1. Williams Auto has a machine that installs tires. The machine is now in need of repair.

The
machine originally cost $10,000 and the repair will cost $1,000, but the machine will then last
two years. The labor cost of operating the machine is $0.50 per tire. Instead of repairing the old
machine, Williams could buy a new machine at a cost of $5,000 that would also last two years;
the labor cost would then be reduced to $0.25 per tire. Should Williams repair or replace the
machine if it expects to install 10,000 tires in the next two years?

2. Jackson Inc. disposes of other companies’ toxic waste. Currently, Jackson loads the waste by
hand into a truck, which requires labor of $20 per load. Jackson is considering a machine that
would reduce the amount of time needed to load the waste. The machine would cost $200,000
but would reduce labor cost to $5 per load. Assume that Jackson averages 10,000 loads per year.
How many years (rounded to 2 decimal places) would it take for Jackson to recover the cost of
the new machine?

3. Lance’s Diner has a hot-lunch special each weekday and Sunday afternoon. The cost of food and
other variable costs for each meal served is $3.50; weekly fixed costs (e.g., building depreciation
and equipment rental costs) are $6,000, regardless of how many days the diner is open per
week. Lance has an average of 500 customers per day. What is the lowest price in total (not per
meal) that Lance should charge for a special group of 200 that wants to come on Saturday for a
family reunion?

4. Special Order; Opportunity Cost. Grant Industries, a manufacturer of electronic parts, has
recently received an invitation to bid on a special order for 20,000 units of one of its most
popular products. Grant currently manufactures 40,000 units of this product in its Loveland,
Ohio, plant. The plant is operating at 50% capacity. There will be no marketing costs on the
special order. The sales manager of Grant wants to set the bid at $9 per unit because she is sure
that Grant will get the business at that price. Others on the executive committee of the firm
object, saying that Grant would lose money on the special order at that price.
40,000 units 60,000 units
Manufacturing costs:
Direct materials $ 80,000 $120,000
Direct labor 120,000 180,000
Factory overhead 240,000 300,000

Total manufacturing costs $440,000 $600,000

a. Compute for the unit factory cost at 40,000 and 60,000 units.
b. Why does the unit cost decline from $11 to $10 when production level rises from 40,000 to
60,000 units?
c. What would be the impact on short-term operating income if the order is accepted at the
price recommended by the sales manager? What do you think the minimum (short-term) bid
price should be?
d. What would the total opportunity cost be if by accepting the special order the company lost
sales of 5,000 units to its regular customers? Assume the preceding facts plus a normal
selling price of $20 per unit. Should the company accept the special order?
5. Product-Line Profitability Analysis. Barbour Corporation, located in Buffalo, New York, is a
retailer of high-tech products and is known for its excellent quality and innovation. Recently, the
firm conducted a relevant cost analysis of one of its product lines that has only two products, T-1
and T-2. The sales for T-2 are decreasing and the purchase costs are increasing. The firm might
drop T-2 and sell only T-1.

Barbour allocates fixed costs to products on the basis of sales revenue. When the president of
Barbour saw the income statements (see below), he agreed that T-2 should be dropped. If T-2 is
dropped, sales of T-1 are expected to increase by 10% next year, but the firm’s cost structure will
remain the same.

T-1 T-2
Sales $200,000 $260,000
Variable costs
Cost of goods sold 70,000 130,000
Selling & administrative 20,000 50,000

Contribution margin $110,000 $ 80,000

Fixed expenses:
Fixed corporate costs 60,000 75,000
Fixed selling and administrative 12,000 21,000
Total $ 72,000 $ 96,000

Operating income $ 38,000 $(16,000)

a. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
(Round answer to nearest whole dollar.)
b. By what percentage would sales from T-1 have to increase in order to make up the financial
loss from dropping T-2? (Round your answer to 2 decimal places. For example, 56.568% =
56.57%.)
c. What is the required percentage increase in sales (rounded to 2 decimal places) from T-1 to
compensate for lost margin from T-2, if total fixed costs can be reduced by $45,000?

