Workshop week 4 - in class assignment PDF

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in class assignment...

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E 19.24 International Chemical Company (ICC) recently received an order for a product that it does not normally produce. Since the company has spare production capacity, management is considering accepting the order. In analysing the decision, the assistant accountant is compiling the relevant costs of producing the order. Production of the special order would require 8 000 kilograms of theolite. International Chemical Company does not use theolite for its regular product, but the firm has 8 000 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for $29 000. The carrying amount of the theolite is $4 per kilogram. International Chemical Company could buy theolite for $4.80 per kilogram. Required: 1. What is the relevant cost of theolite for the purpose of analysing the special-order decision? 2. Discuss each item of numerical data given in the exercise about its relevance in making the decision.

Answer: 1. The relevant cost of the theolite to be used in producing the special order is the $29,000 sales value that the company will forego if it uses the chemical. This is an example of an opportunity cost. 2. A) $29,000 sales value B) $32,000 carrying amount (8000 kg * $4 per kg); This is irrelevant as this is a sunk cost and no decision now can change it C) $38,400 current purchase price (8000 kg * $4.80 per kg); this is irrelevant as the company will not be buying any more theolite. E 19.25Refer to the data given in Exercise E19.24. International Chemical Company’s special order also requires 1 000 kilograms of genatope, a solid chemical regularly used in the company’s products. The current stock of genatope is 8 000 kilograms at a carrying amount of $16.20 per kilogram. If the special order is accepted, the firm will be forced to restock genatope earlier than expected, at a predicted cost of $17.40 per kilogram. Without the special order, the purchasing manager predicts that the price will be $16.60 when normal restocking takes place. The order size for genatope is 5 000 kilograms. Required: 1. What is the relevant cost of genatope? 2. Discuss each item of numerical data detailed in this exercise in terms of its relevance to the decision. Answer: 1 Relevant cost Cost of replacing 1000kg @17.40 = 17,400 Additional cost of buying 4000kg @17.40 - $16.60 = 3,200 Total Relevant Cost = 17,400 + 3,200 = $20,600

2 the carrying amount $16.20 = $ 129000 (irrelevant sunk cost) Gen $17.40/kg

P 19.34 Part 1 : Assume that present sales will not be affected. Should the order be accepted from a financial point of view. That is, is it profitable? Why? Show calculations.

Existing fixed overhead/ unit = $75000/60,000 machine hour = $12.50/ Machine hour Variable overhead/unit = $40 - $12.50 = $27.5/ machine hour Selling price = $31.50 Less variable costs: Direct material ($16.40 - $4.20)

12.2

Direct labour

4.50

Overhead (0.5 machine hour*27.5) 13.75 Total =

30.45

Unit Contribution Margin = $ 1.05 Contribution to profit = $1.05 *11,000 = 11,550 Less additional fixed costs: Setup costs

$7400

Special device

$4800

Net contribution to profit = (650) No, the order should not be accepted.

Part 2 : Assume that Mercury’s current production activity consumes 70 per cent of planned machine-hour activity. Can the company accept the order and meet Venus’ deadline? Required machine hours (0.5 * 11,000)

=5500

Available machine hours Total planned machine hours (5000*3) 15000 Current usage (70% * 15000)

(10,500)

=4500

The company should not accept the order as it does not have enough machine hours to support the production

Part 3 : What options might Mercury consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm? • Jupiter could outsource some or all the required units • Jupiter could acquire additional machine capacity • Jupiter could have its employees work overtime, recognizing that the overtime pay would increase the direct labour cost • Jupiter could sacrifice some of its current business with the hope that the long-term relationship would be established with Venus...