E7-11 Kirk Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Spock, Uhura, and Sulu. Each of these products can be sold as is, or each can be processed further and sold for a higher price. The company incurs joint costs of $180,000 to process one batch of the raw material that produces the three joint products. The following cost and sales information is available for one batch of each product.
Determine whether each of the three joint products should be sold as is, or processed further.
Prepare incremental analysis for whether to sell or process materials further.
P7–3A Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week, 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $240,000.
FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25-ounce bottle.
The company decided not to process the table cleaner into TSR and TP based on the following analysis.
|Production in ounces||300,000||300,000||300,000|
|Weekly gross profit||$134,000
*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
Determine if management made the correct decision to not process the table cleaner further by doing the following.
- Calculate the company’s total weekly gross profit assuming the table cleaner is not processed further.
- Calculate the company’s total weeklygross profit assuming the table cleaner is processed further.
(2) Gross profit $186,000
- Compare the resulting net incomes and comment on management’s decision.
Using incremental analysis, determine if the table cleaner should be processed further.
Compute gain or loss, and determine if equipment should be replaced.
E8–2 Eckert Company is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large potential market. Because of competition, Eckert does not believe that it can charge more than $90 for LittleLaser. At this price, Eckert believes it can sell 100,000 of these laser guns. Eckert will require an investment of $8,000,000 to manufacture, and the company wants an ROI of 20%.
Determine the target cost for one LittleLaser.
Compute target cost and cost-plus pricing
E8–6 Alma’s Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,352,000 in the studio and expects a return on investment (ROI) of 20%. Budgeted costs for the coming year are as follows.
|Direct materials (CDs, etc.)||$ 20|
|Variable overhead||$ 50|
|Variable selling and administrative expenses||$ 40|
|Fixed selling and administrative expenses||$500,000|
- Determine the total cost per session.
- Determine the desired ROI per session.
- Calculate the markup percentage on the total cost per session.
- Calculate the target price per session.
Use cost-plus pricing to determine various amounts.
E8-9 Rey Custom Electronics (RCE) sells and installs complete security, computer, audio, and video systems for homes. On newly constructed homes it provides bids using timeand-material pricing. The following budgeted cost data are available.
|Time Charges||Material Loading Charges|
|Technicians’ wages and benefits||$150,000||—|
|Parts manager’s salary and benefits||—||$34,000|
|Office employee’s salary and benefits||30,000||15,000|
|Total budgeted costs||$195,000
The company has budgeted for 6,250 hours of technician time during the coming year. It desires a $38 profit margin per hour of labor and an 80% profit on parts. It estimates the total invoice cost of parts and materials in 2017 will be $700,000.
- Compute the rate charged per hour of labor.
- Compute the material loading percentage.
- RCE has just received a request for a bid from Buil Builders on a $1,200,000 new home. The company estimates that it would require 80 hours of labor and $40,000 of parts. Compute the total estimated bill.
Use time-and-material pricing to determine bill.
P8–5A Gutierrez Company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The Board Division has offered the Chip Division $21 per unit to supply it with chips for 40,000 boards. It has been purchasing these chips for $22 per unit from outside suppliers. The Chip Division receives $22.50 per unit for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Division is $14.50. It estimates that it will save $4.50 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity.
- Calculate the minimum transfer price that the Chip Division should accept. Discuss whether it is in the Chip Division’s best interest to accept the offer.
Suppose that the Chip Division decides to reject the offer. What are the financial implications for each division, and for the company as a whole, of this decision?
(b) Total loss to company $160,000
Determine minimum transfer price under different situations.