Chapter 25: Q25-15RQ (page 1406)
When should special pricing orders be accepted?
Answer
Special pricing orders should be accepted when theunit sales price is higher than thevariable costper unit of the related product.
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Dan Jacobs, production manager for GreenLife, invested in computer-controlled production machinery last year. He purchased the machinery from Superior Design at a cost of \(3,000,000. A representative from Superior Design has recently contacted Dan because the company has designed an even more efficient piece of machinery. The new design would double the production output of the year-old machinery but would cost GreenLife another \)4,500,000. Jacobs is afraid to bring this new equipment to the company presidentโs attention because he convinced the president to invest $3,000,000 in the machinery last year.
Explain what is relevant and irrelevant to Jacobsโs dilemma. What should he do?
What are sunk costs? Give an example.
Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acresโs reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.
Requirements
1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?
2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?
StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to \(115,000 per period. Sales prices and variable costs are as follows:
Regular Large
Sales price per unit \)8.00 $10.40
Variable cost per unit 3.50 4.40
Requirements
1. Which product should StoreAll emphasize? Why?
2. To maximize profits, how many of each size bin should StoreAll produce?
3. Given this product mix, what will the companyโs operating income be?
Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018:
SECURITY CHECK Income Statement For the Year Ended May 31, 2018 |
Product Line |
Industrial Systems | Household Systems | Total |
Net Sales Revenue | \( 300,000 | \) 330,000 | \( 630,000 |
Cost of Goods Sold: | |||
Variable | 35,000 | 42,000 | 77,000 |
Fixed | 210,000 | 63,000 | 273,000 |
Total Cost of Goods Sold | 245,000 | 105,000 | 350,000 |
Gross Pro๏ฌt | 55,000 | 225,000 | 280,000 |
Selling and Administrative Expenses: | |||
Variable | 66,000 | 77,000 | 143,000 |
Fixed | 39,000 | 28,000 | 67,000 |
Total Selling and Administrative Expenses | 105,000 | 105,000 | 210,000 |
Operating Income (Loss) | \) (50,000) | \( 120,000 | \) 70,000 |
Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(81,000 and decrease fixed selling and administrative expenses by \)15,000.
Requirements
1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Teamโs total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternativesโ income numbers to your answer to Requirement 1.
3. What have you learned from this comparison in Requirement 2?
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