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Outside Supplier, Production Budget, Overhead Rates, & Price

Question 1

Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit
of the components is as follows:
Direct materials $10
Direct labor 14
Variable overhead 6
Fixed overhead 8
Total unit cost $38
Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for $32.

a. What is the effect on income if Solomon purchases the component from the outside supplier?
b. Assume that Solomon can avoid $50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

Question 2

Dusty Company manufactures oak porch swings. Budgeted sales for the first four months of the year are as follows:
Budgeted Sales (Units)
January 320
February 280
March 340
April 240
Each porch swing requires 15 square feet of oak, at a cost of $20 per square foot.
The company wants to maintain an inventory of swings equal to 20 percent of the following month's sales. At the beginning of the year, 40 swings are on hand.
Assume the company maintains an inventory of oak equal to 10 percent of the next month's needs. At the beginning of the year, 500 square feet of oak are on hand. Inventory of oak at March 31 is estimated to be 400 square feet.

a. Prepare a production budget, in units, for each of the first three months of the year.
b. Prepare a purchases budget, in dollars, for direct materials for each of the first three months of the year.

Question 3

Mills Company uses standard costing for direct materials and direct labor. Management would like to use standard costing for variable and fixed overhead.
The following monthly cost functions were developed for manufacturing overhead items:
Overhead Item Cost Function
Indirect materials $0.40 per DLH
Indirect labor $0.50 per DLH
Utilities $0.20 per DLH
Insurance $4,000
Depreciation $16,000
The cost functions are considered reliable within a relevant range of 20,000 to 40,000 direct labor hours. The company expects to operate at 25,000 direct labor hours per month.
Information for the month of September is as follows:
Actual overhead costs incurred:
Indirect materials $10,400
Indirect labor 12,000
Utilities 4,800
Insurance 4,400
Depreciation 16,000
Total $47,600
Actual direct labor hours worked 24,000
Standard direct labor hours
allowed for production achieved 27,000

a. Calculate the following standard overhead rates based upon expected capacity:
Variable overhead rate
Fixed overhead rate
Total overhead rate
b. Calculate the following variances:
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending variance
Fixed overhead volume variance

Question 4

Brown Industries has two divisions: the Hank Division and the Murray Division. Information about a component that the Hank Division produces is as follows:
Sales $150 per unit
Variable manufacturing costs $60 per unit
Fixed manufacturing overhead $40 per unit
Expected sales in units 20,000 units
The Hank Division can produce up to 22,000 components per year. The Murray Division needs 1,000 units of the component for a product it manufactures.

a. Determine the minimum transfer price that the selling division would be willing to accept.
b. Determine the maximum transfer price that the buying division would be willing to pay.
c. If the Hank Division did not have excess capacity, what would be the correct transfer price?

Question 5

Information about Ray Industries is as follows

Last Year Current Year
Output (units) 400,000 420,000
Selling price per unit $20 $20
Input quantities:
Materials (pounds) 125,000 100,000
Labor (hours) 80,000 80,000
Input prices:
Materials (per pound) $7 $8
Labor (per hour) $10 $11

a. Calculate the materials productivity ratio and the labor productivity ratio for last year and this year.
b. Did materials productivity improve?
c. Did labor productivity improve?
d. By how much did profits change as a result of changes in productivity?
e. How much of the profit change is attributable to price recovery?

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Solution Summary

The solution discusses managerial components that include the outside supplier, production budget, overhead rates and transfer price.