Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!

ter "" PROBLEM 11-12B Dropping or Retaining a Flight (LO2)

CHECK FIGURE (1) Decrease in net operating income if the f ight is !roppe!" #12$%&&

Profits have been decreasing for several years at Wright Airlines. In an effort to improve the companys performance, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement for one such flight (flight 58 ! is given belo" (per flight!# $ic%et revenue (&'' passengers ( )'* occupancy ( +)'' per passenger!.......... -ariable e.penses (&'' passengers ( )'* occupancy ( +&' per passenger!....... 0ontribution margin.............................................................................................. 1light e.penses# 2alaries, flight cre"........................................................................................... 1light promotion................................................................................................ 3epreciation of aircraft...................................................................................... 1uel for aircraft.................................................................................................. 4iability insurance............................................................................................. 2alaries, flight assistants.................................................................................... 6aggage loading and flight preparation............................................................. 7vernight costs for flight cre" and assistants at destination............................. $otal flight e.penses............................................................................................. 8et operating loss.................................................................................................. +,&,''' ,/'' ,',)'' &,)'' ,,''' 8,''' ',&'' 5,&'' ,&'' 8'' 5'' ,,,5'' + (,, ''!

$he follo"ing additional information is available about flight 58 # a. 9embers of the flight cre" are paid fi.ed annual salaries, "hereas the flight assistants are paid by the flight. b. 7ne:third of the liability insurance is a special charge assessed against flight 58 because in the opinion of the insurance company, the destination of the flight is in a ;high:ris%< area. $he remaining t"o:thirds "ould be unaffected by a decision to drop flight 58 . c. $he baggage loading and flight preparation e.pense is an allocation of ground cre"s salaries and depreciation of ground e=uipment. 3ropping flight 58 "ould have no effect on the companys total baggage loading and flight preparation e.penses. d. If flight 58 is dropped, Wright Airlines has no authori>ation at present to replace it "ith another flight. e. Aircraft depreciation is due entirely to obsolescence. 3epreciation due to "ear and tear is negligible. f. 3ropping flight 58 "ould not allo" Wright Airlines to reduce the number of aircraft in its fleet or the number of flight cre" on its payroll. Required: . Prepare an analysis sho"ing "hat impact dropping flight 58 "ould have on the airlines profits. &. $he airlines scheduling officer has been critici>ed because only about 5'* of the seats on Wright Airlines flights are being filled compared to an industry average of /'*. $he scheduling officer has e.plained that Wright Airlines average seat occupancy could be improved considerably by eliminating about '* of its flights, but that doing so "ould reduce profits. ?.plain ho" this could happen.

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Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-13B Make or Buy a Component (LO')
CHECK FIGURE (1) (he part can )e ma!e insi!e the compan* for #+,&& ess per -nit,

2trausser Automotive manufactures a variety of engines for use in heavy e=uipment. $he company has al"ays produced most of the parts for its engines, including all of the pistons. An outside supplier has offered to sell one type of piston to 2trausser Automotive at a price of +/5.'' per unit. $o evaluate this offer, 2trausser Automotive has gathered the follo"ing information relating to its o"n cost of producing the piston internally# 52,000 Per Unit Units Per Year 3irect materials................................................... +,' + ,5/',''' 3irect labor......................................................... , /5/,''' -ariable manufacturing overhead....................... ' 5&',''' 1i.ed manufacturing overhead, traceable@......... & /&),''' 1i.ed manufacturing overhead, allocated........... 8 ) /,''' $otal cost............................................................ +5, +,,5A/,''' @7ne:third supervisory salariesB t"o:thirds depreciation of special e=uipment (no resale value!. Required: . Assuming that the company has no alternative use for the facilities that are no" being used to produce the pistons, should the outside suppliers offer be acceptedC 2ho" all computations. &. 2uppose that if the pistons "ere purchased, 2trausser Automotive could use the freed capacity to launch a ne" product. $he segment margin of the ne" product "ould be +/5',''' per year. 2hould 2trausser Automotive accept the offer to buy the pistons for +/5.'' per unitC 2ho" all computations.

