Problems on Relevant Costs for Decision Making

Problem no: 1: Accepting a Special Order

Sutherland manufactures and sells 110,000 laser printers each month. A principal component part in each printer is its paper feed drive. Sutherlands plant currently has the monthly capacity to produce 150,000 drives. The unit costs of manufacturing these drives (up to 150,000 per month) are as follows: Variable costs per unit: Direct materials .. $ 45 Direct labor . 25 Variable M.O.H . 5 Fixed costs per month: Fixed M.O.H .. $1,430,000 Desk-Mate Printers has offered to buy 20,000 paper feed drives from Sutherland to be used in its own printers. Compute the following: a. The average unit cost of manufacturing each paper feed drive assuming that Sutherland manufactures only enough drives for its own laser printers b. The incremental unit cost of producing an additional paper feed drive. c. The per-unit sales price that Sutherland should charge DeskMate to earn $500,000 in monthly pretax profit on the sale of drives to Desk-mate

Problem no: 2: Scarce Resources/Constraint Factor Texteriles Company creates different types of bolts of cloth. These bolts of cloth are made on the same machinery. The textile machines have the capacity of 3,600 hours per month. Texteriles is considering producing three different types of cloth: denim, chenille, and gauze with contribution margins per bolt of $14, $22, and $9 respectively. Texteriles knows they can sell only a total of 6,000 bolts of denim, 2,000 bolts of chenille, and/or 1,200 bolts of gauze. A bolt of each type of cloth requires a different amount of machine time as follows: denim takes 0.5 machine hours, chenille takes 1 machinehour, and gauze takes 0.3 machine-hours. What combination of products will maximize the profits of Texteriles?

Problem no: 3: Make or Buy Decision Barometer, Inc., makes part no. 566 on one of its production lines. Each month Bacrometer makes 60,000 of part no. 566 at a variable cost of $2.50 per part. The fixed costs for the production line are $180,000 or $3.00 per part. Bacrometer has been provided a bid for part no. 566 from another manufacturer who will make the part for $2.65 per part. Bacrometer knows the production line could be rented to another manufacturer for $5,000 per month. Should Bacormeter continue to make part no. 566 or should they buy the part and rent the production line?

Problem no: 4: Joint Products Treadwell Pharmaceuticals produces two medications in a joint process: Amoxiphore and Benidrate. With each production run, Treadwell incurs $4,000 in common costs up to the split-off point. Amoxiphore can be sold for $2,700 at the split-off point or be processed further at a cost of $1,600 at which time it can be sold for $4,200. However, if Amoxiphore is sold at the split-off point, its side effects include nausea and headaches. If it is processed further, these side effects are diminished. Demand for Amoxiphore far exceeds Treadwells production capacity.Benidrate can be sold for $2,400 at the split-off point or be processed further at a cost of $3,700 at which time it can be sold for $6,000. a. Determine which product is more profitable to process beyond the split-off point? b. What nonfinancial issues should the company consider regarding its processing decisions?