Chapter 25: Q25-25RQ (page 1407)
What are joint costs? How do they affect the sell or process further decision?
Answer
The joint costs do not affect the sale or process of further decisions of a business concern.
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Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:
Per Unit
Deluxe Toothbrush Standard Toothbrush
Sales price \(86 \)56
Variable costs 20 18
Contribution margin \(66 \)38
Contribution margin ratio 76.7% 67.9%
After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.
Requirements
1. Identify the constraining factor for Brinn.
2. Prepare an analysis to show which product line to emphasize.
Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.
Oak Petroleum has spent \(202,000 to refine 63,000 gallons of petroleum distillate, which can be sold for \)6.00 per gallon. Alternatively, Oak can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost \(1.80 per gallon of distillate. The cleaner fluid can be sold for \)9.10 per gallon. To sell the cleaner fluid, Oak must pay a sales commission of \(0.12 per gallon and a transportation charge of \)0.19 per gallon.
Requirements
1. Diagram Oak’s decision alternatives, using Exhibit 25-18 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Oak’s decision?
3. Should Oak sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
Each morning, Max Smith stocks the drink case at Max’s Beach Hut in Myrtle Beach, South Carolina. The drink case has 120 linear feet of refrigerated drink space. Each linear foot can hold either six 12-ounce cans or three 20-ounce bottles.
Max’s Beach Hut sells three types of cold drinks:
1. Licious-Ade in 12-oz. cans for \(1.40 per can
2. Licious-Ade in 20-oz. bottles for \)1.90 per bottle
3. Pep-Cola in 20-oz. bottles for \(2.20 per bottle
Max’s Beach Hut pays its suppliers:
1. \)0.20 per 12-oz. can of Licious-Ade
2. \(0.35 per 20-oz. bottle of Licious-Ade
3. \)0.55 per 20-oz. bottle of Pep-Cola
Max’s Beach Hut’s monthly fixed costs include:
Hut rental \(355
Refrigerator rental 65
Max’s salary 1,700
Total fixed costs \)2,120
Max’s Beach Hut can sell all the drinks stocked in the display case each morning.
Requirements
1. What is Max’s Beach Hut’s constraining factor? What should Max stock to maximize profits?
2. Suppose Max’s Beach Hut refuses to devote more than 80 linear feet to any individual product. Under this condition, how many linear feet of each drink should Max’s stock? How many units of each product will be available for sale each day?
Grimm Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes:
Direct materials \(500
Direct labor 1,000
Variable manufacturing overhead 200
Fixed manufacturing overhead 1,200
Total manufacturing cost \)2,900
Number of cakes ÷ 100
Cost per cake \(29
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Grimm expects to retain the equipment. Grimm can buy the cakes for \)25.
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