Exercises for Decision Making (Part II)

Exercise (1):
Superbowl Corporation manufactures two products, Footballs and Helmets. The
following annual information was gathered:
Footballs Helmets
Retail price per unit $54.00 $33.00
Merchandise cost per unit 43.00 27.00
Total annual fixed costs are $25,000. Assume Superbowl Corporation can sell either
8,000 footballs or 18,000 helmets at full capacity. Which product should Superbowl
Corporation sell to maximize profits?
A) Footballs because the contribution margin per unit is higher
B) Helmets because the total units sold is higher
C) Helmets because the total contribution margin is higher
D) Footballs because the sales price per unit is higher
Answer: C

Exercise (2):
Ring Corporation manufactures two types of tables: Small and Large. The following
data is available:
Small Large
Selling price per unit $100 $210
Variable cost per unit $68 $138
Machine hours per unit 3.2 10
Total fixed costs are $9,600. Ring Corporation can sell a maximum of 1,000 units
of each size of table. Machine hour capacity is 8,000 hours per year.
Required:
A) Which table has the highest contribution margin per unit?
B) Which table has the highest contribution margin per machine hour?
C) How many tables of each size should be produced to maximize operating income?
Answer:
A) The large table has the highest contribution margin of $72.
B) The small table has the highest contribution margin per machine hour of $10.
C) The company should produce 1,000 small tables and 480 large tables.
D)
Contribution margin from small tables (1,000 x $32) $32,000
Contribution margin from large tables (480 x $72) 34,560
Fixed costs 9,600
Operating income $56,960
Exercise (3):
Cena Corporation has a joint process that produces three products: P, G and A. Each
product may be sold at split-off or processed further and then sold. Joint-processing
costs for a year amount to $25,000. Other data follows:

Sales Value Separable Processing Sales Value

Product
at Split-Off Costs after Split-Off at Completion
P $32,000 $5,000 $40,000
G 16,500 7,500 29,000
A 6,400 8,000 10,000

Processing Product P beyond the split-off point will cause profits to ________.
A) increase $3,000
B) increase $8,000
C) decrease $5,000
D) decrease $8,000
Answer: A

Exercise (4):
Dummie Corporation has a joint process that produces three products: P, G and A.
Each product may be sold at split-off or processed further and then sold. Joint-
processing costs for a year amount to $25,000. The production level for each product
is 1,000 units. Other data follows:

Sales Value Separable Processing Sales Value

Product
at Split-Off Costs after Split-Off at Completion
P $12 $9 $21
G 10 4 17
A 15 6 19

Assume Dummie Corporation processes the joint products beyond the split-off point
that will maximize net income. What is Dummie Corporation's net income?
A) $7,000
B) $15,000
C) $30,000
D) $32,000
Answer: B
Exercise (5):
Lamar Corporation has a joint process, which produces three products called A, B
and C. Each product may be sold at split-off or processed further and then sold.
Joint processing costs for a year are $10,000. Other relevant data are:
Sales Value Separable Processing Sales Value
Product
at Split-Off Costs After Split-Off at Completion
A $94,000 $28,000 $116,000
B 60,000 8,000 82,000
C 66,000 14,000 80,000
Required:
A) Which products should be processed further? Why?
B) If the Lamar Company maximizes profits, what is the operating income?
Answer:
A) Only Product B should be processed further. The additional revenues ($82,000 -
$60,000) exceed the additional costs ($8,000) of further processing.
B) Product A Revenue $94,000
Product B Revenue 82,000
Product C Revenue 66,000
Joint Costs 10,000
Product B Addtl. Costs 8,000
Operating income $224,000

Exercise (6):
Bert Company is considering the replacement of a machine that is presently used in
production. The following data are available:
Old Machine New Machine
Original cost $57,000 $35,000
Useful life in years 17 5
Current age in years 12 0
Book value $39,000 -
Disposal value now $8,000 -
Disposal value in 5 years 0 0
Annual cash operating costs $7,000 $4,000
Adding all five years together, the difference in total cost between the old machine
and the new machine is ________ the old machine.
A) $12,000 in favor of keeping
B) $22,000 in favor of keeping
C) $22,000 in favor of replacing
D) $37,000 in favor of replacing
Exercise (7):

Swensen Company is considering the replacement of equipment used in operations.

The following data are available:

Old Equipment New Equipment

Original cost $93,000 $60,000
Useful life in years 13 6
Current age in years 7 0
Book value $57,000 -
Disposal value now $45,000 -
Disposal value in 6 years 0 0
Annual cash operating costs $15,000 $11,000

Required:

A) Prepare a cost comparison for replacing the old equipment. Use only relevant
items and add the items together for the next 6 years.

B) Should the old equipment be replaced?

Answer:
A)
Keep Replace Difference
Cash operating costs $90,000 $66,000 $24,000
Disposal value old equip. (45,000) 45,000
New equipment, cost ________ 60,000 (60,000)
Total relevant costs $90,000 $81,000 $(9,000)

B) The old equipment should be replaced.

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