Case 14-56 (Page 668) QUESTION 1 Identify and explain the costs that will be relevant to Cathy Donatos

analysis of the special order being considered by Winners Circle, Inc

1. The cost that will be relevant in Cathy Donato's analysis of the special order being considered by Winner's Circle, Inc. are those expected future costs that are applicable to a particular decision (the cost that will differ between the alternatives of accepting or rejecting the offer). 2. Only the variable costs of labor and material are relevant. Since the order was received directly by Winner's Circle, variable marketing is not relevant, because additional marketing costs will not be incured under this order. 3. The fixed costs also not relevant, because no additional capital investments are needed to meet the order. The firm is operating below full capacity and will be able to absord this order. (fixed costs typically will not change in total, whether the order is accepted or rejected)

QUESTION 2 Determine if Winner's Circle should accept the special order. In explaining your answer, compute both the new average unit cost and the incremental unit cost for the special order.

Current Monthly Production ($175) Units produced Sales (-)Variable costs: Direct Labor Direct Material Marketing Total Variable costs 7,500 1,312,500 375,000 262,500 187,500 825,000

Special Order ($100) 2,500 250,000 125,000 87,500 212,500

Combined Production 10,000 1,562,500 500,000 350,000 187,500 1,037,500

(7500x$175)

(2500x$100) (375000/7500x2500) (262,500/7500x2500)

Contribution margin(sales-total variable) (-)Fixed costs: Manufacturing Marketing Total fixed costs Profit Cost per unit: Variable cost per unit Fixed cot per unit Averange cost per unit.

487,500

37,500

525,000 275,000 175,000 450,000 75,000

275,000 175,000 450,000 37,500

37,500

110.00 60.00 170.00

85.00 $ 85.00 $

103.75 45.00 148.75

*total variable cost/unit produced = variable incremental cost per unit *total fixed cost/unit produced = fixed cost per unit *total cost/unit produced = average cost per unit 1. Winner's Circle should accept the offer. Winner's Circle has the capacity to produce 10,000 unit of medal per month.Although the average unit cost of $148.75 is higher than the price offered, the unit incremental cost for special order is only $85.00 ($170-$85). 2. By accepting the special order will result in a contribution per unit of of $15.00 ($100.00 - $85.00) and a total additional contribution margin of $37,500 (2500 units x $15.00).

QUESTION 3 Discuss any other consideration that Donato should include in her analysis of the special order. Other solution that Donato should include in her analysis of the special order are as below: 1. Possible problems with other customers who pressure the company for similar treatment. (Before decison is made, the problem needs to be clarified and defined in more specific terms)

2. The future customer potential of the buyer of the special order, generating additional revenues 3. To maintain the product quality 4. Determine objective to accept the special order if it can minimized the production cost or to maximized the profit.

QUESTION 4 What steps could Donato take to resolve the ethical conflict arising out of the controller's insistence that the company avoid competitive bidding? Donata could try to resolve the ethical conflict arising out of the controller's insistence that the company avoid competitive bidding by taking the following steps: 1. Donata should follow the company's extablished policies on such matters. 2. If such policies does not exist, or if they do not resolve the conflict, Donato should discuss the situation with her manager. Unless, as in this case, the manager is involved in the conflict. Then Donato should discuss the situation with the manager's supervisor. 3. If this approach did not help Donato to resolve the matter, then she should continue going to the next-higher managerial level, including the audit committee of the board of directors, if necessary. 4. Donato should clarify relevant concepts by confidential discussions with an objective advisor to obtain an understanding of possible courses of action. 5. If the ethical conflict still exists after exhausting all of these avenues of internal review, Donato may have to resign from the company and submit an informative memorandum to the board of directors.

QUESTION 5

Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (2). Show how the solution will change if the sales price is $170 per medal. Current Monthly Production ($175) Units produced Sales (-)Variable costs: Direct Labor Direct Material Marketing Total Variable costs Contribution margin(sales-total variable) (-)Fixed costs: Manufacturing Marketing Total fixed costs Profit Cost per unit: Variable cost per unit Fixed cot per unit Averange cost per unit. 7,500 1,312,500 375,000 262,500 187,500 825,000 487,500 Special Order ($170) 2,500 425,000 125,000 87,500 212,500 212,500 Combined Production 10,000 1,737,500 500,000 350,000 187,500 1,037,500 700,000 275,000 175,000 450,000 250,000

(7500x$175)

2500x$170) (375000/7500x2500) (262,500/7500x2500)

275,000 175,000 450,000 37,500

212,500

110.00 60.00 170.00

85.00 $ 85.00 $

103.75 45.00 148.75

1. Average cost per unit of $85.00 still remain and does not change when the sales price of special order increase. 2. Contribution Margin increase to $212,500.00 for special order itself and contribution per unit increase to $85.00 ($212,500/2500). Accepting the special order will definitely incur profit for Winner's Circle as shown in the above calculation.

Differential 2,500 250,000 125,000 87,500 irrelevant cost 212,500

37,500 Contributes toward covering the fixed costs irrelevant cost 37,500

6.25 15.00 21.25

Differential 2,500 425,000 125,000 87,500 irrelevant cost 212,500 212,500 irrelevant cost 212,500

6.25 15.00 21.25

Case 14.49 (Page 663) Company : Casting Technology Resources (CTR) Purchase pump : 10,000 unit/annum @ less RM68 per unit The problem : pump price increase to RM68/unit Report submitted to management as below;

Components (outside purchases)110,000 Assembly labor 300,000 Manufacturing overhead 450,000 fix+varieable OH General and administrative overhead 43,000 TOTAL COST $ 903,000 or

90.3 per unit

Was the analysis prepared by Casting Technology Resources' engineering, manufacturing and accounting departments and their recommendation to continue purchasing the pumps correct? Explain your answer and include any supporting calculations you consider necessary. 1. The analysis prepared by the engineering, manufacturing and accounting departments of Casting Technology Resources (CTR) was not correct. 2. However, their recommendation was correct, provided that potential labor-cost improvements are ignored. 3. An incremental cost analysis similar to the following table should have been prepared to determine whether the pump should be purchased or manufactured. 4. In the following analysis, fixed factory overhead costs and general and admintrative overhead costs have not been included because they are not relevant. (these costs would not increase because no additional equipment, space or supervision would be required if the pumps were manufactured). 5. Therefore, if potential labor cost improvements are ignored, CTR should purchase the pumps because the purchase price of $68.00 is less than $71.00 relevant cost to manufacture.

Manufactured cost Purchased components Assembly labor Variable manufacturing overhead Total relevant cost

Cost of 10,000 Unit Cost per Unit Assembly Run 110,000 11 300,000 30 300,000 30 $ 710,000.00 $ 71.00

Note; Fixed overhead 50% of direct-labor dollars Variable overhead 100% of direct-labor dollars Manufacturing overhead 150% rate of direct-labor dollars

71

cost per unit