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Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-14B Dropping or Retaining a Pro u!t (LO2)
CHECK FIGURE (1) Discontin-ing the )ic*c ing shoes .o- ! !ecrease net operating income )* #/2$&&&

$he 9ontla%e 2hoe 0ompany manufactures three types of shoesDhi%ing shoes, running shoes, and bicycling shoes. 3ata on sales and e.penses for the past =uarter follo"# Hiking Shoes 2ales........................................................................ + 5',''' -ariable e.penses................................................... 5',''' 0ontribution margin............................................... '',''' 1i.ed e.penses# Advertising, traceable......................................... &',''' 3epreciation of special e=uipment...................... ),5'' 2alaries of product:line managers....................... ,''' Allocated common fi.ed e.penses@................... 8,55' $otal fi.ed e.penses............................................... /),&5' 8et operating income (loss!.................................... +,5,55' @Allocated on the basis of sales dollars Running Bicycling Shoes Shoes +&8',''' +& ',''' ,',''' &5,''' 5',''' 85,''' &8,''' &,,''' 5,''' ,5,''' ' ,''' + )A,''' Total +/)',''' ,'5,''' ,,5,'''

&A,''' 55,''' &5,''' /),5'' ),''' )',''' &/,&5' 8',''' A/,&5' &/ ,5'' +( ,&5'! + 5,,5''

9anagement is concerned about the continued losses sho"n by the bicycling shoes and "ants a recommendation as to "hether or not the line should be discontinued. $he special e=uipment used to produce bicycling shoes has no resale value and does not "ear out. Required: . 2hould production and sale of the bicycling shoes be discontinuedC 2ho" computations to support your ans"er. &. Eecast the above data in a format that "ould be more usable to management in assessing the long:run profitability of the various product lines.

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Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-1"B Dropping or Retaining a #egment (LO2)
CHECK FIGURE (1) Dropping ho-se0eeping .o- ! !ecrease o1era net operating income )* #'2$&&&,

Adams 0ounty 2enior 2ervices is a nonprofit organi>ation devoted to providing essential services to seniors "ho live in their o"n homes "ithin the Adams 0ounty area. $hree services are provided for seniorsDhome nursing, meals on "heels, and house%eeping. In the home nursing program, nurses visit seniors on a regular basis to chec% on their general health and to perform tests ordered by their physicians. $he meals on "heels program delivers a hot meal once a day to each senior enrolled in the program. $he house%eeping service provides "ee%ly housecleaning and maintenance services. 3ata on revenue and e.penses for the past year follo"# Home Nursing 2ales...................................................................... -ariable e.penses................................................. 0ontribution margin.............................................. 1i.ed e.penses# 3epreciation...................................................... 4iability insurance............................................. Program administrators salaries....................... Feneral administrative overhead@..................... $otal fi.ed e.penses............................................. 8et operating income (loss!.................................. @Allocated on the basis of program revenues +&A',''' ,',''' /',''' A,''' & ,''' )&,''' //,5'' ,8,5'' + & ,,'' Meals on heels +))',''' &&',''' &&',''' House! kee"ing

Total + ,''','' +&5',''' ' 8',''' 5,',''' A',''' )5','''

,5,''' 8,''' /),''' A,''' /,''' )/,''' ,A,''' ,8,''' A,''' ' ,&'' /&, '' &,',''' 8/,&'' ,), '' )5A,''' + ,,,8'' +()), ''! + ,'''

$he head administrator of Adams 0ounty 2enior 2ervices, 9ariam 2antoya, is concerned about the organi>ations finances and considers the net operating income of + ,''' last year to be ra>or:thin. (4ast years results "ere very similar to the results for previous years and are representative of "hat "ould be e.pected in the future.! 2he feels that the organi>ation should be building its financial reserves at a more rapid rate in order to prepare for the ne.t inevitable recession. After seeing the above report, 9s. 2antoya as%ed for more information about the financial advisability of perhaps discontinuing the house%eeping program. $he depreciation in house%eeping is for a small van that is used to carry the house%eepers and their e=uipment from Gob to Gob. If the program "ere discontinued, the van "ould be donated to a charitable organi>ation. 8one of the general administrative overhead "ould be avoided if the house%eeping program "ere dropped, but the liability insurance and the salary of the program administrator "ould be avoided. Required: . 2hould the house%eeping program be discontinuedC ?.plain. 2ho" computations to support your ans"er. &. Eecast the above data in a format that "ould be more useful to management in assessing the long:run financial viability of the various services.

