Special Order: Special Order.

Over the past few months, Wilson Tech Company

produced and sold 10,000 units of Wartex each month. Monthly costs for Wartex are as
follows:
Direct materials...... $ 20,000
Direct labor......... 35,000
Variable factory overhead………. 10,000
Fixed factory overhead……….. 45,000
Variable marketing expenses (shipping and sales commissions)…….. 20,000
Allocated marketing and administrative expenses..... 30,000
The normal sales price is $25 per unit. One of the company's salespersons has been
negotiating a contract with a prospective customer who has offered to purchase 15,000
units of Wartex for $12.50 per unit. The salesperson does not expect any repeat
business from this customer after this sale and does not believe that this sale will affect
the normal sales of Wartex. The company has a production capacity sufficient to
produce only 15,000 units of Wartex. As a consequence, the company would have to
rent additional equipment at a cost of $5,000 and pay overtime in the amount of
$10,000 to manufacture the addi- tional quantity of Wartex required.
Required: Prepare a differential cost analysis showing whether the company should
accept this special order.
Make or Buy. Huntington Products manufactures 10,000 units of Part M-1
annually for use in its production. The following costs are reported:
Direct materials...... $20,000
Direct labor......... 55,000
Variable factory overhead……. 45,000
Fixed factory overhead......... 70,000

