Problem-1
Adams County Area on Aging is a nonprofit organization that helps its senior residents live in their own homes by providing three essential services. These services are home health care, meal delivery and housekeeping. In the home health care program, trained aides visit seniors on a regular basis to provide companionship, meal preparation, and some health care. The meal delivery program provides daily delivery of a hot meal. The housekeeping service provides weekly housecleaning services. Data on revenue and expenses for the past year is shown below:
The director of the Adams County Area on Aging is concerned about the organization’s finances. Last year’s results were similar to the results for previous years and are representative of what would be expected in the future. The director believes the net operating income of $5,000 last year is too small for the organization to be sustainable in the face of anticipated rising costs and an upcoming recession. The director has asked for more information about the financial advisability of discontinuing the housekeeping program.
The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a chartable organization. Depreciation charges assume zero residual value. The liability insurance and the salary of the program administrator would be avoided if the housekeeping program were dropped, however, the general administrative overhead would not be avoided.
1. Should the housekeeping program be discontinued? Your answer should be fully explained with computations to support your answer.
2. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services.
| Total | Home Health Care | Meal Delivery | House-keeping | |
| Revenues | $870,000 | $250,000 | $390,000 | $230,000 |
| Variable expenses | $490,000 | $120,000 | $210,000 | $160,000 |
| Contribution margin | $380,000 | $130,000 | $180,000 | $70,000 |
| Fixed expenses: | ||||
| Depreciation | $60,000 | $5,000 | $35,000 | $20,000 |
| Liability insurance | $36,000 | $17,000 | $7,000 | $12,000 |
| Program administrators’ salaries | $106,000 | $37,000 | $35,000 | $34,000 |
| General administrative overhead* | $173,000 | $51,000 | $78,000 | $44,000 |
| Total fixed expenses | $375,000 | $110,000 | $155,000 | $110,000 |
| Net operating income (loss) | $5,000 | $20,000 | $25,000 | -$40,000 |
| *Allocated on the basis of program revenues |
Problem-2
Bikes-R-Us manufactures a variety of bicycles. Currently, the company manufactures all of its own component parts. An outside supplier has offered to sell gears to Bikes-R-Us for $25 per unit. To evaluate this offer, Bikes-R-Us has gathered the following information relating the costs of producing the gears internally:
| Per Unit | 5,000 Units per Year | |
| Direct materials | $7 | $35,000 |
| Direct labor | $8 | $40,000 |
| Variable manufacturing overhead | $1 | $5,000 |
| Fixed manufacturing overhead, traceable | $6 | $30,000 |
| Fixed manufacturing overhead, common, but allocated | $10 | $50,000 |
| Total cost | $32 | $160,000 |
| *40% supervisory salaries; 60% depreciation of special equipment |
1. Assuming that the company has no alternative use for the facilities now being used to produce the gears, should the outside supplier’s offer be accepted? Show all computations.
2. Suppose that if the gears were purchased, Bikes-R-Us could use the freed capacity to launch a new bicycle. The segment margin of the new bicycle would be $45,000 per year. Should Bikes-R-Us accept the offer to buy the gears from the outside supplier for $25 each? Show all computations.
Problem-3
Sawyer Jewelers is considering a special order for 10 handcrafted gold watches which would be given as retirement gifts. The customer is requesting a special watch face and would like to purchase each watch at a price of $350 for a total purchase price of $3,500. A gold watch normally sells for $390 with a unit product cost of $251.00 as shown below:
| Direct materials | $ 138.00 |
| Direct labor | 83.00 |
| Manufacturing overhead | 30.00 |
| Unit product cost | $ 251.00 |
Most of Sawyer’s manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $5 of the overhead is variable with respect to the number of watches produced. The special watch face would require additional materials costing $6 per watch and would also require the purchase of a special tool costing $356 that would have no other use once the special order is completed. This order would have no effect on the company’s regular sales and the order could be fulfilled using the company’s existing capacity without affecting any other order.
What effect would accepting this order have on the company’s net operating income? Should the special order be accepted at this price?
Problem-4
Majors Design crafts fine upholstered furniture. The bottleneck in the production of Major’s furniture is the time in the upholstery shop. Data regarding three of the company’s top selling chairs appears below:
| Wingback Armchair | Leather Office Chair | Savanah Armchair | |
| Selling price per unit | $1,100 | $1,700 | $1,200 |
| Variable cost per unit | $700 | $1,100 | $900 |
| Upholstery shop time | 7 | 10 | 4 |
| required to produce one unit |
1. One strategy to make more time available in the upholster shop is to ask the employees who work in the upholstery shop to work overtime. If the extra time is used to produce the Leather Office Chairs, up to how much should the company be willing to pay per hour to keep the upholstery shop open after normal working hours? Show all computations.
2. A small, reputable company has offered to upholster furniture for Majors Design at a fixed charge of $50 per hour. Majors Design is confident that this company’s workmanship is of high quality and the speed would be comparable to their own on more simple jobs such as the Savanah Armchair. Should management accept this offer? Explain. Show computations to support your answer.
Problem-5
Appex Corporation manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $100,000 per year. These costs are allocated to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities. The sales values, additional processing costs and the sales value after further processing for each product on an annual basis are shown below:
| Product | Sales Value at Split-Off Point | Additional Processing Costs | Sales Value After Further Processing |
| A | $60,000 | $20,000 | $90,000 |
| B | $100,000 | $35,000 | $140,000 |
| C | $70,000 | $17,000 | $85,000 |
Which product or products should be sold at the split-off point and which product or products should be processed further. Show all computers to support your answer.
