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Problems on Relevant Costs for Decision Making

Problem no: 1: Accepting a Special Order

Sutherland manufactures and sells 110,000 laser printers eachmonth. A principal component part in each printer is its paper feeddrive. Sutherlands plant currently has the monthly capacity to

produce 150,000 drives. The unit costs of manufacturing thesedrives (up to 150,000 per month) are as follos!

"aria#le costs per unit!$irect materials %%%%.. & '5$irect la#or %%%%%%. 5"aria#le .*.+ %%%%. 5

i-ed costs per month!i-ed .*.+ %%%%%.. &1,'0,000

$es/ate rinters has offered to #uy 0,000 paper feed drivesfrom Sutherland to #e used in its on printers. 2ompute thefolloing!

a. The average unit cost of manufacturing each paper feed driveassuming that Sutherland manufactures only enough drivesfor its on laser printers

#. The incremental unit cost of producing an additional paperfeed drive.

c. The perunit sales price that Sutherland should charge $es/ate to earn &500,000 in monthly preta- profit on the sale of

drives to $es/mate

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Problem no: 2: Accepting a Special Order

$over 3u##er 2ompany has #een offered a contract to supply

500,000 premium automo#ile tires to a large automo#ilemanufacturer at a price of &'1.45 per tire. $overs full cost ofproducing the tire is &51.0. The normal sales price for the tire is&6.50 to #oth distri#utors and some selected retailers. "aria#lecosts per tire amount to &'.07 hoever, in order to meet theneeds of the auto manufacturer, $over ill have to cut its sales toregular customers #y 100,000 tires annually. The automa/er hasclearly indicated that it ill enter into the agreement only if $overill agree to supply all 500,000 of the tires re8uested.

Should $over accept the offer9

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Problem no : 3 : Dropping te prod!ct line"

"ulcan Simsuit 2ompany is considering dropping its line ofomens #each ro#es. A recent product income statement for the

ro#e line follos!

articulars Amount

3evenue &:50,640

2ost of goods sold 41,'0

;ross margin ,:0

Selling and administrative

e-penses

14,00

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Problem no: #: Scarce Reso!rces$Constraint

%actor

Te-teriles 2ompany creates different types of #olts of

cloth. These #olts of cloth are made on the samemachinery. The te-tile machines have the capacity of,400 hours per month. Te-teriles is considering

producing three different types of cloth! denim,chenille, and gau>e ith contri#ution margins per

#olt of &1', &, and &: respectively. Te-teriles/nos they can sell only a total of 4,000 #olts ofdenim, ,000 #olts of chenille, and?or 1,00 #olts ofgau>e. A #olt of each type of cloth re8uires adifferent amount of machine time as follos! denimta/es 0.5 machine hours, chenille ta/es 1 machinehour, and gau>e ta/es 0. machinehours. @hatcom#ination of products ill ma-imi>e the profits of

Te-teriles9

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Problem no: &: Make or '!( Decision

arometer, Bnc., ma/es part no. 544 on one of its

production lines. Cach month acrometer ma/es 40,000 ofpart no. 544 at a varia#le cost of &.50 per part. The fi-edcosts for the production line are &10,000 or &.00 per part.acrometer has #een provided a #id for part no. 544 fromanother manufacturer ho ill ma/e the part for &.45 perpart. acrometer /nos the production line could #e rentedto another manufacturer for &5,000 per month. Should

acrometer continue to ma/e part no. 544 or should they#uy the part and rent the production line9

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Problem no: ): *oint Prod!cts

Treadell harmaceuticals produces to medications in a

Doint process! Amo-iphore and enidrate. @ith eachproduction run, Treadell incurs &',000 in common costsup to the splitoff point.Amo-iphore can #e sold for &,600 at the splitoff point or#e processed further at a cost of &1,400 at hich time it can#e sold for &',00. +oever, if Amo-iphore is sold at thesplitoff point, its side effects include nausea andheadaches. Bf it is processed further, these side effects are

diminished. $emand for Amo-iphore far e-ceedsTreadells production capacity.enidrate can #e sold for&,'00 at the splitoff point or #e processed further at a costof &,600 at hich time it can #e sold for &4,000.

a. $etermine hich product is more profita#le to process#eyond the splitoff point9

#. @hat nonfinancial issues should the company consider

regarding its processing decisions9