Chapter 23: Exercises

Exercise 23-1: Make or Buy Scenario: Beto Company can buy a part for $2.50/unit or make it internally. Making it would cost $1.20 in direct materials and $1.00 in direct labor. Overhead is applied at 200% of direct labor, but incremental overhead would be 80% of direct labor. Analysis: 1. Cost to Make: o Direct Materials: $1.20 o Direct Labor: $1.00 o Incremental Overhead (80% of Direct Labor): $1.00 × 0.80 = $0.80 o Total Make Cost: $3.00/unit 2. Cost to Buy: $2.50/unit. Decision: Buy the part because $2.50 (buy cost) is less than $3.00 (make cost). Exercise 23-2: Make or Buy Scenario: Gelb Co. has the option to make a part with per-unit costs of $1.20 (Direct Materials), $0.75 (Direct Labor), and $1.40 (Incremental Overhead) or buy it for $3.50/unit. Analysis: 1. Cost to Make: o Direct Materials: $1.20 o Direct Labor: $0.75 o Incremental Overhead: $1.40 o Total Make Cost: $3.35/unit 2. Cost to Buy: $3.50/unit. Decision: Make the part because $3.35 (make cost) is less than $3.50 (buy cost). Exercise 23-3: Sell or Process Scenario: Cobe Co. can sell 200 partially finished cabinets for $60,000. Alternatively, further processing costs $12,000, allowing them to be sold for $80,000. Analysis: 1. Sell As-Is: Revenue of $60,000. 2. Process Further: o Revenue: $80,000 o o Additional Costs: $12,000 Net Income from Processing: $80,000 - $12,000 = $68,000. Decision: Process further, as the net income is $68,000 compared to $60,000. Exercise 23-4: Scrap or Rework Scenario: 22,000 defective units have a sunk cost of $132,000. They can be scrapped for $78,000 or reworked for $99,000 and sold for $187,000. Analysis: 1. Scrap Value: $78,000. 2. Rework: o Cost: $99,000 o Revenue: $187,000 o Net Income from Rework: $187,000 - $99,000 = $88,000. Decision: Rework, as it results in $88,000, which is higher than the $78,000 scrap value. Exercise 23-5: Sell or Process Scenario: Varto Co. has 7,000 old model units that cost $154,000 to produce. They can be sold as is for $56,000 or processed further at an additional $125,000 for a total sale of $175,000. Analysis: 1. Sell As-Is: Revenue of $56,000. 2. Process Further: o Revenue: $175,000 o Additional Costs: $125,000 o Net Income from Processing: $175,000 - $125,000 = $50,000. Decision: Sell as is, as $56,000 is higher than the $50,000 from processing. Exercise 23-6: Sales Mix Scenario: Colt Co. produces two skateboard models. Hero requires 2 machine hours, Flip requires 1. Total machine capacity is 1,600 hours. Analysis: 1. Compute Contribution Margin per Machine Hour for each product. o Allocate machine time based on the highest contribution margin per machine hour. 2. Use the contribution data to determine the best production mix. Exercise 23-7: Sales Mix Scenario: Chip Co. makes three products: Kin, Ike, and Bix, each using the same raw material but different amounts. Analysis: 1. Calculate Contribution Margin per Pound of Material for each product. 2. Prioritize production based on the highest contribution margin per pound. Exercise 23-8: Segment Elimination Scenario: Marin Co.'s canoe segment shows a loss, with $300,000 of fixed costs avoidable. Analysis: 1. Calculate the difference in total income if the segment is eliminated. Decision: Eliminate the segment if total income increases. Exercise 23-9: Segment Elimination Scenario: Suresh Co. has multiple segments; those with sales below avoidable costs are candidates for elimination. Analysis: 1. Identify segments where sales < avoidable costs. 2. Determine the total income impact from eliminating those segments. Exercise 23-10: Keep or Replace Scenario: Lopez Co. considers replacing an old machine. Options include keeping or purchasing Machine A or B, with different costs and savings. Analysis: 1. Compare the variable manufacturing costs for each option over the machine's remaining life. 2. Include any sale value of the old machine. Decision: Choose the option that results in the highest net income increase. Exercise 23-11 & 23-12: Pricing Analysis 1. Total Cost Pricing (Exercise 23-11): Determine price per unit by adding a markup to total costs. 2. Variable Cost Pricing (Exercise 23-12): Calculate markup based on variable costs to set the product price. Exercise 23-13 & 23-14: Special Offer Analysis 1. Determine the profitability of accepting special orders by comparing incremental costs and revenues. Decision: Accept if additional income is generated. Exercise 23-15: Time and Materials Pricing Scenario: HH Electric has specific labor charges and a materials markup. Analysis: 1. Compute Time Charge per Hour and Materials Markup. 2. Calculate total price for a given job using these metrics. This comprehensive summary addresses each scenario, focusing on relevant costs, contribution margins, and profit impacts for decision-making.