6. Sell-or-Process-Further Decision. Product Mix Cantel Company produces cleaning compounds

for both commercial and household customers. Some of these products are produced as part of
a joint manufacturing process. For example, GR37, a coarse cleaning powder meant for
commercial sale, costs $1.60 a pound to make and sells for $2.00 per pound. A portion of the
annual production of GR37 is retained for further processing in a separate department where it
is combined with several other ingredients to form SilPol, which is sold as a silver polish, at $4.00
per unit. The additional processing requires ¼ pound of GR37 per unit; additional processing
costs amount to $2.50 per unit of SilPol produced. Variable selling costs for SilPol average $0.30
per unit. If production of SilPol were discontinued, $5,600 of costs in the processing department
would be avoided. Cantel has, at this point, unlimited demand for, but limited capacity to
produce, product GR37.
a. Calculate the minimum number of units of SilPol that would have to be sold in order to
justify further processing of GR37. Round your answer to nearest whole number
 b. Assume that the cost data reported for GR37 are obtained at a level of output equal to
5,000 pounds, which is the maximum that the company can produce at this time. What is
the expected operating income (to the nearest whole dollar) under each of the following
scenarios: (a) all available capacity is used to produce GR37, but no SilPol; (b) 4,000 units
of SilPol are produced, with the balance of capacity devoted to the production and sale of
GR37; (c) 8,000 units of SilPol are produced, with the balance of capacity devoted to the
production and sale of GR37; and (d) 10,000 units of SilPol are produced, with the
balance of capacity devoted to the production and sale of GR37.

7. Make vs. Buy; Strategy. Martens Inc. manufactures a variety of electronic products. It specializes
in commercial and residential products with moderate-to-large electric motors such as pumps
and fans. Martens is now looking closely at its production of attic fans, which included 10,000
units in the prior year (see the table below). These costs included $100,000 of allocated fixed
manufacturing overhead. Martens has capacity to manufacture 15,000 attic fans per year.
Martens believes demand in the coming year will be 20,000 attic fans. The company has looked
into the possibility of purchasing the attic fans from another manufacturer to help it meet this
demand. Harris Products, a steady supplier of quality products, would be able to provide up to
9,000 attic fans per year at a price of $46.00 per fan delivered to Martens’s facility. The following
is based on the production of 10,000 units in the prior year:

Selling price per unit $72.00

Cost per unit:
Electric motor $ 6.00
Other parts 8.00
Direct labor ($15/hr) 15.00
Manufacturing overhead 15.00
Selling and administrative costs 20.00 64.00
Profit per unit $ 8.00

The selling and administrative cost of $20.00 per unit (fan) includes (at a sales level of 10,000
units) fixed costs of $6.00 per unit.

a. What is the (short-term) relevant manufacturing cost per fan for Martens? (Round your
answer to 2 decimal places.)
b. Given the projected demand of 20,000 units, how many units should the company
manufacture, and how many units (if any) should it purchase from Harris Products? Assume
that the variable selling and administrative expense will be incurred for all sales. Explain your
reasoning. Under this optimum plan, what is the total contribution margin?
c. Independent of requirement 2, assume that Beth Johnson, Martens’s product manager, has
suggested that the company could make better use of its fan department capacity by
manufacturing marine pumps instead of fans. Johnson believes that Martens could expect to
use the production capacity to produce and sell 25,000 pumps annually at a price of $60.00
per pump. Johnson’s estimate of the costs to manufacture the pumps is presented below. If
Johnson’s suggestion is not accepted, Martens would sell 20,000 attic fans instead.
Information on the sales price and costs for the marine pumps follows (assume that total
fixed selling/administrative costs and total fixed overhead costs are the same, regardless of
whether fans fans or pumps are produced):
Selling price per pump $60.00
Cost per unit:
Electric motor $ 5.50
Other parts 7.00
Direct labor ($15/hr) 7.50
Manufacturing overhead 9.00
Selling and administrative costs 20.00 49.00
Profit per unit $ 11.00

What would the total contribution margin be (to nearest whole dollar) from manufacturing
and selling the marine pumps? Given this information, should Martens manufacture pumps
or attic fans (based solely on short-term financial considerations)?