| $4.00 2. | Sandlewood Company has 10,200 units of its sole product that it produced last year at a cost of $40 each. This year's model is superior to last year's and the 10,200 units cannot be sold for their regular selling price of $80 each. Sandlewood has two alternatives for these items: (1) they can be sold to a wholesaler for $20 each, or (2) they can be reworked at a total cost of $400,000 and then sold for $60 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the company's profits the most? | | Reworking because profit will increase by $204,000 more than scrapping. | | Reworking, because profit will increase by $212,000 more than scrapping. | | Reworking, because profit will increase by $8,000 more than scrapping. | | Scrapping, because profit will increase by $8,000 more than reworking. | | Scrapping, because profit will increase by $204,000 more than reworking. 3. | Altertech Inc. manufactures a product that contains a circuit board. The company has always purchased this circuit board from a supplier for $112.0 each. Altertech recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the circuit board instead of buying it. The company prepared the following per unit cost projections of making the circuit board, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 115% of direct labor cost. | | Direct materials | $8 | | Direct labor | 80 | | Overhead (fixed and variable) | 92 | | Total | $180 | | The required volume of output to produce the circuit boards will not require any incremental fixed overhead. Incremental variable overhead cost is $12.0 per circuit board. What is the effect on income if Altertech decides to make the circuit boards? | | Income will decrease by $68.0 per unit. | | Income will increase by $24.0 per unit. | | Income will increase by $12.0 per unit. | | Income will increase by $68.0 per unit. | | Income will decrease by $12.0 per unit. 4. | Wade Company is operating at 75% of its manufacturing capacity of 230,000 product units per year. A customer has offered to buy an additional 18,500 units at $54 each and sell them outside the country so as not to compete with Wade. The following data are available: | | Costs at 75% capacity: | Per unit | Total | | Direct materials | $21.60 | $3,726,000 | | Direct labor | 16.20 | 2,794,500 | | Overhead (fixed and variable) | 27.00 | 4,657,500 | | Totals | $64.80 | $11,178,000 | | In producing 18,500 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $10.8 per unit would be incurred. What is the effect on income if Wade accepts this order? | | Income will increase by $10.80 per unit. | | Income will increase by $5.40 per unit. | | Income will increase by $16.20 per unit. | | Income will decrease by $48.60 per unit. | | Income will decrease by $10.80 per unit. 5. | Wave-Zone Company has 11,700 units of its sole product that it produced last year at a cost of $135 each. This year's model is superior to last year's and the 11,700 units cannot be sold for their regular selling price of $202.5 each. Wave-Zone has two alternatives for these items: (1) they can be sold to a wholesaler for $13.5 each, or (2) they can be reworked at a total cost of $590,000 and then sold for $60.75 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the company's profits the most? | | Reworking because profit will increase by $157,950 more than scrapping. | | Reworking, because profit will increase by $120,775 more than scrapping. | | Scrapping, because profit will increase by $157,950 more than reworking. | | Scrapping, because profit will increase by $37,175 more than reworking. | | Reworking, because profit will increase by $37,175 more than scrapping. 6. | Derby Inc. manufactures a product which contains a small part. The company has always purchased this motor from a supplier for $172 each. Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it. The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 125% of direct labor cost. | | Direct materials | $52 | | Direct labor | 44 | | Overhead (fixed and variable) | 55 | | Total | $151 | | The required volume of output to produce the motors will not require any incremental fixed overhead. Incremental variable overhead cost is $31 per motor. What is the effect on income if Derby decides to make the motors? | | Income will increase by $76 per unit. | | Income will decrease by $21 per unit. | | Income will increase by $21 per unit. | | Income will increase by $45 per unit. | | Income will decrease by $45 per unit. 7. | A company expects to produce and sell 20,000 units of a single product. Management desires a 20% return on assets of $1,300,000. The following additional company information is available: | | Variable costs (per unit) | | | Production costs | $69 | | Nonproduction costs | $11 | | Fixed costs (in total) | | | Overhead | $97,000 | | Nonproduction | $23,000 | | Compute selling price per unit given that markup percentage equals desired profit divided by total costs. | | $80.0 | | $13.0 | | $86.0 | | $93.0 | | $99.0 | | | | | | |