Lufkin Company has offered to sell Huntington 10,000 units of Part M-1
annually for $18 per unit. If Huntington accepts the offer, some of the facilities
presently used to man- ufacture Part M-1 could be rented to a third party at an
annual rental of $15,000. Additionally, $4 per unit of the fixed factory overhead
applied to Part M-1 would be totally eliminated.
Required: Should Huntington accept Lufkin's offer? Explain.
Make or Buy. Creed Corporation is considering manufacturing a new engine designated
as model VX4. The engine will be a different size from any produced by Creed, and the
company expects to sell 20,000 units a year. At the present time the company has the
capacity to produce the projected quantity of all of the parts required for 20,000 units of
VX4 except for the pistons. Each model VX4 engine requires 4 pistons, so 80,000 pistons
will be required annually. Pistons are manufactured in the company's Tuscon plant, which
is presently operating at full capacity. None of the company's other plants has the
equipment or the expertise necessary to manufacture pistons. To manufacture the num-
ber of pistons required, the company can expand facilities at the Tuscon plant by renting
additional machinery at an annual cost of $30,000 and hiring an additional supervisor at
an annual cost of $40,000. Alternatively, the company can purchase the required number
of pistons of equal quality from Wichita Machine Works, an outside supplier, at a contract
price of $4.40 each. The projected cost of manufacturing 80,000 pistons at the Tuscon
plant is as follows:
Direct materials……$160,000
Direct labor.......... 80,000
Allocated factory overhead…….. 240,000
The Tuscon plant uses a predetermined factory overhead rate computed on the basis of
absorption costing. Budgeted factory overhead used as the basis for determining the rate
was composed of 80% fixed cost and 20% variable cost.
Required: Determine whether Creed Corporation should manufacture the pistons in its
Tuscon plant or purchase them from Wichita Machine Works.
Tuscon plant or purchase them from Wichita Machine
Works.
Product Sales Price Quantity Total Sales
Decision to Drop a Product. The Grable Company
manufactures and sells three products, Mift, Tift, and Lift. Mift 10 5,000 50,000
For the coming year, sales are expected to be as follows:
Tift 6 7,000 42,000
At the expected sales quantity and mix, the manufacturing
cost per unit is as follows: Lift 15 3,000 45,000
Variable marketing expense is $1 per unit for Mift and Tift
and $2 per unit for Lift. Budgeted fixed marketing expenses
for the coming year are $3,000, and budgeted fixed
administrative expenses are $6,000.
The sales manager has recommended dropping Tift from the
product line and using the production capacity currently Mift Tift Lift
committed to the production of Tift to produce more Mift. Materials 2 2 4
The production manager reports that 4,000 additional units
of Mift can be produced with the pro- duction capacity now Direct Labor 2 1 3
used in manufacturing Tift. To sell 4,000 additional units of
Mift, the sales manager believes that the advertising budget FO – Var 1 1 2
will have to be increased by $5,000.
FO- Fix 1 1 3
Required:
(1) Should the sales manager's proposal be accepted?
Support your answer by computing the change in
profitability that would result from this action.
(2) In addition to the factors mentioned by the production
manager and the sales manager, what other factors should
be considered?
Sell or Process Further. Twister Company produces a variety of cleaning
compounds and solutions for both industrial and household use. One of its
products, a coarse cleaning pow- der called Grit 337, has a variable
manufacturing cost of $1.60 and sells for $2 per pound.
A small portion of this product's annual production is retained for further
processing in the Mixing Department, where it is combined with several
other ingredients to form a paste that is marketed as a silver polish selling for
$4 per jar. The further processing requires one fourth of a pound of Grit 337
per jar; other ingredients, labor, and variable factory overhead associated
with further processing cost $2.50 per jar, and unit variable marketing cost is
$.30. If a decision is made to cease silver polish production, $5,600 of fixed
Mixing Department costs will be avoided.
Required: Calculate the minimum number of jars of silver polish that must be
sold to justify further processing Grit 337.
Alternative Cash Collection Methods. WashTech Corporation is a franchiser of auto-
matic car washes in the southeast. The company has 420 franchisees that operate 7
days per week. The average gross revenue for each location is $500 per day. The
company collects 25% of the gross revenue as its franchise fee. Each franchisee mails a
check each day to the company headquarters in Miami. The check is supposed to be
mailed by noon each day. Many of the franchisees are lax, however, and payments are
forwarded an average of 2 days late. Once mailed, the checks take an average of 12
days in the mail and another 3 days to be processed in the company's receivables
department.
Management is considering a change in the company's cash collection method and is
considering two proposals, denoted a and b. The company has a 15% before-tax
opportunity cost of funds and is subject to an income tax rate of 40%.
(a) Use local messenger services to collect and mail checks. This will save the 2 days of
late check forwarding. The messenger service costs $20,000 per year.
(b) Combine messenger service with a lock-box arrangement for a combined savings of
5 days. Costs of this proposal are $20,000 per year for messenger service plus $15,000
that must be left on deposit as a compensating balance required by the bank servicing
the lock-box.
Required: Compute the annual change in the company's before-tax income that will
result from the each of the two proposals.
Choice of Production Method. PrintBoard Company is evaluating the use of AZ-17 Photo Resist for the
manufacture of printed circuit boards. The major advantages of this process over the present silk-screen
method include:
(a) Anticipated reduced manufacturing cycle time and cost due to elimination of the need for silk circuit
screens and shorter operator time to produce circuit boards.
(b) Improved ease of registration between front and back patterns.
(c) The ability to achieve finer line widths and closer spacing between circuit paths.
The proposed AZ-17 process is as follows:
(a) Fabricate through the completion of the drilling and copper plating of inside holes. (b) Pressure spray AZ-17
Photo Resist on one side, over bake for 10 minutes, and repeat for other side.
(c) Use the photo negative and expose each side for seven minutes in a Nu-Arc Printer. (d) Develop in AZ-17
Developer and proceed through normal operations for making printed circuit board.
Total direct labor time for the proposed AZ-17 process is 30 minutes. The original silk- screen method uses a
wire mesh stencil film, screening ink, and frames. The direct labor time to prepare the screen for each circuit
board is 11⁄2 hours. The direct labor time to screen patterns on the printed wire board is 20 minutes. The
hourly direct labor rate is $6.50. The monthly cost for materials and for equipment rental and operation
needed for the proposed process is $4,000 greater than for the silk-screen method, excluding the direct labor.
The company manufactures 20,000 circuit boards annually.
Required: Compute the annual savings or added cost from changing from the silk-screen method to the new
AZ-17 process. (Round all computations to the nearest dollar.)
Berber Company is considering expand- ing its production facilities with a building costing $260,000 and
equipment costing $84,000. Building and equipment depreciable lives are 25 and 20 years, respectively, with
straight-line depreciation and no salvage value. Of the additional depreciation cost, 5% is expected to be
allocated to inventories.
The plant addition will increase volume by 50%; the product's sales price is expected to remain the same. The
new union contract calls for a 5% increase in wage rates. Because of the increased plant capacity, quantity
buying will yield an overall 6% decrease in mate- rials cost. One additional supervisor must be hired at a salary of
$15,000.
The following data pertain to last year:
Sales, 50,000 units at $10 per unit
Direct materials, $2 per unit
Direct labor, $4 per unit
Variable factory overhead, $1.30 per unit
Fixed factory overhead, $72,500
Variable marketing expense, $12,000
Fixed marketing expense, $11,000
With the volume increase, advertising, which is 10% of present fixed marketing expense, will be increased 25%.
Required: Prepare an analysis estimating contribution margin and operating income for both the present and
proposed capacities.
The Lex Glass Company uses silica in the duction of three different lines of glassware. The company plans to
introduce a new line of glassware without expanding its present facilities. The company wants to purchase the
required silica at a lower price to increase its profits. The present purchase price of silica is $2 per ton, and the
company consumes approximately 120,000 tons per year. Silica is used at a fairly uniform rate throughout the
year. The company's policy has been to place an order for materials once a month and to maintain a minimum
inventory of 5,000 tons. This represents one half of one month's consumption and results in an average
inventory of 10,000 tons (1/2 of the 10,000-ton monthly requirement + 5,000 ton minimum).
Other firms in the same industry and the same manufacturing area purchase the silica in small lots for $2.20 a
ton. The purchasing manager contacted suppliers and determined that a price of $1.80 per ton can be
obtained if the company purchases 400,000 tons of silica or more a year. The purchasing manager then
contacted other manufacturers in the area and offered to sell silica to them for $2 a ton. Most of the
manufacturers accepted the offer; however, they asked the purchasing manager to keep an inventory of at
least one half of one month's consumption in storage at all times to be available for their use. The annual
consumption of these manufacturers is expected to be 300,000 tons per year, and consumption is expected to
be uniform each month. Lex Glass plans to continue its once-a-month ordering policy.
To handle the additional volume of silica required by these other manufacturers, Lex Glass will need to
increase its labor force at an annual cost of $20,000 and incur $10,000 of additional administrative expenses
annually. The company can borrow the additional funds necessary from the local bank at an interest rate of
5%. The additional materials can be stored in a company-owned warehouse, which is now being leased to
another company for $10,000 a year.
Required: Determine whether the Lex Glass Company should take advantage of the quantity discount.