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Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-1$B %tili&ation o' a Con(traine Re(our!e (LO3)
CHECK FIGURE (2) Ho-rs re4-ire!" 132$2&& DLHs

$he 6randilyn ?vans $oy 0ompany manufactures a line of dolls and a doll dress se"ing %it. 3emand for the dolls is increasing, and management re=uests assistance from you in determining an economical sales and production mi. for the coming year. $he company has provided the follo"ing information# $eman# Selling Ne%t Year Price "er $irect &units' Unit Materials 5',''' +,&.'' +).&' &),''' +&&.'' +5.A' 5/,''' +&8.'' +)./' /&,''' +&,.'' +A.8' )&',''' + ).'' +,./' $irect (a)or +).8' +,.'' +/.'' +,./' +&.)'

Pro#uct 3ebbie............... $rish.................. 2arah................. 9i%e.................. 2e"ing %it.........

$he follo"ing additional information is available# a. $he companys plant has a capacity of )', '' direct labor:hours per year on a single:shift basis. $he companys present employees and e=uipment can produce all five products. b. $he direct labor rate of + &.'' per hour is e.pected to remain unchanged during the coming year. c. 1i.ed costs total +) ',''' per year. -ariable overhead costs are +&.'' per direct labor:hour. d. All of the companys nonmanufacturing costs are fi.ed. e. $he companys finished goods inventory is negligible and can be ignored. Required: . 3etermine the contribution margin per direct labor:hour e.pended on each product. &. Prepare a schedule sho"ing the total direct labor:hours that "ill be re=uired to produce the units estimated to be sold during the coming year. ,. ?.amine the data you have computed in ( ! and (&! above. Ho" "ould you allocate the )', '' direct labor: hours of capacity to the companys various productsC ). What is the highest price, in terms of a rate per hour, that 6randilyn ?vans $oy 0ompany should be "illing to pay for additional capacity (that is, for added direct labor time!C 5. Assume again that the company does not "ant to reduce sales of any product. Identify "ays in "hich the company may be able to obtain the additional output. (0PA, adapted!

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"

Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-1)B #hutting Do*n or Continuing to Operate a Plant (LO2)
CHECK FIGURE (1) #3/$/&& !isa!1antage to c ose

(8ote# $his type of decision is similar to dropping a product line.! Prit%er 3evices normally produces and sells /&,''' units of EF:/ each month. EF:/ is a small electrical relay used as a component part in the automotive industry. $he selling price is +)/.'' per unit, variable costs are +)&.'' per unit, fi.ed manufacturing overhead costs total +&8',''' per month, and fi.ed selling costs total +88,''' per month. 2tri%es in the companies that purchase the bul% of the EF:/ units have caused Prit%er 3evicess sales to temporarily drop to only &/,''' units per month. Prit%er 3evices estimates that the stri%es "ill last for t"o months, after "hich sales of EF:/ should return to normal. 3ue to the current lo" level of sales, Prit%er 3evices is thin%ing about closing do"n its o"n plant during the stri%e, "hich "ould reduce fi.ed manufacturing overhead costs by +5',''' per month and its fi.ed selling costs by '*. 2tart:up costs at the end of the shutdo"n period "ould total +),'''. 2ince Prit%er 3evices uses Gust:in:time (II$! production methods, no inventories are on hand. Required: . Assuming that the stri%es continue for t"o months, "ould you recommend that Prit%er 3evices close its o"n plantC 2ho" computations in good form. &. At "hat level of sales (in units! for the t"o:month period should Prit%er 3evices be indifferent bet"een closing the plant or %eeping it openC 2ho" computations. (Hint# $his is a type of brea%:even analysis, e.cept that the fi.ed cost portion of your brea%:even computation should include only those fi.ed costs that are relevant Ji.e., avoidableK over the t"o:month period.!

