Chapter 11, Problem 35P

1.

To determine

Calculate the number of additional direct labor hours (DLHs) that will be required each month to fill the Company G’s order.

Explanation of Solution

Calculate the number of additional direct labor hours (DLHs):

$\begin{array}{c}\begin{array}{l}\text{Number of additional}\\ \text{direct labor hours}\end{array}\}=\left[\begin{array}{l}\text{Number of units per month}\times \\ \text{Standard direct labor hour}\end{array}\right]\\ =30,000\text{ units}\times \text{0}\text{.5 hour}\\ =15,000\text{ direct labor hours}\end{array}$

Note: The standard direct labor hour (DLH) per finished valve is ½ hour.

2.

To determine

Prepare an analysis showing the impact on operating income of accepting the Company’s order.

Explanation of Solution

Prepare an analysis showing the impact on operating income of accepting the Company’s order.

Particulars	Per unit	Total for 120,000 units
Incremental revenue (a)	$ 21.00	$ 2,520,000
Incremental costs
Variable costs:
Direct materials	6	720000
Direct labor	8	960,000
Variable overhead	3	360,000
Total variable costs	$ 17	$ 2,040,000
Fixed overhead:
Supervisory and clerical costs $\left(4\times \$12,000\right)$		48,000
Total incremental costs (b)		$ 2,088,000
Incremental operating income (loss) $\left(\text{a}-\text{b}\right)$		$ 432,000

Table (1)

3.

To determine

Calculate the minimum unit price that Company W could accept for the company G’s order without reducing operating income.

Explanation of Solution

The least unit selling price that Company W could accept without decreasing operating income equals a price that covers variable costs plus the additional fixed costs. In this case, there are no opportunity costs. The $30.00 suggested selling price is irrelevant for the special order:

Particulars	Amounts in ($)
Incremental variable costs, per unit:
Direct materials	$ 6.00
Direct labor	$ 8.00
Variable overhead	$ 3.00
Additional fixed cost $\left(\$48,000÷120,000\text{ units}\right)$	0.4
Minimum selling price per unit	$ 17.40

Table (2)

4.

To determine

Calculate the minimum unit selling price using the Goal Seek function in Excel for the special sales order and prove the answer of requirement 3.

Explanation of Solution

Calculate the minimum unit selling price using the Goal Seek function in Excel for the special sales order and prove the answer of requirement 3:

Step: 1 set up the equation:

Particulars	Per unit	Total for 120,000 units
Four month volume (units)	$ 21.00	$ 120,000
Selling per unit
Incremental revenue, special sales order		$ 0
Incremental costs:
Variable per unit		17
Total Variable		$ 2,040,000
Total fixed		48,000
Opportunity cost		0
Total incremental costs full order		$ 2,088,000
Incremental operating income (loss)		$ -2,088,000

Table (3)

Workings:

Special order characteristics
# of units	120,000
offer price (per unit)	$ 21
Cost data pressure value:
Direct material (per unit)	$ 6
Direct labor:
Hours per unit	0.5
DL cost per unit	$ 8
Manufacturing overhead per unit	$ 9
% of overhead that is variable	33.33%
Additional fixed manufacturing costs:
Per month  charge	$ 12,000
Duration (# of months)	4

Table (4)

Table (5)

Step 2: Run the goal seek as follows:

In excel go to data tab and select what if analysis, then select Goal seek rom the drop down menu. Then select the respective values as follows:

Figure (1)

After selecting click ok.

Figure (2)

Step 2: Result:

Then the result will be as follows:

Table (6)

5.

To determine

Calculate the revised breakeven selling price per unit for G Company’s special sales order.

Explanation of Solution

The minimum unit price that Company W could accept without reducing operating income must cover all incremental costs: variable, fixed, and opportunity costs.

Particulars	Per unit	Amounts in ($)
Incremental variable cost/unit:
Direct materials	$ 6.00
Direct labor	$ 8.00
Variable overhead	$ 3.00	$ 17.00
Incremental fixed costs/unit ($48,000 ÷ 120,000 units)		0.4
Minimum selling price per unit (a)		$ 17.40
Opportunity cost, per unit:
Total lost sales (in units) (4 × 5,000 units)	20,000
Regular selling price per unit		$ 30.00
Less: variable costs (per unit):
Direct materials	$ 6.00
Direct labor	$ 8.00
Variable manufacturing overhead	$ 3.00
Sales commissions (5% of sales $)	$ 1.50
Freight charge (per unit)	$ 1.00
Total variable cost per unit		$ 19.50
CM per unit, regular sales		$ 10.50
Total lost CM (20,000 units	$ 210,000
Divide by: Four month units	120,000
Lost CM per unit of special sales order (b)		1.75
Minimum selling price per unit $\left(\text{a}+\text{b}\right)$		$ 19.15

Table (7)

6.

To determine

Identify the strategic factors that the company should consider before accepting the order.

Explanation of Solution

The following factors should be considered before accepting the order:

• The special order’seffect on sales at regular prices.
• The impact on local, state, and federal taxes.
• The company's “relevant range” of activity and whether the special order will cause volume to exceed this range.
• The likelihood of future sales and the effects of participating in the international marketplace.
• The effect on machinery.
• The strategic benefit of the long-term commitment from Company G.
• The firm that would handle warranty, repair, and service needs to be analyzed.

7.

To determine

Identify the factors related to international business that Company W should consider before accepting the Company G’s order.

Explanation of Solution

• The customs duties and import and export limitations which might affect the special order and future business.
• However the special order will be completed in the relatively short time of a few months, and the foreign exchange rates might change considerably in this period. Hence, the special order agreement regarding the sales price needs to be analyzed.
• If Company W is not now significantly involved in global sales, then the way in which the firm might use this opportunity to increase its exposure in foreign markets needs to be described.