Short Term Decision Making 56 Practice Questions

1. LIMITING FACTOR The below illustration assumes a shortage of diret labour as the limiting resoure onstraint. The details of the om!an" three !rodut lines are as follows# $roduts A % C &elling !rie# '() '*) '+) ,ariable osts# '-) '-) '-) nit Contribution# '+) '-) '1) /0!eted demand 1)))units2 ())units2 3))units To !rodue 1 unit of !rodut the diret labour hours for eah !rodut is# $rodut A # 1) hours2 $rodut % # ( hour $rodut C# 1 hour 4ue to una5ailabilit" of labour su!!l" for the forthoming !eriod it is assumed that the o5erall shortage of labour hours is 11)) hours. 6uestion# 4etermine the !rodution mi0 to ma0imi7e the om!an"8s !rofit. -. MA9/ OR %: Com!an" A has to deide whether to manufature internall" or to bu" or ontrat from outsiders. Com!an" A is able to ontrat with another om!an" to su!!l" them read" ma;e at '( eah. The details of Com!an" A internal !rodution osts are as follows# 4iret material. The ost estimate !er unit based on urrent a!ait" of ?)@ is as follows# ' $er unit 4iret material '-.)) 4iret labour '(.)) ,ariable !rodution o5erhead '+.)) Fi0ed !rodution o5erhead '*.)) Total '1*.)) The om!an" sells the !rodut > to its regular ustomer at '-).)). owe5er a nonB regular ustomer has a!!roahed the om!an" to !urhase the e0ess a!ait" at '1? eah. 6uestion# &hould Com!an" A ae!t this s!eial order= *. ood" Com!an" whih manufatures snea;ers has enough idle a!ait" a5ail able to ae!t a s!eial order of -)))) !airs of snea;ers at '3.)) a !air. The normal selling !rie is '1).)) a !air 5ariable manufaturing ost are ' *.() a !air and fi0ed manufaturing osts are '1.() a !air. ood" will not inur an" selling e0!enses as a result of the s!eial order. hat would the effet on o!erating inome be if the s!eial order ould be ae!ted without affeting normal sales= (. 4i0on Com!an" manufatures !art +*D for use in one of its main !roduts. Normal annual !rodution for !art +*D is 1))))) units. The osts !er 1)) units is as follows Direct material………………... Direct labor………………....... Manufacturing overhead: Variable ………………............ Fixed ………………................ otal co!t! "er 100 unit!……..

$260 100 120 160 $6#0

Ce0t Com!an" has offered to sell 4i0on all 1))))) units it will need during the oming "ear for '3)) !er 1))units. If 4i0on ae!ts the often from Ce0t the failities used to manufature !art +*D ould be used in the !rodution of !art *?+. This hange would sa5e 4i0on 'E)))) in rele5ant osts. Also a '1))))) ost item inluded in the fi0ed fator" o5erhead that is s!eifiall" related to !art +*D would be eliminated. &hould 4i0on Com!an" ae!t the offer from Ce0t Com!an"= 3. Rie Cor!oration urrent l" o!erat es two di5isi ons whish had o!erati ng result s for the "ear ende d 4eember +1 1E>- as follows# ale! Variable co!t! ,ontribution margin Fixed co!t! for the divi!ion Margin over direct co!t! llocated cor"orate co!t! ("eratingincomelo!!3

%& '() D*V**(+ D*V*(+ $600-000 $00-000 10-000 200-000 $2/0-000 $100-000 110-000 0-000 $140-000 $ 0-000 /0-000 #5-000 $/0-000 $15-0003 &ine the tro" di5ision also sustained an o!erating loss during 1E>1 rie !resident is onsidering the elimination of this di5ision. A ssume that the tro" di5ision fi0ed ots ould be a5oided if the di5ision were eliminated. If the tro" di5ision had been eliminated on anuar" 11E0- rie or!oration1E>o!erating inome would ha5e been eual to what amount=

D. The !rodution de!artment of Cronin manufaturing om!an" must ma;e a !rodut mi0 deision in light of a shortage of !ound of diret material. The following data are a5ailable for !rodut 0 and "# PRODUCT X

elling "rice "er unit Direct material! Direct labor Variablefactoroverhead ,ontribution margin "er unit

PRODUCT Y

12 $

10 $

#$

2$

1

 

4 $ # 77777 189

2

 $ 

77777 ,ontribution margin ratio ,M8 ale!3 09 +umber of "ound! of direct material 'euire"erunit 2 1 Maximum!ale!inunit!3 2.000 5-000 4etermine the number of units of !roduts 0 and !roduts " to be !rodued if onl" ?))) !ounds of diret material are a5ailable.

?. %ri;e Com!an" whih manufatures robes has enou gh idle a!a it" a5ail able to ae!t a s!eia l order of 1)))) robes at '? a robe. A robe !redited inome statement for the "ear without this s!eial order is as follows# ale! Manufacturing co!t!: Variable Fixed otal manufacturing co!t! >ro!! "ro?t elling &x"en!e!: Variable Fixed otal elling &x"en!e!

;&' ro!!"ro?t elling&x"en!e! ("eratingincome HHHHHHHH HHHHHH

$/RNIT

#-000-000 $ 10.00 $ $ -200-000 $ 400-000 $ 2.00 00-000 $ .5 $ 500-000 $1.25 H

4.00

Fi0ed osts inluded in the abo5e foreasted inome statement are '1-))))) in manufaturing ost of goods sold and '1))))) in selling e0!enses. A s!eial order offering to bu" ()))) bas;etballs for 'D.() eah was made to %o"er. There will be no additional selling e0!enses if the s!eial order is ae!ted. Assuming %o"er has suffiient a!ait" to manufature ()))) more bas;et balls b" what amount would o!erating inome be inreased or dereased as a result of ae!ting the s!eial order= 11. The manufa turing a!ait " of ordan Com!an"s failities is +)))) writs of !rodut a "ear. A summar" of o!erating results for the "ear ended 4eember +1 1E>- is as follows# ale!14-000unit!@$1003 Variable Manufacturing and !elling co!t! ,ontribution Fixed co!t! Margin ("erating*ncome

$1-400-000 //0-000 $ 410-000 $ #/5-000 $ 15-000

A foreign distributor has offered to bu" 1())) units at 'E) !er unit during 1E>+. Assume that all of ordans osts would be at the same le5els and rates in 1E>+ as in 1E>-. If ordan ae!ted this offer and reJeted some business from regular ustomers so as not to e0eed a!ait" what would be the total rele5ant inome from ae!ting the s!eial offer= 1-. %lade 4i5ision of 4ana Com!an" !rodues hardened steel blades. OneBthi rd of the %lades 4i5ision out!ut is sold to the Lawn $roduts 4i5ision of 4ana# the remainder sold to outside ustomer s. The %lade 4i5isions estimated sales and standard ost dataBfor the fisal "ear ending une +) 1E>1 are as follows# LAN$RO4CT& ale! Variableco!t! Fixed co!t! >ro!! margin