Question No.

1
5 Marks

The following Table contains data for the Block Company for the year just ended. The company makes
industrial power drills. The Table shows the costs of the plastic housing separately from the costs of the
electrical and mechanical components. Answer each of the following questions independently.

A B A+B
Electrical and Plastic Industrial
Description Mechanical Housing Drills
Components*
-----------------------Amounts in $-----------------------
Sales: 100,000, units at $100 10,000,000
Variable costs:
Direct materials 4,400,000 500,000 4,900,000
Direct Labor 400,000 300,000 700,000
Variable factory overheads 100,000 200,000 300,000
Other variable costs 100,000 - 100,000
Sales commission, at 10% of sales 1,000,000 - 1,000,000
Total variable costs 6,000,000 1,000,000 7,000,000
Contribution margin 3,000,000
Total fixed costs 2,200,000 480,000 2,700,000
Operating income 300,000
*Not including the costs of plastic housing (column B).

1. During the year, a prospective customer in an unrelated market offered $82,000 for 1,000 drills.
The drills would be manufactured in addition to the 100,000 units sold. Block Company would pay
the regular sales commission rate on the 1,000 drills. The president rejected the order because “it
was below our costs of $97 per unit.” What would operating income have been if Block Company
had accepted the order?

2. A supplier offered to manufacture the year’s supply of 100,000 plastic housings for $12.00 each.
What would be the effect on operating income if the Block Company purchased rather than made
the housings? Assume that Block Company would avoid $350,000 of the fixed costs assigned to
housings if it purchases the housings.

3. Suppose that Block Company could purchase the housings for $13.00 each and use the vacated
space for the manufacture of a deluxe version of its drill. Assume that it could make 20,000 deluxe
units (and sell them for $130 each in addition to the sales of the 100,000 regular units) at a unit
variable cost of $90, exclusive of housings and exclusive of the 10% sales commission. The
company could also purchase the 20,000 extra plastic housings for $13.00 each. All the fixed costs
pertaining to the plastic housings would continue because these costs relate primarily to the
manufacturing facilities used. What would operating income have been if Block had bought the
housings and made and sold the deluxe units?
Question No. 2
 5 Marks

Vendmart Food Services Company operates and services snack vending machines located in restaurants,
gas stations, and factories in four southwestern states. The machines are rented from the manufacturer.
In addition, Vendmart must rent the space occupied by its machines. The following expense and revenue
relationships pertain to a contemplated expansion program of 80 machines.
Fixed monthly expenses follow:

Machine Rental: 80 machines @ $22.10 $1,768

Space rental: 80 locations @ $20.00 $1,600
Part-time wages to service the additional 80 machines $500
Other fixed costs $132
Total monthly fixed cost $4,000

Other data follow:

Per Unit (Snack) Per $100 of Sales

Selling price $ 1.00 100%
Cost of Snack $ 0.68 68%
Contribution Margin $0.32 32%

These questions relate to the given data unless otherwise noted. Consider each question independently.

1. What is the monthly break-even point in number of units (snacks)? In dollar sales?

2. If 45,000 units were sold, what would be the company’s net income?

3. If the space rental cost was doubled, what would be the monthly break-even point in number of
units? In dollar sales?

4. Refer to the original data. If, in addition to the fixed space rent, Vendmart Food Services
Company paid the vending machine manufacturer $.07 per unit sold, what would be the
monthly breakeven point in number of units? In dollar sales?

5. Refer to the original data. If, in addition to the fixed rent, Vendmart paid the machine
manufacturer $.11 for each unit sold in excess of the break-even point, what would the new net
income be if 45,000 units were sold?
 Question No. 3
5 Marks

Woolen Products Company makes a heavy outdoor shirt in one factory. Revenue and cost data relating
to the coming year’s operations are budgeted as follows:

Sales $2,300,000
Cost of sales 1,380,000
Gross Profit 920,000
Selling & Admin expenses 575,000
Income 345,000

The factory has the capacity to make 250,000 shirts per year. The fixed costs included in cost of goods
sold are $460,000. The only variable selling, general and admin expenses are a 10% sales commission
and a $0.50 per shirt licensing fee paid to the designer.

A chain store manager has approached the sales manager of Woolen Products offering to buy 15,000
shirts at $6 per shirt. The sales manager believes that accepting the offer would result in a loss because
the average cost of a shirt is $8.50. He feels that even though sales commission would not be paid on
the order, a loss would still result.

Required:

1. Determine the income that would result if the company accepts the offer.

2. Suppose that the order was for 40,000 shirts instead of 15,000. What would the firm’s income be if
it accepted the order?

3. Assuming the same facts as in part 1 above, what is the lowest price that the firm could accept and
still earn $345,000?
 Question No. 4
5 Marks

ConAgra produces meat products with brand names such as Healthy Choice, Armour, and Butterball.
Suppose one of the company’s plants processes beef cattle into various products. For simplicity, assume
that there are only three products: steak, hamburger, and hides, and that the average steer costs $700.
The three products emerge from a process that costs $100 per steer to run, and output from one steer
can be sold for the following net amounts:

Steak (100 pounds) $

400
Hamburger (500 pounds) 600
Hide (120 pounds) 100
Total $ 1,100

Assume that each of these three products can be sold immediately or processed further in another
ConAgra plant. The steak can be the main course in frozen dinners sold under the Healthy Choice label.
The vegetables and desserts in the 400 dinners produced from the 100 pounds of steak would cost
$110, and production, sales, and other costs for the 400 meals would total $330. Each meal would be
sold wholesale for $2.10.

The hamburger could be made into frozen Salisbury steak patties sold under the Armour label. The only
additional cost would be a $200 processing cost for the 500 pounds of hamburger. Frozen Salisbury
steaks sell wholesale for $1.70 per pound.

The hide can be sold before or after tanning. The cost of tanning one hide is $80, and a tanned hide can
be sold for $170.

Required:

1. Compute the total profit if all three products are sold at the split-off point.

2. Compute the total profit if all three products are processed further before being sold.

3. Which products should be sold at the split-off point? Which should be processed further?

4. Compute the total profit if your plan in number 3 is followed.