1) X Company is considering a modification to one of its main products that woul
ID: 2462776 • Letter: 1
Question
1) X Company is considering a modification to one of its main products that would make it more attractive to customers. A market research study costing $8,000 was conducted, and it indicated that the company could increase the price of the product by $2.84 with no decrease in unit sales; the current price is $9.96. Variable costs for the product are $3.48 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $11,200 to $15,200. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?
2) X Company is considering buying a part next year that they currently make. This year's production costs for 3,200 units were:
A company has offered to supply this part for $11.62 per unit. If X Company buys the part, $7,987 of the fixed overhead can be avoided. Also if X Company buys the part, it can use the freed-up resources to increase production of another product, resulting in additional contribution margin of $3,000. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?
3) X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $15.85 per unit. This year's per-unit production costs for 56,000 units were:
Of the total overhead costs, $78,400 were fixed, and $50,176 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented to another company for $80,000. Production next year is expected to increase to 60,350 units. If X Company buys the part instead of making it, it will save
4)X Company is considering outsourcing its email system. Total costs related to last month's in-house email operation, when there were 3,830 employee mailboxes, were as follows:
$13,443 of the computer hardware costs were common costs that will continue even if the email system is abandoned, and X Company will still need to pay for the virus protection license. Y Company has offered to operate an email system for X Company for $14.00 per mailbox. Next year, X Company estimates that 4,135 mailboxes will be required per month.
By how much will X Company's monthly profits change if they decide to outsource its email function to Y Company instead of managing the service internally? [A positive number means that make costs are more than buy costs; a negative number means that make costs are less than the buy costs.]
5) At the end of the year, a company offered to buy 4,830 units of a product from X Company for $12.00 each instead of the company's regular price of $19.00 each. The following functional income statement is for the 64,900 units of the product that X Company has already made and sold to its regular customers:
Fixed cost of goods sold for the year was $120,065, and fixed selling and administrative costs were $75,933. The special order product has some unique features that will require additional material costs of $0.85 per unit and the rental of special equipment for $3,000.
(a) Profit on the special order would be
(b). Assume the following fact: regular variable selling and administrative costs include sales commissions equal to 2% of sales, but there will be no sales commissions on the special order. This will cause the special order profit to increase by
6) The following information is for X Company's two products, A and B:
(a) If X Company drops Product A because it shows a loss, what will be the effect on firm profits?
(b) Assume that if X Company drops Product A, it can use the vacant space to increase sales of Product B by $37,200, but $3,000 of additional fixed costs will be incurred. This use of the vacant space will result in an increase in X Company's profits of?
7) X Company is planning to drop a department that has shown a loss over the past few years. Its accountant estimates that the savings from dropping the department will be $30,000 a year for the next 7 years. The accountant also believes that the company will be able to immediately sell some equipment that was used in the department for $18,000. Assuming a discount rate of 5%, what is the net present value of dropping the department?
8) X Company must decide whether to continue using its current equipment or replace it with new, more efficient equipment. The following information is available for the current and new equipment:
The current and new equipment will last for 6 years. If X Company replaces the current equipment, what is the approximate internal rate of return (enter your rate as a decimal; so 1% would be .01)
Total Per-Unit Materials $11,040 $3.45 Direct labor [all variable] 10,080 3.15 Variable overhead 8,640 2.70 Fixed overhead 15,360 4.80Explanation / Answer
1. The point of indifference where the Company X modifying the product and not modifying it.
point of indifference = change in fixed cost / change in contribution margin
change in fixed cost = 15,200 - 11,200 = 4,000
change in contribution margin = $2.84 ( 9.32 - 6.48)
Note: figure 9.32 = 12.8 sales - 3.48variable cost, here sales = 9.96 + 2.84
figure 6.48 = 9.96 sales - 3.48variable cost
point of indifference = change in fixed cost / change in contribution margin
= 4,000 / 2.84 = 1,408 units is the point of indeference
If the expected units are more than 1,408 then modify the product and if sales are less than 1,408 then not to modify it.
2. At what production level would it be indifferent between making and buying the part?
Solution: same formula as above with a small change can be applied here, that is
point of indifference = change in fixed cost / change in Variable cost
change in fixed cost = 7,987 already given + opportunity cost that is contribution forgone = 10,987
change in varaible cost = $1.38 ( that is 11.62 - 10.24 )
the figure 11.62 already given by buying it and 9.3 need to be computed that is
Total variable cost = (3.45 + 3.15 + 2.7) = 9.3
change in Variable cost = 11.62 - 9.3 = 2.32
point of indifference = change in fixed cost / change in Variable cost
= 10,987 / 2.32 = 3,443 units is the indifferent between making and buying the part
If the units are expected less than 3,443 then he will buy and If more than 3,443 he will produce himself.
3.If X Company buys the part instead of making it, it will save
Saving's in cost = 935,370 - 926,723.5 = $8,646.5
Note-1: Variable overhead cost:
Total overhead cost = 4.4per unit for 56,000 units
= 4.4 * 56,000 = 246,400
From this 246,400 it was given that 78,400 are fixed = that means 246,400 - 78,400 = 168,000 is variable portion
variable overhead cost per unit = 168,000 / 56,000units = $3 per unit
Details If buys If Produced Material cost (15.85 * 60,350) = 956,547.5 (6.9 * 60,350) = 416,415 Direct labor [all variable] - (4.3 * 60,350) = 259,505 Variable overhead cost -note1 - (3 * 60,350) = 181,050 Fixed cost 50,176 ( unavoidable) 78,400 Total cost 1,006,723.5 935,370 Less: rental income -80,000 0 Net cost 926,723.5 935,370Related Questions
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