer is likely beneficial. The exercises illustrate a mix of make-or-buy, cost analysis, and special offer decisions, demonstrating how relevant costs influence strategic business decisions.