ACCT 386 - Week 7 - Homework 7

ACCT 386 - Week 7 - Homework 7
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ACCT 386 - Week 7 - Homework 7

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Question 1

Blueline Tours, Inc., operates tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours to improve the company’s overall operating performance.

     One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from a typical Historic Mansions tour is given below:






  Ticket revenue (105 seat capacity × 40%
    occupancy × $70 ticket price per person)





  Variable expenses ($15.00 per person)






  Contribution margin






  Tour expenses:





     Tour promotion





     Salary of bus driver





     Fee, tour guide





     Fuel for bus





     Depreciation of bus





     Liability insurance, bus





     Overnight parking fee, bus





     Room and meals, bus driver and tour guide





     Bus maintenance and preparation








  Total tour expenses








  Net operating loss








The following additional information is available about the tour:


Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.


The “Bus maintenance and preparation” cost on the previous page is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company’s fleet of buses in good operating condition.


Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible.


Liability insurance premiums are based on the number of buses in the company’s fleet.


Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.


Question 2

(Prepared from a situation suggested by Professor John W. Hardy.) Abilene Meat Processing Corporation is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as is or to process them further into filet mignon and New York cut steaks.

       Management believes that a 1-pound T-bone steak would yield the following profit:




  Wholesale selling price ($2.40 per pound)



  Less joint costs incurred up to the split-off point where
    T-bone steak can be identified as a separate product




  Profit per pound




       As mentioned above, instead of being sold as is, the T-bone steaks could be further processed into filet mignon and New York cut steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut. A one pound (16-ounce) T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. The cost of processing the T-bone steaks into these cuts is $0.17 per pound. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold wholesale for $3.80 per pound.


Question 3

Hallas Company manufactures a fast-bonding glue in its Northwest plant. The company normally produces and sells 44,000 gallons of the glue each month. This glue, which is known as MJ-7, is used in the wood industry to manufacture plywood. The selling price of MJ-7 is $34 per gallon, variable costs are $21 per gallon, fixed manufacturing overhead costs in the plant total $229,000 per month, and the fixed selling costs total $300,000 per month.

      Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Hallas Company’s sales to temporarily drop to only 13,000 gallons per month. Hallas Company’s management estimates that the strikes will last for two months, after which sales of MJ-7 should return to normal. Due to the current low level of sales, Hallas Company’s management is thinking about closing down the Northwest plant during the strike.

      If Hallas Company does close down the Northwest plant, fixed manufacturing overhead costs can be reduced by $70,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $13,000. Because Hallas Company uses Lean Production methods, no inventories are on hand.


Question 4

Pietarsaari Oy, a Finnish company, produces cross-country ski poles that it sells for €32 a pair. (The Finnish unit of currency, the euro, is denoted by €.) Operating at capacity, the company can produce 55,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below:


Per Pair


  Direct materials




  Direct labor






  Variable manufacturing overhead






  Fixed manufacturing overhead






  Variable selling expense






  Fixed selling expense







  Total cost







Question 5

Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company’s Zippo pen line, at a price of $0.58 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.

         Bronson Company estimates that if the supplier’s offer were accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%.

         Under present operations, Bronson Company manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $8 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total $40,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pens (one box) is given below:





  Direct materials




  Direct labor




  Manufacturing overhead





  Total cost





* Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year.


Question 6

Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for use in the production of its circuit boards. The machine would cost $800,000. (All currency amounts are in Singapore dollars.) An additional $560,000 would be required for installation costs and for software. Management believes that the automated machine would provide substantial annual reductions in costs, as shown below:


Annual Reduction
in Costs

  Labor costs



  Material costs



   The new machine would require considerable maintenance work to keep it properly adjusted. The company’s engineers estimate that maintenance costs would increase by $5,010 per month if the machine were purchased. In addition, the machine would require a $97,000 overhaul at the end of the sixth year.
     The new etching machine would be usable for 10 years, after which it would be sold for its scrap value of $404,000. It would replace an old etching machine that can be sold now for its scrap value of $67,000. Tiger Computers, Inc., requires a return of at least 15% on investments of this type. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.


Question 7
Nagoya Amusements Corporation places electronic games and other amusement devices in supermarkets and similar outlets throughout Japan. Nagoya Amusements is investigating the purchase of a new electronic game called Mystic Invaders. The manufacturer will sell 20 games to Nagoya Amusements for a total price of ¥166,000. (The Japanese currency is the yen, which is denoted by the symbol ¥.) Nagoya Amusements has determined the following additional information about the game:

a.    The game would have a 5-year useful life and a negligible salvage value. The company uses straight-line depreciation.
b.    The game would replace other games that are unpopular and generating little revenue. These other games would be sold for a total of ¥23,000.
c.    Nagoya Amusements estimates that Mystic Invaders would generate annual incremental revenues of ¥209,000 (total for all 20 games). Annual incremental out-of-pocket costs would be (in total): maintenance, ¥44,000; and insurance, ¥8,000. In addition, Nagoya Amusements would have to pay a commission of 48% of total revenues to the supermarkets and other outlets in which the games were placed. (Ignore income taxes.)

Question 8
Dr. Heidi Black is the managing partner of the Crestwood Dental Clinic. Dr. Black is trying to determine whether or not the clinic should move patient files and other items out of a spare room in the clinic and use the room for dental work. She has determined that it would require an investment of $121,500 for equipment and related costs of getting the room ready for use. Based on receipts being generated from other rooms in the clinic, Dr. Black estimates that the new room would generate a net cash inflow of $18,000 per year. The equipment purchased for the room would have a thirteen-year estimated useful life. (Ignore income taxes.)
Click here to view Exhibit 13B-2, to determine the appropriate discount factor using tables.