Chapter 12 Assigned Problems

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Industrial Engineering

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Jan 9, 2024

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EXERCISE 12-6 Sell or Process Further In a joint processing operation, Nolen Company manufactures three grades of sugar from a common input, sugar cane. Joint processing costs up to the split-off point total $80,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. These sales values are as follows: raw sugar, $40,000; brown sugar, $40,000; and white sugar, $42,000. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities. The additional processing costs and the sales value after further processing for each product (on an annual basis) are shown below: Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations. EXERCISE 12-8 Dropping or Retaining a Segment Anderson Document Services, a document creation and copying company, has two departments, Design and Copying. The company's most recent monthly contribution format income statement follows: A study indicates that $14,000 of the fixed expenses being charged to the Design Department are sunk costs or allocated costs that will continue even if the Design Department is dropped. In addition, the elimination of the Design Department would result in a 5% decrease in the sales of the Copying Department. Required: If the Design Department is dropped, what will be the effect on the operating income of the company as a whole? Should the Design Department be dropped?

EXERCISE 12-9 Make or Buy a Component For many years, Comstock Company has produced an electrical part that it uses in the production of diesel tractors. The company's unit product cost for the part, based on a production level of 60,000 parts per year, is as follows: An outside supplier has offered to supply the electrical parts to Comstock Company for only $10.00 per part. One-third of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other two-thirds of the traceable fixed manufacturing costs consists of depreciation of special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle. Required: Prepare computations showing how much profits would increase or decrease as a result of purchasing the parts from the outside supplier rather than having the company make them. EXERCISE 12-11 Utilization of a Constrained Resource Westburne Company produces three products: Alpha, Omega, and Beta. Data (per unit) concerning the three products follow: Demand for the company's products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $6 per kilogram, with a maximum of 10,000 kilograms available each month. Required: Which orders would you advise the company to accept first, those for Alpha, Omega, or Beta? Which orders second? Third?

PROBLEM 12-21 Dropping or Retaining a Tour A study has indicated that some of the bus tours operated by Clear Water Tours Inc. are not profitable. As a result, consideration is being given to dropping these unprofitable tours to improve the company's overall operating performance. Page 559 One such tour is a three-day Majestic Islands bus tour. Additional information and an income statement from a typical Majestic Islands tour are given below: The following additional information is available about the tour: a. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. b. The “Bus maintenance and preparation” cost in the statement is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition. c. Depreciation of buses is due to obsolescence. d. Liability insurance premiums are based on the number of buses in the company's fleet. e. Dropping the Majestic Islands bus tour would not allow Clear Water Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff. Required: 1. Prepare an analysis showing what the impact will be on the company's profits if this tour is discontinued. 2. The company's tour director has been criticized because only about 50% of the seats on Clear Water's tours are being filled, compared to an industry average of 60%. The tour director has explained that Clear Water's average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.

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PROBLEM 12-27 Make or Buy Analysis That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich Company. “We need to make a decision quickly.” The company is trying to decide whether it should rent new equipment and continue to make its carburetors internally or whether it should discontinue production of its carburetors and purchase them from an outside supplier. The alternatives follow: • Alternative 1: Rent new equipment for producing the carburetors for $120,000 per year. • Alternative 2: Purchase carburetors from an outside supplier for $16 each. Hondrich Company's costs per unit of producing the carburetors internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 units per year: The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($60,000 per year) and direct materials cost per unit would not be affected by the new equipment. The new equipment's capacity would be 60,000 carburetors per year. The total general company overhead would be unaffected by this decision. Required: 1. Seebach is unsure what the company should do and would like an analysis showing the unit costs and total costs for each of the two alternatives given above. Assume that 40,000 carburetors are needed each year. Which course of action would you recommend to Seebach? 2. Would your recommendation in (1) above be the same if the company's needs were ( a ) 50,000 carburetors per year, or ( b ) 60,000 carburetors per year? Show computations in good form.

Chapter 12 Assigned Problems

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