Better Food Company recently acquired an olive oil processing company that has an annual capacity

Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows:

Direct materials per liter $1.00
Direct processing labor 0.50
Variable processing overhead 0.24
Fixed processing overhead 0.40
Total $2.14

Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter.

Question 1: Compute the operating income for the Olive Oil Division using a transfer price of $4 (5 points).

Question 2: Compute the operating income for the Olive Oil Division using a transfer price of $2.14 (5 points).

Question 3: What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation (5 points).

Click here for the solution: Better Food Company recently acquired an olive oil processing company that has an annual capacity

Gaelic Industries Inc., operating at full capacity, sold 22,350 units at a price of $150 per unit during 2010

1. Gaelic Industries Inc., operating at full capacity, sold 22,350 units at a price of $150 per unit during 2010. Its income statement for 2010 is as follows:

Sales.......................... $3,352,500
Cost of goods sold............ 2,200,000
Gross Profit............................... 1,152,500
Expenses:
Selling expenses......................... $250,000
Administrative expenses.................. 250,000
Total expenses........................ 500,000
Income from operations..................... $ 652,500

The division of costs between fixed and variable is as follows:
Fixed Variable
Cost of sales 60% 40%
Selling expenses 50% 50%
Administrative expenses 55% 45%

Management is considering a plant expansion program that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $242,500, but will not affect the relationship between sales and variable costs.

1. Determine for 2010 the total fixed costs and the total variable costs.
2. Determine for 2010 (a) the unit variable cost and (b) the unit contribution margin.
3. Compute the break-even sales (units) for 2010.
4. Compute the break-even sales (units) under the proposed program.
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $652,500 of income from operations that was earned in 2010.
6. Determine the maximum income from operations possible with the expanded plant.
7. If the proposal is accepted and sales remain at the 2010 level, what will the income or loss from operations be for 2011?
8. Based on the data given, would you recommend accepting the proposal? Explain.

Click here for the solution: Gaelic Industries Inc., operating at full capacity, sold 22,350 units at a price of $150 per unit during 2010

Conda Products Company implemented a JIT work environment in its trowel division eight months ago, and the division has been operating at near capacity since then

E 12. Conda Products Company implemented a JIT work environment in its trowel division eight months ago, and the division has been operating at near capacity since then. At the beginning of May, Work in Process Inventory and Finished Goods Inventory had zero balances. The following transactions took place last week:

May 28 Ordered, received, and used handles and sheet metal costing $11,340.
29 Direct labor costs incurred, $5,400.
29 Overhead costs incurred, $8,100.
30 Completed trowels costing $24,800.
31 Sold trowels costing $24,000.

Using backflush costing, calculate the ending balance in the Work in Process Inventory and Finished Goods Inventory accounts


Click here for the solution: Conda Products Company implemented a JIT work environment in its trowel division eight months ago, and the division has been operating at near capacity since then

Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity

Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.

Project A Project B
Initial Investment(CF) $80,000 $50,000
Year Cash Inflows(CF)
1 15,000 15,000
2 20,000 15,000
3 25,000 15,000
4 30,000 15,000
5 35,000 15,000

a. Calculate each project's payback period
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.

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For Lobes Company, the relevant range of production is 40-80% of capacity

BE5-2 For Lobes Company, the relevant range of production is 40-80% of capacity. At 40% of capacity, a variable cost is $4,000 and fixed cost is 6,000. Diagram the behavior of each cost within the relevant range assuming the behavior is linear.

Click here for the solution: For Lobes Company, the relevant range of production is 40-80% of capacity