Did you ever get answers to the following problem set. If so could you share. 

 Problem Set 

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 INSTRUCTIONS 

Problem 1: DECISION MAKING (KEEP MACHINE OR REPLACE) 

You have been appointed manager of an operating division of The Bluth Company, a producer of frozen bananas. On January 1 of this year, you invested $1 million in new banana freezing equipment. At that time, your expected income statement for this year was as follows: Sales revenues1,800,000 Operating costs:Variable (cash expenditures)225,000 Fixed (cash expenditures)750,000 Equipment depreciation200,000 Other depreciation125,000 Total operating costs1,300,000 Operating profit (before tax)500,000 

On November 15 of this year, a sales representative for the Sitwell Company approaches you. Sitwell wants to rent to your division a new banana freezing machine that would be installed on December 31 for an annual rental charge of $300,000, and would be available for use on January 1st of next year. The new equipment would enable you to increase your division’s annual revenue by 10 percent. The more efficient machine would decrease fixed cash expenditures by 5 percent. You will have to write off the cost of the current banana freezing equipment this year because it has no salvage value. Equipment depreciation shown in the income statement is for the current banana freezing equipment. 

Ignore taxes and any effects on operations on the day of installation of the new machine. Assume that the data given in your expected income statement are the actual amounts for this year and next year if the current equipment is kept. Also, assume that the variable cost per unit does not change. 

Required: 

a) What is the difference in this year’s divisional operating profit if the new machine is rented and installed on December 31 of this year? 

 For this question, please assume that any write-offs from retiring the old machine are recognized in this year (on Dec. 31), and are not deferred until next year. 

 Also, please assume that any depreciation that would have been incurred this year from the old machine is avoided, should it be replaced. 

b) What would be the effect on next year’s divisional operating profit if the new machine is rented and installed on December 31 of this year? 

c) Would you rent the new machine? Please consider both an income and cash flow perspective. 

Problem Set 

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Problem 2: CONTRIBUTION MARGIN / BREAKEVEN 

The Dharma Initiative manufactures and sells one product, cages for polar bears. The sales price, $60 per unit (the cages are not high quality ones), remains constant regardless of volume. Last year’s sales were 10,000 units, and it had an operating loss of $50,000 (i.e., -$50,000). 

Dharma can produce up to 15,000 units per year operating with only a day shift. With only a day shift operating (which was the case last year), fixed costs are $250,000 per year. If demand exceeds 15,000 units, Dharma can also operate a night shift to produce up to an additional 10,000 units. Additional fixed costs to run the night shift are $100,000 per year. Due to its union contract (and the fact that it has to move all the workers to its factory, which is on an island in the Pacific), Dharma must operate the night shift for the entire year or not at all. It cannot operate the night shift for only a portion of a year. Last year it operated only a day shift. 

Variable costs per unit are 20 percent higher during the night shift than the day shift because of the higher wages required for night shift workers under the union agreement. 

Last year’s cost structure and selling price are not expected to change this year. The company sells everything it produces. 

Required: 

a) Compute the contribution margin per unit for each shift. 

b) Compute the break-even point(s). 

c) Compute the volume in units that will maximize operating profits. 

Problem Set 

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Problem 3: DECISION MAKING (MAKE OR OUTSOURCE) 

The Night’s Watch Inc. produces ice machines for a variety of different customers. The costs of manufacturing and marketing ice machines at the company’s normal volume of 4,000 units per month are shown below. A regular selling price of $740 per unit should be assumed. Costs per unit for ice machines:Variable materials120Variable labor140Variable overhead70Fixed overhead100Total manufacturing costs430Variable marketing costs60Fixed marketing costs110Total marketing costs170Total unit costs600

Required: 

a) A proposal is received from an outside contractor who will make and ship 1,250 ice machines per month directly to The Night’s Watch’s customers as orders are received from The Night’s Watch’s sales force. The Night’s Watch’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 1,250 units produced by the contractor. The Night’s Watch’s plant would operate at 68.75 percent of its normal level, and total fixed manufacturing costs would be cut by 30 percent. What in-house unit cost should be used to compare with the quotation received from the supplier? Should the proposal be accepted for a price (that is, payment to the contractor) of $450 per unit? 

b) Assume the same facts as above in requirement (a) except that the idle facilities would be used to produce 600 enhanced ice machines per month. These enhanced ice machines can make ice blocks as big as a person, and could be sold for $1,000 each. Each enhanced ice machine costs an additional $50 in variable materials, an extra $100 in variable labor, and an extra $70 in variable overhead per unit, relative to the cost of a regular ice machine. Furthermore, these enhanced ice machines incurred an extra $90 in marketing costs per unit over the regular ice machines.1 Fixed marketing and manufacturing costs would be unchanged whether the original 4,000 regular ice machines were manufactured or the mix of 2,750 regular ice machines plus 600 enhanced ice machines were produced. What is the maximum purchase price per unit that The Night’s Watch should be willing to pay the outside contractor, assuming it could sell all 600 enhanced ice machines? Should the proposal be accepted for a price of $450 per unit to the contractor? 

1 Please note that these additional variable manufacturing costs and variable marketing costs per unit ONLY apply to the enhanced ice machines, and not the regular ice machines. Furthermore, please note that these extra costs should be added to the costs of the regular ice machines to get the cost of the enhanced ice machines. For example, the variable materials per enhanced ice machine is $120 + $50 = $170. Problem Set 

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Problem 4: CONTRIBUTION MARGIN 

The divisional accountant for Vandalay Industries (a producer of latex products) has prepared the following budget (on a per unit basis) for the fourth quarter: OH rate per DL hour 24.00 Cost per DL hour 10 A B Planned production 25,000 12,500 DL hours per unit 1.00 0.50 OH per unit 24.00 12.00 Direct materials 15 15 Direct labor 10 5 Price 32 26 

All direct material and direct labor costs are variable. Direct labor costs $10 per hour. The fourth quarter estimated production of Product A is 25,000 units and the estimated production of Product B is 12,500 units. Each product is sold independently. The firm has no step costs. Variable overhead is driven by the number of direct labor hours, which is also used to apply all overhead costs to the product. Total overhead costs have exhibited the following behavior in the previous three quarters, and this cost behavior is expected to persist in the future: Quarter Total Overhead ($) Direct Labor Hours 1 615,000 20,000 2 687,000 26,000 3 639,000 22,000

Required: 

Assume that fixed costs are unavoidable and all variable costs are avoidable. Should the company produce Product A, Product B, both, or neither?