Feinan Sports, Inc., manufactures sporting equipment, including weight-lifting gloves. A national sporting goods chain recently submitted a special order for 4,600 pairs of weight-lifting gloves. Feinan Sports was not operating at capacity and could use the extra business. Unfortunately, the order’s offering price of $12.80 per pair was below the cost to produce them. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a pair of weight-lifting gloves is presented below.
No variable selling or administrative expenses would be associated with the order. Non-unit-level activity costs are a small percentage of total costs and are therefore not considered.
Required:
- 1. Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supporting computations.
- 2. Suppose that Feinan Sports has negotiated with the potential customer, and has determined that it can substitute cheaper materials, reducing direct materials cost by $0.95 per unit. In addition, the company’s engineers have found a way to reduce direct labor cost by $0.50 per unit. Should the company accept or reject the order? Provide supporting computations.
- 3. Consider the personnel manager’s concerns. Discuss the merits of accepting the order even if it decreases total profits.
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Chapter 17 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Feinan Sports, Inc., manufactures sporting equipment, including weight- lifting gloves. A national sporting goods chain recently submitted a special order for 4,600 pairs of weight-lifting gloves. Unfortunately, the order's offering price of $14.80 per pair was far below the regular price of $25, and even below the cost of production. One marketing manager was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce and sell a regular pair of weight-lifting gloves is presented below. Direct material Direct labor Variable overhead Fixed overhead Variable selling and adm. Total 7.5 3.9 1.6 3.1 2.8 18.9 No variable selling or administrative expenses would be associated with the special order. Required: (You must Provide supporting computations.) 1. Assume that the company has…arrow_forwardSTARTOM Inc, manufactures sporting equipment, including weight-lifting gloves. Anationalsporting goods chain recently submitted a special order for 4,600 pairs of weight-lifting gloves. STARTOM JnC.was not operating at capacity and couldusethe extra business. Unfortunately, the order's offering price of $12.80 per pair was below the costto produce them. The controller was opposedto takingaloss onthe deal. However, the personnel manager arguedin favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs andwouldhelp maintainthe community image of the company. The full costto produce a pair of weight-lifting gloves is presented as follows: Direct materials - S7.50; Direct labor- $3.90; Variable overhead -$1.60; Fixed overhead - $3.10; Total - $16.10. No variable and selling or administrative expenses would be associated with the order. Non-unit level activity costs are a small percentage oftotal costs and are therefore not censidered Assume…arrow_forwardFusion Metals Company is considering the elimination of its Packaging Department. Management has received an offer from an outside firm to supply all Fusion’s packaging needs. To help her in making the decision, Fusion’s president has asked the controller for an analysis of the cost of running Fusion’s Packaging Department. Included in that analysis is $9,100 of rent, which represents the Packaging Department’s allocation of the rent on Fusion’s factory building. If the Packaging Department is eliminated,the space it used will be converted to storage space. Currently Fusion rents storage space in a nearby warehouse for $11,000 per year. The warehouse rental would no longer be necessary if the Packaging Department were eliminated. Required:1. Discuss each of the figures given in the exercise with regard to its relevance in the departmentclosing decision.2. What type of cost is the $11,000 warehouse rental, from the viewpoint of the costs of the Packaging Department?arrow_forward
- Finerly Corporation sells cosmetics through a network of independent distributors. Finerly shipped cosmetics to its distributors and is considering whether it should record $300,000 of revenue upon shipment of a new line of cosmetics. Finerly expects the distributors to be able to sell the cosmetics, but is uncertain because it has little experience with selling cosmetics of this type. Finerly is committed to accepting the cosmetics back from the distributors if the cosmetics are not sold. How much revenue should Finerly recognize upon delivery to its distributors?arrow_forward[The following information applies to the questions displayed below.] Watko Entertainment Systems (WES) buys audio and video components for assembling home entertainment systems from two suppliers, Bacon Electronics and Hessel Audio and Video. The components are delivered in cartons. If the cartons are delivered late, the installation for the customer is delayed. Delayed installations lead to contractual penalties that call for WES to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following: Bacon Hessel Total Total purchases (cartons) 5,000 3,000 8,000 Average purchase price (per carton) $ 190 $ 206 $ 196 Number of deliveries 40 20 60 Percentage of cartons delivered late. 30% 15% 25% The Accounting Department recorded $263,250 as the cost of late deliveries to customers. Required: Assume that the average quality, measured by the percentage of late deliveries,…arrow_forwardTalladega Company manufactures an electric clock radio. The company expects production of 5,000 units this year. Currently, Talladega produces the clock used in the product. Talladega has received an offer from Daytona, Incoporated to supply the clock. If Talladega discontinues production of the clock, the company will be able to eliminate its product-level costs because no other products along the same line are produced by the company. However, due to its concern for quality, the company will have to inspect each clock. Various costs and items are described below: Required: Select the appropriate classification of the cost item from the drop-down that best describes the item in the context of the described outsourcing decision. A cost varies if the amount of the cost or the incurrence of the cost differs between the two alternatives: continuing to make the clocks or purchasing the clocks from Daytona. Purchase cost of clocks from Daytona Item Income that can be earned from renting the…arrow_forward
