![Cornerstones of Cost Management (Cornerstones Series)](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_largeCoverImage.gif)
Brandy Dees recently bought Nievo Enterprises, a company that manufactures ice skates. Brandy decided to assume management responsibilities for the company and appointed herself president shortly after the purchase was completed. When she bought the company, Brandy’s investigation revealed that with the exception of the blades, all parts of the skates are produced internally. The investigation also revealed that Nievo once produced the blades internally and still owned the equipment. The equipment was in good condition and was stored in a local warehouse. Nievo’s former owner had decided three years earlier to purchase the blades from external suppliers.
Brandy Dees is seriously considering making the blades instead of buying them from external suppliers. The blades are purchased in sets of two and cost $8 per set. Currently, 100,000 sets of blades are purchased annually.
Skates are produced in batches, according to shoe size. Production equipment must be reconfigured for each batch. The blades could be produced using an available area within the plant. Prime costs will average $5.00 per set. There is enough equipment to set up three lines of production, each capable of producing 80,000 sets of blades. A supervisor would need to be hired for each line. Each supervisor would be paid a salary of $40,000. Additionally, it would cost $1.50 per machine hour for power, oil, and other operating expenses. Since three types of blades would be produced, additional demands would be made on the setup activity. Other overhead activities affected include purchasing, inspection, and materials handling. The company’s ABC system provides the following information about the current status of the overhead activities that would be affected. (The lumpy quantity indicates how much capacity must be purchased should any expansion of activity supply be needed—the units of purchase. The purchase cost per unit is the fixed activity rate. The variable rate is the cost per unit of resources acquired as needed for each activity.)
The demands that the production of blades places on the overhead activities are as follows:
If the blades are made, the purchase of the blades from outside suppliers will cease. Therefore, purchase orders will decrease by 6,500 (the number associated with their purchase). Similarly, the moves for the handling of incoming blades will decrease by 400. Any unused activity capacity is viewed as permanent.
Required:
- 1. Should Nievo make or buy the blades?
- 2. Explain how the ABC resource usage model helped in the analysis. Also, comment on how a conventional approach would have differed.
![Check Mark](/static/check-mark.png)
Trending nowThis is a popular solution!
![Blurred answer](/static/blurred-answer.jpg)
Chapter 17 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Moab Incorporated manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year. Moab Incorporated sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 in depreciation. Moab Incorporated held stock in ABC Corporation, which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year. Moab Incorporated sold some of its inventory for $7,000 cash. This inventory had a basis of $5,000. Moab Incorporated disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken $15,000 in…arrow_forwardMoab Incorporated manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year. a. Moab Incorporated sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 in depreciation. b. Moab Incorporated held stock in ABC Corporation, which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year. c. Moab Incorporated sold some of its Inventory for $7,000 cash. This Inventory had a basis of $5,000. d. Moab Incorporated disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken…arrow_forwardMoab Incorporated manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year. Moab Incorporated sold a machine that it used to make computerized gadgets for $33,300 cash. It originally bought the machine for $23,200 three years ago and has taken $8,000 in depreciation. Moab Incorporated held stock in ABC Corporation, which had a value of $32,000 at the beginning of the year. That same stock had a value of $35,230 at the end of the year. Moab Incorporated sold some of its inventory for $11,000 cash. This inventory had a basis of $5,000. Moab Incorporated disposed of an office building with a fair market value of $95,000 for another office building with a fair market value of $71,000 and $24,000 in cash. It originally bought the office building seven years ago for $82,000 and has taken $15,000 in…arrow_forward
