Q1. The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. Either way production can not continue using the current equipment.
New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value.
Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a five-year contract.
Hyatt Company’s present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year:
Fixed Overhead ($0.80 supervision, $0.90 depreciation,
and $2 general company overhead)
Total Cost per Unit
The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company’s total general company overhead would not be affected by this decision. Assume direct labour is a variable cost.
Assume that 40,000 subassemblies are needed each year. Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action. (10 Marks)
Q2. Benjamin Signal Company produces products R, J, and C from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin’s operations for the current year are as follows:
Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000.
Which products should be processed beyond the split-off point? (10 marks – show your work)
Q3. Madison Optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago. Selected information on the two machines is given below:
Ignore income taxes and the time value of money in this problem.
Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years. (10 marks)
Be careful with depreciation in this question. You are looking at the decision in terms of cashflows rather than traditional accounting expense recording. Depreciation is designed to recover, over time, the cash expended for an asset purchase.
Q4. Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow:
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Total Manufacturing Cost per Unit
An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If Kramer Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided [think carefully as to what cost amount will ultimately have to be consider in the decision. Often a cost avoided means that under one decision option that is the cost to be factored in. Don’t be thrown off by the terminology ‘avoided’]. Assume that direct labour is a variable cost.
a) Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, should Kramer Company accept the offer? Fully support your answer with appropriate calculations. (8 marks)
b) Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps? (2 marks)
Q5. Juanita earns $68,000 annually as a marketing specialist in Mexico City, Mexico. She has applied for admission to the M.B.A program at Dalhousie University. If accepted, she will resign and move to Halifax, Nova Scotia. Juanita has assembled the following data to make the decision:
Juanita’s annual salary $ 68,000
Annual tuition and fees 14,000
Annual book and supply expense 3,000
Monthly living expenses in Mexico City 800
Monthly living expenses in Halifax 1,600
Monthly auto expenses in Mexico City 350
Monthly auto expenses in Halifax 350
Cost of two business suits purchased just prior to resigning 600
Moving expenses 5,500
a) Calculate the following in the context of Juanita’s decision:
(i) Total sunk costs (if any) (2 marks)
(ii) Total annual differential or incremental costs (if any) (4marks)
(iii) Total annual opportunity costs (if any) (2 Marks)
b) What is your best estimate of the total cost to Juanita of earning an M.B.A. degree if it will take her 12 months to complete the program? (1 mark)
c). Suppose you are Juanita. What specific additional information would you need in order to make a rational decision to pursue and successfully complete the MBA program at Dalhousie? Explain.
Know the meaning of each cost category well
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