EBK HORNGREN'S COST ACCOUNTING
16th Edition
ISBN: 9780134475950
Author: Datar
Publisher: PEARSON CO
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Chapter 11, Problem 11.43P
Product mix, special order. (N. Melumad, adapted) Gormley Precision Tools makes cutting tools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high-precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the regular machine and a high-precision machine. The following information is available:
| A6 | EX4 | |
| Selling price | $ 180 | $ 280 |
| Variable |
$ 110 | $ 190 |
| Variable marketing cost per unit | $ 20 | $ 60 |
| Budgeted total fixed |
$700,000 | $1,100,000 |
| Hours required to produce one unit on the regular machine | 1.0 | 0.5 |
Additional information includes the following:
- a. Gormley faces a capacity constraint on the regular machine of 50,000 hours per year.
- b. The capacity of the high-precision machine is not a constraint.
- c. Of the $1,103,000 budgeted fixed overhead costs of EX4, $600,000 are lease payments for the high-precision machine. This cost is charged entirely to EX4 because Gormley uses the machine exclusively to produce EX4. The company can cancel the lease agreement for the high-precision machine at any time without penalties.
- d. All other overhead costs are fixed and cannot be changed.
- 1. What product mix—that is, how many units of A6 and EX4—will maximize Gormley’s operating income? Show your calculations.
- 2. Suppose Gormley can increase the annual capacity of its regular machines by 15,000 machine-hours at a cost of $300,000. Should Gormley increase the capacity of the regular machines by 15,000 machine-hours? By how much will Gormley’s operating income increase or decrease? Show your calculations.
- 3. Suppose that the capacity of the regular machines has been increased to 65,000 hours. Gormley has been approached by Clark Corporation to supply 20,000 units of another cutting tool, V2, for $240 per unit. Gormley must either accept the order for all 20,000 units or reject it totally. V2 is exactly like A6 except that its variable manufacturing cost is $130 per unit. (It takes 1 hour to produce one unit of V2 on the regular machine, and variable marketing cost equals $20 per unit.) What product mix should Gormley choose to maximize operating income? Show your calculations.
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All Terrain Tires manufactures three different off-road ATV tires: Model A, Model B, and Model C. Plenty of market demand exists for all models. The table below reports the prices and costs per unit of each product:
Model A
Model B
Model C
Selling price
$ ?
$50
$55
Direct materials costs
$5
$5
$5
Direct labor costs ($15 per labor hour)
$15
$15
$30
Variable support costs ($3 per machine hour)
$3
$6
$9
Fixed support costs
$10
$10
$10
Assuming that machine hours are limited (i.e., this is the constrained resource), at what price does Model A become the most profitable model to produce?
Chapter 11 Solutions
EBK HORNGREN'S COST ACCOUNTING
Ch. 11 - Prob. 11.1QCh. 11 - Define relevant costs. Why are historical costs...Ch. 11 - All future costs are relevant. Do you agree? Why?Ch. 11 - Distinguish between quantitative and qualitative...Ch. 11 - Describe two potential problems that should be...Ch. 11 - Variable costs are always relevant, and fixed...Ch. 11 - A component part should be purchased whenever the...Ch. 11 - Prob. 11.8QCh. 11 - Managers should always buy inventory in quantities...Ch. 11 - Management should always maximize sales of the...
Ch. 11 - Prob. 11.11QCh. 11 - Cost written off as depreciation on equipment...Ch. 11 - Managers will always choose the alternative that...Ch. 11 - Prob. 11.14QCh. 11 - Prob. 11.15QCh. 11 - Qualitative and quantitative factors. Which of the...Ch. 11 - Special order, opportunity cost. Chade Corp. is...Ch. 11 - Prob. 11.18MCQCh. 11 - Keep or drop a business segment. Lees Corp. is...Ch. 11 - Relevant costs. Ace Cleaning Service is...Ch. 11 - Disposal of assets. Answer the following...Ch. 11 - Relevant and irrelevant costs. Answer the...Ch. 11 - Multiple choice. (CPA) Choose the best answer. 1....Ch. 11 - Special order, activity-based costing. (CMA,...Ch. 11 - Make versus buy, activity-based costing. The...Ch. 11 - Inventory decision, opportunity costs. Best Trim,...Ch. 11 - Relevant costs, contribution margin, product...Ch. 11 - Selection of most profitable product. Body Image,...Ch. 11 - Theory of constraints, throughput margin, relevant...Ch. 11 - Closing and opening stores. Sanchez Corporation...Ch. 11 - Prob. 11.31ECh. 11 - Relevance of equipment costs. Janets Bakery is...Ch. 11 - Equipment upgrade versus replacement. (A. Spero,...Ch. 11 - Special order, short-run pricing. Diamond...Ch. 11 - Short-run pricing, capacity constraints. Fashion...Ch. 11 - International outsourcing. Riverside Clippers Corp...Ch. 11 - Relevant costs, opportunity costs. Gavin Martin,...Ch. 11 - Opportunity costs and relevant costs. Jason Wu...Ch. 11 - Opportunity costs. (H. Schaefer, adapted) The Wild...Ch. 11 - Make or buy, unknown level of volume. (A....Ch. 11 - Make versus buy, activity-based costing,...Ch. 11 - Prob. 11.42PCh. 11 - Product mix, special order. (N. Melumad, adapted)...Ch. 11 - Theory of constraints, throughput margin, and...Ch. 11 - Theory of constraints, contribution margin,...Ch. 11 - Closing down divisions. Ainsley Corporation has...Ch. 11 - Dropping a product line, selling more tours....Ch. 11 - Prob. 11.48PCh. 11 - Dropping a customer, activity-based costing,...Ch. 11 - Equipment replacement decisions and performance...
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