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Chapter 25: Q31PGB (page 1422)

Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:

Direct materials \(17,510

Direct labor 2,600

Variable overhead 2,060

Fixed overhead 7,000

Total manufacturing costs for 2,000 bindings \)29,170

Suppose Topnotch will sell bindings to Cold Sports for \(15 each. Cold Sports would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.

Requirements

1. Cold Sports鈥檚 accountants predict that purchasing the bindings from Topnotch will enable the company to avoid \)2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings.

2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sports鈥檚 facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

Short Answer

Expert verified

Answer

The company should make the bindings.

Step by step solution

01

Meaning of Short-Term Decisions

Short-term decisions are the steps a business entity takes to ensure theoptimum utilization of available resourcesin the short run. In this process, a business focuses on profit maximization and recovery of associatedvariable expenses.

02

Preparation of analysis

Particulars

Make ($)

Buy ($)

Direct materials

17,510


Direct labor

2,600


Variable overhead

2,060


Fixed overhead

7,000

4,700

Purchase cost (2000*15)


30,000

Transportation (2000*3)


6,000

Logo cost (2000*0.50)


1,000

Total cost

$29,170

$41,700

Comment:

The cost of buying the bindings is more than the making costs; hence, the company should continue making the bindings.

03

Selection of alternative

Particulars

Make ($)

Buy ($)

Buy and make another product ($)

Cost of making

29,170



Cost of buying


41,700

41,700

Increase in fixed overhead



2,300

Less: Increase in operating income



(3,100)

Total cost

$29,170

$41,700

$40,900

Comment:

As per the above-shown analysis, the company should focus on making the bindings because it costs less than other alternatives.

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Most popular questions from this chapter

McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.

MCCOLLUM COMPANY

Income Statement

Month Ended June 30, 2018

Total Product A Product B

Net Sales Revenue \(150,000 \)75,000 \(75,000

Variable Costs 90,000 55,000 35,000

Contribution Margin 60,000 20,000 40,000

Fixed Costs 50,000 5,000 45,000

Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)

  1. If fixed costs cannot be avoided, should McCollum drop Product B? Why or why not?
  2. If 50% of Product B鈥檚 fixed costs are avoidable, should McCollum drop Product B? Why or why not?

Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Light could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows:

Per Unit

Deluxe Regular

Sales price \(1,030 \)610

Costs:

Direct materials 320 130

Direct labor 88 180

Variable manufacturing overhead 270 90

Fixed manufacturing overhead* 102 34

Variable operating expenses 121 63

Total costs 901 497

Operating income \(129 \)113

*allocated on the basis of machine hours

Requirements

1. What is the constraint?

2. Which model should Tread Light produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)

3. If Tread Light should produce both models, compute the mix that will maximize operating income.

Each morning, Max Smith stocks the drink case at Max鈥檚 Beach Hut in Myrtle Beach, South Carolina. The drink case has 120 linear feet of refrigerated drink space. Each linear foot can hold either six 12-ounce cans or three 20-ounce bottles.

Max鈥檚 Beach Hut sells three types of cold drinks:

1. Licious-Ade in 12-oz. cans for \(1.40 per can

2. Licious-Ade in 20-oz. bottles for \)1.90 per bottle

3. Pep-Cola in 20-oz. bottles for \(2.20 per bottle

Max鈥檚 Beach Hut pays its suppliers:

1. \)0.20 per 12-oz. can of Licious-Ade

2. \(0.35 per 20-oz. bottle of Licious-Ade

3. \)0.55 per 20-oz. bottle of Pep-Cola

Max鈥檚 Beach Hut鈥檚 monthly fixed costs include:

Hut rental \(355

Refrigerator rental 65

Max鈥檚 salary 1,700

Total fixed costs \)2,120

Max鈥檚 Beach Hut can sell all the drinks stocked in the display case each morning.

Requirements

1. What is Max鈥檚 Beach Hut鈥檚 constraining factor? What should Max stock to maximize profits?

2. Suppose Max鈥檚 Beach Hut refuses to devote more than 80 linear feet to any individual product. Under this condition, how many linear feet of each drink should Max鈥檚 stock? How many units of each product will be available for sale each day?

What are sunk costs? Give an example.

This problem continues the Piedmont Computer Company situation from Chapter 24. Piedmont Computer Company鈥檚 payroll accountant has submitted her resignation and will be leaving the company in two weeks. The company must decide if it will hire a replacement or outsource the payroll position. The current employee earns a salary of \(40,000. Medical insurance, employer payroll taxes, and contributions to the pension plan for this position cost \)7,600. The company has already invested \(22,000 in payroll software. Required annual updates to remain in compliance with all state and federal laws are \)495. The company also spends \(1,750 per year in professional development for this position to ensure the employee stays up-to-date with payroll changes. Piedmont Computer Company pays its employees weekly. Payroll Professionals will processthe company鈥檚 weekly payroll for \)1,000 per week. This fee also includes preparing all necessary payroll tax returns, reports, and W-2s.

Requirements

1. Prepare a differential analysis to determine if Piedmont Computer Company should replace the employee or outsource the payroll function.

2. What other factors should Piedmont Computer Company consider in making this decision?
See all solutions

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