Chapter 7: Exercises 3, 7, and 11
Chapter 8: Exercises 2, 6, and 9
E7-3 Moonbeam Company manufactures toasters. For the first 8 months of 2017, the company reported the following operating results while operating at 75% of plant capacity:
Prepare an incremental analysis for the special order.
E7-7 Riggs Company purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $250 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $100 for direct materials, $80 for direct labor, and $90 for overhead. The $90 overhead is based on $78,000 of annual fixed overhead that is allocated using normal capacity.
The president of Riggs has come to you for advice. “It would cost me $270 to make the sails,” she says, “but only $250 to buy them. Should I continue buying them, or have I missed something?”
Instructions
Prepare a per unit analysis of the differential costs. Briefly explain whether Riggs should make or buy the sails.
If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,000 per year, would your answer to part (a) change? Briefly explain.
E7-11 Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.
Instructions
Determine whether each of the three joint products should be sold as is, or processed further.
E8-2 Eckert Company is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large potential market. Because of competition, Eckert does not believe that it can charge more than $90 for LittleLaser. At this price, Eckert believes it can sell 100,000 of these laser guns. Eckert will require an investment of $8,000,000 to manufacture, and the company wants an ROI of 20%.
Instructions
Determine the target cost for one LittleLaser.
E8-6 Alma’s Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,352,000 in the studio and expects a return on investment (ROI) of 20%. Budgeted costs for the coming year are as follows.
Per Session Total
Direct materials (CDs, etc.) $ 20
Direct labor $400
Variable overhead $ 50
Fixed overhead $950,000
Variable selling and administrative expenses $ 40
Fixed selling and administrative expenses $500,000
Instructions
Determine the total cost per session
Determine the desired ROI per session
Calculate the markup percentage on the total cost per session.
Calculate the target price per session.
E8-9 Rey Custom Electronics (RCE) sells and installs complete security, computer, audio, and video systems for homes. On newly constructed homes it provides bids using timeand-material pricing. The following budgeted cost data are available.
Time Charges Material Loading Charges
Technicians’ wages and benefits $150,000 —
Parts manager’s salary and benefits — $34,000
Office employee’s salary and benefits 30,000 15,000
Other overhead 15,000 42,000
Total budgeted costs $195,000 $91,000
The company has budgeted for 6,250 hours of technician time during the coming year. It desires a $38 profit margin per hour of labor and an 80% profit on parts. It estimates the total invoice cost of parts and materials in 2017 will be $700,000.
Instructions
Compute the rate charged per hour of labor.
Compute the material loading percentage.
RCE has just received a request for a bid from Buil Builders on a $1,200,000 new home. The company estimates that it would require 80 hours of labor and $40,000 of parts. Compute the total estimated bill.