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Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-1+B ,!!ept or Re-e!t a #pe!ial Or er (LO/)
CHECK FIGURE (1) 5et increase in profits" #63$&&&

Arther L 2mith 0orporation manufactures and sells a single product called a ret. 7perating at capacity, the company can produce and sell /',''' rets per year. 0osts associated "ith this level of production and sales are given belo"# Unit Total + 5.'' + ,'',''' 5.'' )&',''' ).'' &)',''' &.'' &',''' 8.'' )8',''' ,.'' 8',''' +&A.'' + ,5)','''

3irect materials..................................... 3irect labor........................................... -ariable manufacturing overhead........ 1i.ed manufacturing overhead............. -ariable selling e.pense....................... 1i.ed selling e.pense............................ $otal cost..............................................

$he rets normally sell for +,8.'' each. 1i.ed manufacturing overhead is constant at + &',''' per year "ithin the range of 55,''' through /',''' rets per year. Required: . Assume that due to a recession, Arther L 2mith 0orporation e.pects to sell only 55,''' rets through regular channels ne.t year. A large retail chain has offered to purchase 5,''' rets if Arther L 2mith 0orporation is "illing to accept a '* discount off the regular price. $here "ould be no sales commissions on this orderB thus, variable selling e.penses "ould be slashed by 8'*. Ho"ever, Arther L 2mith 0orporation "ould have to purchase a special machine to engrave the retail chains name on the 5,''' units. $his machine "ould cost +8,'''. $his "ould be a one:time order that "ould have no effect on regular sales. 3etermine the impact on profits ne.t year if this special order is accepted. &. Eefer to the original data. Assume again that Arther L 2mith 0orporation e.pects to sell only 55,''' rets through regular channels ne.t year. $he M.2. Army "ould li%e to ma%e a one:time:only purchase of 5,''' rets. $he Army "ould pay a fi.ed fee of +8.'' per ret, and in addition it "ould reimburse Arther L 2mith 0orporation for all costs of production (variable and fi.ed! associated "ith the units. $here "ould be no variable selling e.penses associated "ith this order. If Arther L 2mith 0orporation accepts the order, by ho" much "ill profits increase or decrease for the yearC ,. Assume the same situation as that described in (&! above, e.cept that the company e.pects to sell /',''' rets through regular channels ne.t year. $hus, accepting the M.2. Armys order "ould re=uire giving up regular sales of 5,''' rets. If the Armys order is accepted, by ho" much "ill profits increase or decrease from "hat they "ould be if the 5,''' rets "ere sold through regular channelsC

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Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-1.B Rele/ant Co(t ,naly(i( in a 0ariety o' #ituation( (LO2$ LO'$ LO/)
CHECK FIGURE (1) #36$3&& incrementa net operating income (2) #/3,3& )rea07e1en price

4ucy N8 Pals 0orporation has a single product called Pups. $he company normally produces and sells ,/,''' Pups each year at a selling price of +/).'' per unit. $he companys unit costs at this level of activity are given belo"# 3irect materials..................................... 3irect labor........................................... -ariable manufacturing overhead........ 1i.ed manufacturing overhead............. -ariable selling e.penses..................... 1i.ed selling e.penses.......................... $otal cost per unit................................. +&&.'' &.5' ).5' /.'' 5.5' 8.5' +/ .''

(+& /,''' total! (+,'/,''' total!

