The Summers Company manufactures a vanity of industrial valves. Current', the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glasgow Industries Ltd. of Scotland with an offer to buy 120.000 units of a pressure valve. Glasgow manufactures a valve that is almost identical to Summers' pressure valve; however, a fire in Glasgow Industries' valve plant has shut down its manufacturing operations. Glasgow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves. FOB shipping point. Summers' product cost, based on current attainable standards. for the pressure valve isHow many additional direct Labor hours would be required each month to fill the Glascow order?
Answer(s): B
The manufacturing overhead rate is $18 per standard direct labor hour and the standard product cost includes $9 of manufacturing overhead per pressure valve. Accordingly, the standard direct labor hour per finished valve is 112 hour ($9 / $18). Therefore, 30,000 units per month would require 15,000 direct labor hours.
The Sommers Company manufactures a van ely of industrial valves. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment, Management has been approached by Glascow Industries Ltd of Scotland with an offer to buy 120.000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers' pressure valve however, a fire in Glascow industries valve plant has shut down its manufacturing operations. Glascow needs the 120.000 valves over the next 4 months to meet commitments to its regular customers, the company is prepared to pay $19 each for the valves, FOB shipping point. Sommers' product cost, based on current attainable standards, for the pressure valve isWhat is the incremental profit (loss) before tax associated with the Glascow order?
Answer(s): C
The incremental revenue is found by taking the $19 per unit price and multiplying it by the 120,000 units ordered. Then. the variable costs per unit are multiplied by 120.000 to get a $600,000 cost for materials ($5 x 120.000), a $720,000 cost for labor ($6 x 120,000), and a $360,000 cost for overhead ($3 x 120,000). The variable costs are added to the additional fixed overhead cost of $48,000 (4 months x $12,000) to get a total incremental cost of $1,728,000. Then, the total cost is subtracted from the revenue to get an incremental profit before tax of $552,000 ($2,280,000 -- $1,728,000).
The Sommers Company manufactures a vanity of industrial valves. Current', the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120.000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers' pressure valve; however, a fire in Glascow Industries' valve plant has shut down its manufacturing operations. Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves, FOB shipping point. Sommers' product cost, based on current attainable standards, foi the pressure valve isWhat is the minimum unit price that Sommers could accept without reducing net income?
The minimum unit price without reducing net income must cover variable costs plus the additional fixed cost. Therefore, the three variable costs of $5.00 for direct materials, $6.00 for direct labor, and $3.00 for variable overhead are added to the additional fixed cost per unit $40 ($48,000 + 120,000). The total is $14.40.
Specialty Cakes, Inc. produces two types of cakes, a round cake and a heart-shaped cake. Total fixed costs for the firm are $92,000 Variable costs and sales data for these cakes are presented belowHow many cakes will be required to reach the breakeven point?
Answer(s): A
In a multiproduct setting, the contribution margin of each product must be weighted according to its proportion of total sales. Specialty's breakeven quantities can therefore be derived thus:The breakeven point in round cakes is therefore 8,000 units (20.000 composite x 40%), and the breakeven point in heart-shaped cakes is 12,000 units (20,000 composite x 60%).
In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component?
Most types of costs either are variable or contain some mix of fixed and variable components. For example, labor and materials are primarily variable. Their amounts fluctuate with the relevant cost drivers. Selling expenses and overhead costs can be either fixed or variable. Depreciation, however, is strictly a fixed cost when viewed in a decision analysis situation because it requires no cash outlay. Instead, the initial acquisition of the long-lived asset requires the cash outlay.
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