Exam 11: Tactical Decision Making

Under what circumstances might a firm be asked to accept a special order of its product for a reduced price?

Meco Company produces a product that has a regular selling price of $360 per unit. At a typical monthly production volume of 2,000 units, the product’s average unit cost of goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. -Refer to the figure.Assuming Meco Company has excess capacity,what would be the effect on profits of accepting the order?

Information about three joint products follows: Anticipated production 5,000 1,000 2,000 Selling price/kg at split-off Additional processing costs/ \ 10 \ 30 \ 16 after split-off (all variable) \ 6 \ 12 \ 24 Selling price/kg after further processing \2 0 \4 0 \5 0 The cost of the joint process is $60,000.Which of the joint products should be sold at split-off?

The operations of Grant Corporation are divided into the Fix Division and the Roach Division.Projections for the next year are as follows: $\begin{array}{lccc}&\text { Fix Division } & \text { Roach Division } & \text { Total }\\ \text { Sales } & \$ 60,000 & \$ 40,000 & \begin{array}{r}\$ 100,000 \\\end{array} \\ \text { Variable costs } & 20,000 & 15,000 & 35,000 \\ \text { Contribution margin } & \$ 40,000 & \$ 25,000 & \$ 65,000 \\\text { Direct fixed costs } & 12,500 & 30,000 & 42,500 \\ \text { egment margin } & \$ 27,500 & \$(5,000) & \overline{\$ 22,500} \\ \text { located common costs } & 10,000 & 7,500 & 17,500 \\ \text { erating income (loss) } & \$ 17,500 & \$(12,500 & 5,000 \\\end{array}$ a.Determine operating income for Grant Corporation as a whole if the Roach Division is dropped. b.Should the Roach Division be eliminated?

Mickey Company manufactures three joint products: X,Y,and Z.The cost of the joint process is $30,000.Information about the three products follows: Anticipated production 5,600 10,000 2,500 Selling price/kg at split-off \ 2.00 \ 1.00 \ 3.00 Additional processing costs/kg after split-off (all variable) \ 1.50 \ 1.25 \ .75 Selling price/kg after further processing \ 2.50 \ 3.75 \ 6.25 Allocated joint costs \ 12,000 \ 10,500 \ 7.500 a.Determine whether each product should be sold at split-off or processed further.Show all supporting calculations in good form. b.Determine the firm's income if the firm processed all three products beyond split-off.

Harris Company uses 5,000 units of part AA1 each year.The cost of manufacturing one unit of part AA1 at this volume is as follows: Direct materals \1 0.00 Direct labaus 14.00 Variable overhead 6.00 Fixed averhead 4.00 Total \ 34.00 An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of $31.00.If Harris Company accepts this offer,it can eliminate 50 percent of the fixed costs assigned to part AA1.Furthermore,the space devoted to the manufacture of part AA1 would be rented to another company for $24,000 per year.If Harris Company accepts the offer of the outside supplier,what will be the effect on annual profits?

Meco Company produces a product that has a regular selling price of $360 per unit. At a typical monthly production volume of 2,000 units, the product’s average unit cost of goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. -Refer to the figure.Assuming Meco Company is operating at capacity and accepting the order would require an offsetting reduction in regular sales,what would be the effect on profits of accepting the order?

Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials \1 2 Direct labour 36 Variable manufacturing overhead 18 Fixed manufacturing overhead 24 The company has the capacity to produce 90,000 units.The product regularly sells for $120. - If a wholesaler offered to buy 4,500 units for $100 each,what would be the effect of the special order on income?

What are relevant costs?

Which of the following would be classified as committed short-term resources?

What is the term for future costs that differ across alternatives?

The following information pertains to the Ewing Company's three products: $\begin{array}{lrrrr}& \underline{\text { D }}&\underline{E} &\underline{F} \\\text { Unit sales per month } & \underline{900} & \underline{1.400} & \underline{800} \\\\\text { Selling price per unit } & \$ 6.00 & \$ 11.25 & \$ 7.50 \\\text { Variable costs per unit } & \underline{3.00} & \underline{9.00} & \underline{7.80} \\\text { Unit contribution margin } & \$ 3.00 & \$ 2.25 & \$(0.30\end{array}$ -Assume that the selling price of product F is increased to $8.25 with a reduction in monthly sales to 400 units.What will be the effect on monthly profits?

If there is excess capacity,what must the minimum acceptable price for a special order cover?

What is tactical decision making?

Which of the following costs is relevant to a special-order decision?

Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit.Recently the supplier informed Junior Company that a 20 percent increase will take effect next year.Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): Direct materials \ 16 Direct labour 12 Variable overhead 12 Fixed overhead 10 Total \ 50 If the units are purchased from the supplier,$200,000 of fixed costs will continue to be incurred.In addition,the plant can be rented out for $20,000 per year if the parts are purchased externally. Should Junior Company buy the part externally or make it internally?

Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: Variable costs per unit: Variable costs per unit: Fixed costs per month: Direct materials \ 9.00 Factory overhead \ 120,000 Direct labour 4.50 Selling and admin. 60,000 Factory overhead 3.00 Total \1 80,000 Distribution 1.50 Total \1 8.00 The variable distribution costs are for transportation to the retail stores.The current production and sales volume is 20,000 per year.Capacity is 25,000 units per year. -Refer to the figure.A Charlottetown wholesaler has proposed to place a special one-time order for 7,000 units at a special price of $25.20 per unit.The wholesaler would pay all distribution costs,but there would be additional fixed selling and administrative costs of $6,000.In addition,assume that overtime production is not possible and that all other information remains the same as the original data.What is the effect on profits if the special order is accepted?

The following information pertains to Ewing Company's three products: $\begin{array}{lrrrr}& \underline{\text { D }}&\underline{E} &\underline{F} \\\text { Unit sales per month } & \underline{900} & \underline{1.400} & \underline{800} \\\\\text { Selling price per unit } & \$ 6.00 & \$ 11.25 & \$ 7.50 \\\text { Variable costs per unit } & \underline{3.00} & \underline{9.00} & \underline{7.80} \\\text { Unit contribution margin } & \$ 3.00 & \$ 2.25 & \$(0.30\end{array}$ -Assume that product F is discontinued and the space used to produce product F is rented for $600 per month.What will be the effect on monthly profits?

Which costs are important when making a decision between two alternatives?

Which of the following costs is irrelevant to a decision to sell a product at split-off or process the product further and then sell the product?