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# Barker Company has a single product called a Zet.

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Question#2

Problem 13-22 Relevant Cost Analysis in a Variety of Situations [LO2, LO3, LO4]
Barker Company has a single product called a Zet. The company normally produces and sells 80,000 Zets each year at a selling price of \$40 per unit. The company's unit costs at this level of activity are given below:

Direct materials \$ 9.50
Direct labor 10.00
Fixed manufacturing overhead 5.00 (\$400,000 total)
Variable selling expenses 1.70
Fixed selling expenses 4.50 (\$360,000 total)
Total cost per unit \$ 33.50

A number of questions relating to the production and sale of Zets are given below. Each question is independent.
Requirement 1:
(a)
Assume that Barker Company has sufficient capacity to produce 100,000 Zets each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 25% above the present 80,000 units each year if it were willing to increase the fixed selling expenses by \$150,000. Compute the Incremental net operating income. (Omit the "\$" sign in your response.)
Incremental net operating income \$____________
b) Would the increased fixed selling expenses be justified? A) YES B (N0)

Requirement 2:
Assume again that Barker Company has sufficient capacity to produce 100,000 Zets each year. The company has an opportunity to sell 20,000 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total \$14,000. The only selling costs that would be associated with the order would be \$1.50 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Break-even price per unit \$ ____________

Requirement 3:
One of the materials used in the production of Zets is obtained from a foreign supplier. Civil unrest in the supplier's country has caused a cutoff in material shipments that is expected to last for three months. Barker Company has enough material on hand to operate at 25% of normal levels for the three-month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plant would reduce fixed manufacturing overhead costs by 40% during the three-month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the three-month period? (Input the amount as positive value. Omit the "\$" sign in your response.)

Profits would __________ by \$____________

Requirement 4:
The company has 500 Zets on hand that were produced last month and have small blemishes. Due to the blemishes, it will be impossible to sell these units at the normal price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Relevant cost is \$ ____________ per unit

Requirement 5:
An outside manufacturer has offered to produce Zets and ship them directly to Barker's customers. If Barker Company accepts this offer, the facilities that it uses to produce Zets would be idle; however, fixed manufacturing overhead costs would continue at 30%. Since the outside manufacturer would pay for all shipping costs, the variable selling expenses would be reduced by 60%. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Quotation must be __________ than \$____________ per unit.

Question #3
Exercise 13-5 Utilization of a Constrained Resource [LO5]
Banner Company produces three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:

Product
A B C
Selling price \$ 60 \$ 90 \$ 80
Variable costs:
Direct materials 27 14 40
Direct labor 12 32 16
Variable manufacturing overhead 3 8 4
Total variable cost 42 54 60
Contribution margin \$ 18 \$ 36 \$ 20
Contribution margin ratio 30 % 40 % 25 %

Due to a strike in the plant of one of its competitors, demand for the company's products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labor rate is \$8 per hour, and only 3,000 hours of labor time are available each week.

Requirement 1:
Compute the amount of contribution margin that will be obtained per hour of labor time spent on each product. (Omit the "\$" sign in your response.)

A B C
Contribution margin \$ ____________ \$ ____________ \$ ____________

Requirement 2:
Since labor time seems to be the company's constraint, identify the product, which the company should work on next week.

(a) Product A
(b) Product B
(c) Product C

Requirement 3:
By paying overtime wages, more than 3,000 hours of direct labor time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? (Omit the "\$" sign in your response.)

The upper limit of overtime wages for product A \$ ____________
The upper limit of overtime wages for product B \$ ____________
The upper limit of overtime wages for product C \$ ____________

#4

Question 4:
Exercise 13-12 Sell or Process Further [LO6]
Morrell Company produces several products from processing krypton, a rare mineral. Material and processing costs total \$30,000 per ton, one-third of which are allocated to the product merifulon. The merifulon produced from a ton of krypton can either be sold at the split-off point, or processed further at a cost of \$13,000 and then sold for \$60,000. The sales value of merifulon at the split-off point is \$40,000.

Required:
Should merifulon be processed further or sold at the split-off point?

(a) Should be processed further.
(b) Should be sold at the split off point.

Question #1

Exercise 13-1 Identifying Relevant Costs [LO1]
The following are the situations faced by the management of Poulsen & Sonner A/S, a Danish furniture manufacturer

1. The company chronically runs at capacity and the old Model A3000 machine is the company's constraint. Management is considering the purchase of a new Model B3800 machine to use in addition to the company's present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before, with the new Model B3800 being used to expand production. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead

2. The old Model A3000 machine is not the company's constraint, but management is considering replacing it with a new Model B3800 machine because of the potential savings in direct materials cost with the new machine. The Model A3000 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste.

Required:
Indicate whether each item is relevant or not relevant in the above situations. Situation 1 relates to case 1, and situation 2 relates to case 2. Consider the two cases independently
Item Case 1 Case 2
a. Sales revenue __________ __________
b. Direct materials __________ __________
c. Direct labor __________ __________
d. Variable manufacturing overhead __________ __________
e. Book value-Model A3000 machine __________ __________
f. Disposal value-Model A3000 machine __________ __________
g. Depreciation-Model A3000 machine __________ __________
h. Market value-Model B3800 machine (cost) __________ __________
i. Fixed manufacturing overhead __________ __________
j. Variable selling expense __________ __________
k. Fixed selling expense __________ __________

#### Solution Preview

Question#2

Problem 13-22 Relevant Cost Analysis in a Variety of Situations [LO2, LO3, LO4]
Barker Company has a single product called a Zet. The company normally produces and sells 80,000 Zets each year at a selling price of \$40 per unit. The company's unit costs at this level of activity are given below:

Direct materials \$ 9.50
Direct labor 10.00
Fixed manufacturing overhead 5.00 (\$400,000 total)
Variable selling expenses 1.70
Fixed selling expenses 4.50 (\$360,000 total)
Total cost per unit \$ 33.50

A number of questions relating to the production and sale of Zets are given below. Each question is independent.
Requirement 1:
(a)
Assume that Barker Company has sufficient capacity to produce 100,000 Zets each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 25% above the present 80,000 units each year if it were willing to increase the fixed selling expenses by \$150,000. Compute the Incremental net operating income. (Omit the "\$" sign in your response.)
Incremental net operating income \$170,000
b) Would the increased fixed selling expenses be justified? A) YES B (N0)

Net operating income at 80,000 units = 80,000(40 - 33.50) = 520,000

Net operating income at 100,000 units = 100,000(40 - (9.50 + 10 + 2.80 + 400,000/100,000 + 1.70 + 510,000/100,000)) = 690,000

Requirement 2:
Assume again that Barker Company has sufficient capacity to produce 100,000 Zets each year. The company has an opportunity to sell 20,000 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total \$14,000. The only selling costs that would be associated with the order would be \$1.50 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Break-even price per unit \$ 27.80

Break-even price per unit = 9.50 + 10 + 2.80 + 400,000/100,000 + 1.50 = 27.80

Requirement 3:
One of the materials used in the production of Zets is obtained from a foreign supplier. Civil unrest in the supplier's country has caused a cutoff in material shipments that is expected to last for three months. Barker Company has enough material on hand to operate at 25% of normal levels ...

#### Solution Summary

This solution is comprised of a detailed explanation to compute the Incremental net operating income.

\$2.19