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Situational Decsisions, Financial Accounting

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Presented below are four independent situations which you as a Manager Trainee employed with Your Company have been asked to evaluate. Evaluate each situation based on what each requires. To receive a promotion depends upon how your respond.
Situation One
Your Company makes 42,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct material $15.00
Direct labor 18.00
Variable manufacturing overhead 4.00
Fixed manufacturing overhead 25.00
Unit product cost $62.00

An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $268,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $17.00 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company''s remaining products.
Required:
a. How much of the unit product cost of $62.00 is relevant in the decision of whether to make or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 42,000 units required each year?










Situation Two
Your Company produces a single product. The cost of producing and selling a single unit of this product at the company''s normal activity level of 40,000 units per month is as follows:

Direct material $54.00
Direct labor 5.00
Variable manufacturing overhead 2.00
Fixed manufacturing overhead 13.00
Variable selling and administrative expense 2.00
Fixed selling and administrative expense 8.00

The normal selling price of the product is $92.00 per unit.
An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company''s normal sales and would not change the total amount of the company''s fixed costs. The variable selling and administrative expense would be $1.00 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $81.90 per unit. By how much would this special order increase (decrease) the company''s net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 2,100 units for regular customers. What would be the minimum acceptable price per unit for the special order?









Situation Three

Your Company makes three products in a single facility. These products have the following unit product costs:
Product A Product B Product C
Direct material $25.00 $25.00 $26.00
Direct labor 14.00 16.00 15.00
Variable manufacturing overhead 2.00 3.00 4.00
Fixed manufacturing overhead 20.00 27.00 21.00
Unit cost $61.00 $71.00 $66.00

Additional data concerning these products are listed below:
Product A Product B Product C
Mixing minutes per unit 2.50 1.50 1.80
Selling price per unit $71.00 $88.00 $82.00
Variable selling cost per unit $2.50 $2.00 $3.50
Monthly demand in units 1,000 2,500 3,500

The mixing machines are potentially the constraint in the production facility. A total of 10,800 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all four products?
b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)











Situation Four
The most recent monthly income statement for Your Company is given below:
Store A Store B Total
Sales $500,000 $700,000 $1,200,000
Variable expenses 200,000 490,000 690,000
Contribution margin 300,000 210,000 510,000
Traceable fixed expenses 125,000 300,000 425,000
Store segment margin 175,000 (90,000) 85,000
Common fixed expenses 25,000 35,000 60,000
Net operating income $150,000 $ (125,000) $ 25,000

Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 15 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars.
Required:
Compute the overall increase or decrease in the company''s operating income if Store B is closed.

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