A number of =uestions relating to the production and sale of Pups follo". ?ach =uestion is independent. Required: . Assume that 4ucy N8 Pals 0orporation has sufficient capacity to produce 5',''' Pups each year "ithout any increase in fi.ed manufacturing overhead costs. $he company could increase its sales by &5* above the present ,/,''' units each year if it "ere "illing to increase the fi.ed selling e.penses by + '','''. Would the increase fi.ed selling e.penses be GustifiedC &. Assume again that 4ucy N8 Pals 0orporation has sufficient capacity to produce 5',''' Pups each year. A customer in a foreign mar%et "ants to purchase ',''' Pups. Import duties on the Pups "ould be +&.5' per unit, and costs for permits and licenses "ould be + ','''. $he only selling costs that "ould be associated "ith the order "ould be +,.'' per unit shipping cost. 0ompute the per unit brea%:even price on this order. ,. $he company has ,8'' Pups on hand that have some irregularities and are therefore considered to be ;seconds.< 3ue to the irregularities, it "ill be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling priceC ?.plain. ). 3ue to a stri%e in its suppliers plant, 4ucy N8 Pals 0orporation is unable to purchase more material for the production of Pups. $he stri%e is e.pected to last for & months. 4ucy N8 Pals 0orporation has enough material on hand to continue to operate at ,'* of normal levels for the t"o:month period. As an alternative, 4ucy N8 Pals 0orporation could close its plant do"n entirely for the t"o months. If the plant "ere closed, fi.ed manufacturing overhead e.penses "ould continue at )'* of their normal level during the t"o:month period and the fi.ed selling e.penses "ould be reduced by 5*. What "ould be the impact on profits of closing the plant for the t"o:month periodC 5. An outside manufacturer has offered to produce Pups for 4ucy N8 Pals 0orporation and to ship them directly to 4ucy N8 Pals 0orporation customers. If 4ucy N8 Pals 0orporation accepts this offer, the facilities that it uses to produce Pups "ould be idleB ho"ever, fi.ed manufacturing overhead e.penses "ould be reduced by 8'*. 6ecause the outside manufacturer "ould pay for all the shipping costs, the variable selling e.penses "ould be only t"o:thirds of their present amount. 0ompute the unit cost that is relevant for comparison to the price =uoted by the outside manufacturer.

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Introduction to Managerial Accounting, 4th Edition, by Brewer, Garrison, and Noreen Alternate ProblemsSet B, ha!ter "" PROBLEM 11-21B Make or Buy ,naly(i( (LO')
CHECK FIGURE (1) #2$&&& a!1antage to )-*

;$hat old e=uipment for producing subassemblies is "orn out,< said Oari Warner, president of Harle= 0orporation. ;We need to ma%e a decision =uic%ly.< $he company is trying to decide "hether it should rent ne" e=uipment and continue to ma%e its subassemblies internally or "hether it should discontinue production of its subassemblies and purchase them from an outside supplier. $he alternatives follo"# *lternati+e ,# 8e" e=uipment for producing the subassemblies can be rented for +&),''' per year. *lternati+e 2# $he subassemblies can be purchased from an outside supplier "ho has offered to provide them for +).5) each under a five:year contract. Harle= 0orporations present costs per unit for producing the subassemblies internally ("ith the old e=uipment! are given belo". $hese costs are based on a current activity level of )',''' subassemblies per year# 3irect materials.................................................................... 3irect labor.......................................................................... -ariable overhead................................................................ 1i.ed overhead (+'. 5 supervision, +'.)' depreciation, and + .5' general company overhead!............................. $otal cost per unit................................................................ +&.,' .A' '.)' &.'5 +/./5

$he ne" e=uipment "ould be more efficient than the e=uipment Harle= 0orporation has been using and, according to the manufacturer, "ould reduce direct labor costs and variable overhead costs by &'*. $he old e=uipment has no resale value. 2upervision cost (+/,''' per year! and direct materials cost per unit "ould not be affected by the ne" e=uipment. $he ne" e=uipments capacity "ould be /',''' subassemblies per year. $he companys total general company overhead "ould be unaffected by this decision. Required: . $o assist the president in ma%ing a decision, prepare an analysis sho"ing the total cost and cost per drum under each of the t"o alternatives given above. Assume that )',''' subassemblies are needed each year. Which course of action "ould you recommend to the presidentC &. Would your recommendation in ( ! above be the same if the companys needs "ere (a! 5',''' subassemblies per year or (b! /',''' subassemblies per yearC 2ho" computations to support your ans"er, "ith costs presented on both a total and per unit basis. ,. What other factors "ould you recommend that the company consider before ma%ing a decisionC

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