- Betty Boop started a small toy factory, Boopy Doop, Inc., in her garage and incorporated it in March of 2014 as a calendar-year corporation. At that time, she began using her personal computer and tools solely for the business as part of her contribution to the corporation. The computer cost $2,700 but had a fair market value of only $900 at conversion and the tools, which had cost $1,500, were valued at $1,100. During 2014, Boopy Doop, Inc. purchased two machines: Gadget 1, purchased on May 2, cost $24,000; Gadget 2, purchased on June 5, cost $40,000. The corporation expensed Gadget 1 under Section 179. The computer, tools, and Gadget 2 were depreciated using accelerated MACRS only. The corporation did not take any depreciation on the garage nor did Betty charge the business rent because the business moved to a building purchased by Boopy Doop, Inc. for $125,000 on January 5, 2015. On January 20, 2015, Boopy Doop, Inc. purchased $4,000 of office furniture and on July 7, it purchased…arrow_forwardWoodridge USA Properties, L.P., bought eighty-seven commercial truck trailers from Southeast Trailer Mart, Inc. (STM). Gerald McCarty, an independent sales agent who arranged the deal, showed Woodridge the documents of title. The documents did not indicate that Woodridge was the buyer. Woodridge then asked McCarty to sell the trailers, and within three months, they were sold. McCarty did not give the proceeds to Woodridge, however. Woodridge—without mentioning the title documents—asked STM to refund the contract price. STM refused. Does Woodridge have a right to recover damages from STM? Explain.arrow_forwardIn janaruary, Prahbu purchased a new machine for use in the existing production line of his manufacturing business for $90,000. Assume that the machine is a unit of property and is not a material or supply. Prahbu pays $2,500 to install the machine, and after the machine is installed, he pays $1,300 to perform a critical test on the machine to ensure that it will operate in accordance with quality standards. On November 1, the critical test is complete and prahbu places the machine in service on the production line. On December 3, prahbu pays another $3,300 to perform periodic qaulity testing after the machine is placed in service. . How much will prahbu be required to capitalize as the cost of the machine.?arrow_forward
- Anak Mami Berhad owns a factory which sits on freehold land. The factory produces metal works for hawker stalls since Merdeka. The factory was revalued ten years ago and is being depreciated over 50 years from that value. The company made one nasi kandar stall lines many years ago and today the metal used is toxic. Anak Mami expects a nasi kandar stall owner in Sungai Petani will take legal action against them. No mention was made in the latest financial statement of this legal action. Describe the assertions relevant to these matters.arrow_forwardMelinda Stoffers owns and operates ABC Print Co. During February, ABC incurred the following costs in acquiring two printing presses. One printing press was new, and the other was purchased from a business that recently filed for bankruptcy. Costs related to new printing press:1. Fee paid to factory representative for installation2. Freight3. Insurance while in transit4. New parts to replace those damaged in unloading5. Sales tax on purchase price6. Special foundation Costs related to used printing press:7. Fees paid to attorney to review purchase agreement8. Freight9. Installation10. Repair of damage incurred in reconditioning the press11. Replacement of worn-out parts12. Vandalism repairs during installationa. Indicate which costs incurred in acquiring the new printing press should be debited to the asset account.b. Indicate which costs incurred in acquiring the used printing press should be debited to the asset account.arrow_forwardVinubhaiarrow_forward
- Meg O'Brien received a gift of some small-scale jewelry manufacturing equipment that her father had used for personal purposes for many years. Her father originally purchased the equipment for $1,640. Because the equipment is out of production and no longer available, the property is currently worth $5,750. Meg has decided to begin a new jewelry manufacturing trade or business. What is her depreciable basis for depreciating the equipment?arrow_forwardSheila Company is engaged in the manufacture of chemicals which it exports to other countries. On December 25, 2021, one of its tanks in the production assembly plant exploded. Unfortunately one of its employees was caught by the accident and suffered severe burns all over his body. For damages sustained because of the explosion, the employee sued Sheila and claimed an amount totaling P10,000,000 for physical injuries sustained. The lawyers of Sheila expect that Sheila Company will probably lose the lawsuit and estimate that the company may have to pay an amount in the range of P5,000,000 to P8,000,000. On March 15, 2022, upon the advice of his lawyers, the injured employees offered to have an out of court settlement of P7,500,000. The offer was tendered on the same date and Sheila on the advice of its legal counsel accepted the said offer on March 20, 2022. Sheila’s financial statements for the year ended 2021 was issued on March 30, 2022. Sheila’s financial statements for the year…arrow_forwardRaul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $608,500-that is, $78,500 for the land and $530,000 for the building. He has just received an offer from a realty company that wants to purchase the property: however, the property has been a good source of income over the years, and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows: a Keep the property. Martinas's accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Martinas makes a $13,250 mortgage payment each year on the property The mortgage will be paid off in eight more years. He has been depredating the building by the straight-line method, assuming a salvage value of $79,500 for the building, which he still thinks is an appropriate figure. He…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningBusiness Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:Cengage
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
![Text book image](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780357109731/9780357109731_smallCoverImage.gif)