Chapter 23: Problem Set B

Problem 23-1B: Make or Buy Scenario: Alto Company currently buys a part for $4.50 per unit. Two internal methods to produce the part: • • Method 1: Direct Materials ($1.20), Direct Labor ($1.50), Incremental Overhead ($2). Method 2: Direct Materials ($1.20), Direct Labor ($1), Incremental Overhead ($2.75). Analysis: 1. Cost per Unit Calculations: o Method 1:  Direct Materials: $1.20  Direct Labor: $1.50  Incremental Overhead: $2  Total Cost per Unit: $1.20 + $1.50 + $2 = $4.70/unit o Method 2:  Direct Materials: $1.20  Direct Labor: $1.00  Incremental Overhead: $2.75  Total Cost per Unit: $1.20 + $1.00 + $2.75 = $4.95/unit 2. Decision: o Buy Cost: $4.50/unit. o Make Cost:  Method 1: $4.70/unit.  Method 2: $4.95/unit. o Decision: Buy the part, as it costs $4.50, which is cheaper than both internal methods. Problem 23-2B: Scrap or Rework Scenario: Micron Manufacturing has 50 damaged telescopes with three alternatives: 1. Sell as Scrap for $3,750. 2. Disassemble for $2,000 and sell parts for $6,500. 3. Rework for $3,600 and sell for $25,000. Analysis: 1. Income Calculations: o Sell as Scrap: Revenue = $3,750. o Disassemble:  Revenue: $6,500 Cost: $2,000  Net Income: $6,500 - $2,000 = $4,500 o Rework:  Revenue: $25,000  Cost: $3,600  Net Income: $25,000 - $3,600 = $21,400 2. Decision: Choose the Rework option because it results in the highest net income ($21,400).  Problem 23-3B: Sales Mix Strategies Scenario: Sung Company produces two models with a shared machine capacity of 200 hours per month. Requirements: 1. Contribution Margin per Machine Hour for Each Model: o Calculate the contribution margin per unit for each model. o Divide the contribution margin by the machine hours required per unit to determine the contribution margin per machine hour. 2. Best Sales Mix: o Prioritize production based on the highest contribution margin per machine hour, given capacity limits. 3. Revised Mix with Limited Demand: o If the demand for the Standard model is capped at 180 units, adjust the production mix to maximize contribution margin within the remaining capacity. Problem 23-4B: Pricing Using Total Cost, Target Cost, and Variable Cost Scenario: ComPro is designing a new smartphone with costs as follows: • • • • • • Direct Materials: $285 Direct Labor: $10 Variable Overhead: $30 Variable SG&A: $5 Fixed Overhead: $14 Fixed SG&A: $16 Requirements: 1. Total Cost Method with 220% Markup: o Total Cost: $285 + $10 + $30 + $5 + $14 + $16 = $360. o Markup: $360 × 220% = $792. o Selling Price: $360 + $792 = $1,152/unit. 2. Target Cost Method for 60% Profit: Target Profit: 60% of $1,000 = $600. o Target Cost: $1,000 - $600 = $400/unit. 3. Variable Cost Method with 250% Markup: o Variable Costs: $285 + $10 + $30 + $5 = $330. o Markup: $330 × 250% = $825. o Selling Price: $330 + $825 = $1,155/unit. o Problem 23-5B: Special Offer Pricing Scenario: Ace produces energy drinks. A customer offers to buy 50,000 units at $3.00 each. Direct labor cost increases to $0.48/unit due to overtime, and incremental fixed general costs are $5,000. Analysis: 1. Special Offer Income: o Revenue from Special Offer: 50,000 × $3.00 = $150,000. o Additional Costs:  Direct Labor: 50,000 × $0.48 = $24,000.  Incremental Fixed Costs: $5,000. o Total Costs: $24,000 + $5,000 = $29,000. o Net Income: $150,000 - $29,000 = $121,000. 2. Decision: Accept the special offer, as it results in additional income of $121,000. Problem 23-6B: Special Offer Pricing Scenario: MAX produces power adapters. A customer offers to buy 10,000 units at $5.80 each. Additional costs include $2,200 in incremental fixed overhead and $1,800 in SG&A. Analysis: 1. Special Offer Income: o Revenue from Special Offer: 10,000 × $5.80 = $58,000. o Incremental Costs:  Fixed Overhead: $2,200.  Fixed SG&A: $1,800. o Total Incremental Costs: $2,200 + $1,800 = $4,000. o Net Income: $58,000 - $4,000 = $54,000. 2. Decision: Accept the special offer, as it increases income by $54,000. These detailed responses guide decision-making for each scenario, focusing on cost efficiency, contribution margins, and incremental profitability to drive the best business outcomes.