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Q1.The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. Either way production can not continue using the current equipment.
New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value.
Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a five-year contract.
Hyatt Company’s present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year:
| Direct Materials |
$ 3.00 |
| Direct Labour |
$ 4.20 |
| Variable Overhead |
$ 0.60 |
| Fixed Overhead ($0.80 supervision, $0.90 depreciation, | |
| and $2 general company overhead) |
$ 3.70 |
| Total Cost per Unit |
$11.50 |
The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company’s total general company overhead would not be affected by this decision. Assume direct labour is a variable cost.
Required:
Assume that 40,000 subassemblies are needed each year. Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action. (10 Marks)
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Q2.Benjamin Signal Company produces products R, J, and C from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin’s operations for the current year are as follows:
Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000.
Required:
Which products should be processed beyond the split-off point? (10 marks – show your work)
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Q3.Madison Optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago. Selected information on the two machines is given below:
Ignore income taxes and the time value of money in this problem.
Required:
Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years. (10 marks)
Be careful with depreciation in this question. You are looking at the decision in terms of cashflows rather than traditional accounting expense recording. Depreciation is designed to recover, over time, the cash expended for an asset purchase.
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Q4.Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow:
| Direct Materials |
$35 |
| Direct Labour |
$10 |
| Variable Manufacturing Overhead |
$ 8 |
| Fixed Manufacturing Overhead |
$20 |
| Total Manufacturing Cost per Unit |
$73 |
An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If Kramer Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided [think carefully as to what cost amount will ultimately have to be consider in the decision. Often a cost avoided means that under one decision option that is the cost to be factored in. Don’t be thrown off by the terminology ‘avoided’]. Assume that direct labour is a variable cost.
Required:
a) Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, should Kramer Company accept the offer? Fully support your answer with appropriate calculations. (8 marks)
b) Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps? (2 marks)
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Q5Iaci Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:
| Product X | Product Y | Product Z | |
| Allocated joint processing costs | $22,400 | $19,600 | $42,000 |
| Sales value at split off point | $32,000 | $28,000 | $60,000 |
| Cost of further processing | $11,600 | $25,300 | $36,900 |
| Sales value after further processing | $40,800 | $54,200 | $95,000 |
Required:
a) What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? (4 marks)
b) What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? (4marks)
c) What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? (1 Mark)
d) What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point? (1 mark)