- Watko Entertainment Systems (WES) buys audio and video components for assembling home entertainment systems from two suppliers, Bacon Electronics and Hessel Audio and Video. The components are delivered in cartons. If the cartons are delivered late, the installation for the customer is delayed. Delayed installations lead to contractual penalties that call for WES to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following: Bacon 5,000 $ 182 40 Total purchases (cartons) Average purchase price (per carton) Number of deliveries Percentage of cartons delivered late. 30% Bacon Hessel Hessel 3,000 $198 20 15% The Accounting Department recorded $255,450 as the cost of late deliveries to customers. Effective Cost Per Carton Total 8,000 $ 188 60 25% Exercise 10-38 (Algo) Activity-Based Costing of Suppliers (LO 10-3, 4) Required: Assume that the average quality, measured by the percentage of…arrow_forwardWatko Entertainment Systems (WES) buys audio and video components for assembling home entertainment systems from two suppliers, Bacon Electronics and Hessel Audio and Video. The components are delivered in cartons. If the cartons are delivered late, the installation for the customer is delayed. Delayed installations lead to contractual penalties that call for WES to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following: Bacon Hessel Total Total purchases (cartons) 5,000 3,000 8,000 Average purchase price (per carton) $ 170 $ 186 $ 176 Number of deliveries 40 20 60 Percentage of cartons delivered late. 30% 15% 25% The Accounting Department recorded $243,750 as the cost of late deliveries to customers. Required: Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the past. Also…arrow_forwardWatko Entertainment Systems (WES) buys audio and video components for assembling home entertainment systems from two suppliers, Bacon Electronics and Hessel Audio and Video. The components are delivered in cartons. If the cartons are delivered late, the installation for the customer is delayed. Delayed installations lead to contractual penalties that call for WES to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following: Bacon Hessel Total Total purchases (cartons) 5,000 3,000 8,000 Average purchase price (per carton) $ 176 $ 192 $ 182 Number of deliveries 40 20 60 Percentage of cartons delivered late. 30% 15% 25% The Accounting Department recorded $249,600 as the cost of late deliveries to customers. Exercise 10-38 (Algo) Activity-Based Costing of Suppliers (LO 10-3, 4) Required: Assume that the average quality, measured by the percentage of late…arrow_forward
- Watko Entertainment Systems (WES) buys audio and video components for assembling home entertainment systems from two suppliers, Bacon Electronics and Hessel Audio and Video. The components are delivered in cartons. If the cartons are delivered late, the installation for the customer is delayed. Delayed installations lead to contractual penalties that call for WES to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following: Bacon 5,000 $ 192 40 30% Bacon Hessel Hessel 3,000 $ 208 Total purchases (cartons) Average purchase price (per carton) Number of deliveries Percentage of cartons delivered late. The Accounting Department recorded $265,200 as the cost of late deliveries to customers. Effective Cost Per Carton Total 8,000 $ 198 20 15% Required: Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the…arrow_forwardIntercontinental Chemical Company, located in Buenos Aires, Argentina, recently received an order for a product it does not normally produce. Since the company has excess production capacity, management is considering accepting the order. In analyzing the decision, the assistant controller is compiling the relevant costs of producing the order. Production of the special order would require 8,000 kilograms of theolite. Intercontinental does not use theolite for its regular product, but the firm has 8,000 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 14,500 p. The book value of the theolite is 2.00 p per kilogram. Intercontinental could buy theolite for 2.40 p per kilogram. ( p denotes the peso, Argentina’s national monetary unit. Many countries use the peso as their unit of currency. On the day this exercise was written, Argentina’speso was worth .104 U.S. dollar.) Required:1. What is the relevant…arrow_forwardIntercontinental Chemical Company, located in Buenos Aires, Argentina, recently received an order for a product it does not normally produce. Since the company has excess production capacity, management is considering accepting the order. In analyzing the decision, the assistant controller is compiling the relevant costs of producing the order. Production of the special order would require 8,000 kilograms of theolite. Intercontinental does not use theolite for its regular product, but the firm has 8,000 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 14,500 p. The book value of the theolite is 2.00 p per kilogram. Intercontinental could buy theolite for 2.40 p per kilogram. (p denotes the peso, Argentina’s national monetary unit. Many countries use the peso as their unit of currency. On the day this exercise was written, Argentina’s peso was worth 0.104 U.S. dollar.) Required: 1-a. What is the…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning