Manning Industries manufactures and sells three different models of wet-dry shop vacuum cleaners

P6-3A Manning Industries manufactures and sells three different models of wet-dry shop vacuum cleaners. Although the shop vacs vary in terms of quality and features, all are good sellers. Manning is currently operating at full capacity with limited machine time. Sales and production information relevant to each model follows.

Product
Economy Standard Deluxe
Selling price $30 $50 $100
Variable costs and expenses $12 $18 $42
Machine hours required .5 .8 1.6

Instructions
(a) Ignoring the machine time constraint, which single product should Manning Industries produce?
(b) What is the contribution margin per unit of limited resource for each product?
(c) If additional machine time could be obtained, how should the additional time be used?

Click here for the solution: Manning Industries manufactures and sells three different models of wet-dry shop vacuum cleaners

Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest

Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest. The company is developing new standard costs. Trent Roswell suggests that the new standards for materials should not include any waste for liquid plastics that spill out of the molds. "After all," he says, "we're trying to be a world class company. When we build in waste, we tell the workers it's okay to waste some." Betty Farrell, another manager, disagrees. "If we don't allow for some normal human error," she says, "we'll have a mighty unhappy work force. Also, I think that these kinds of perfection standards exploit the workers. I certainly wouldn't want to be held up to perfection every day—what could I do but fail?"



The argument continued. Finally, the standards were prepared. All standards were prepared according to normal expected performance, except that for materials, an ideal standard was used. Betty, still maintaining the unfairness of the system, refused to hold her workers accountable for materials quantity variances.

Do you think it's fair to use ideal standards to evaluate a department or workers ? Is it unethical for Betty to refuse to support the standards? Explain.


Click here for the solution: Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest

Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models

Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising bike (Route 66), a street bike (Main Street), and a starter model (Alley Cat). Because of the different materials used, production processes for each model differ significantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of bike is similar. For this reason, PMI allocates overhead on the basis of machine-hours. Last year, the company shipped 1,000 Route 66s, 4,000 Main Streets, and 10,000 Alley Cats and had the following revenues and expenses:

PICKLE MOTORCYCLES, INC. Income Statement
Route 66Main StreetAlley Cat Total
Sales. . . . . . . . . . . . . . . . . . . . $7,600,000 $11,200,000 $9,500,000 $28,300,000
Direct costs
Direct materials . . . . . . . . . . 3,000,000 4,800,000 4,000,000 11,800,000
Direct labor. . . . . . . . . . . . . 288,000 480,000 1,080,000 1,848,000
Variable overhead
Machine setup. .468,000
Order processing. . . . . . . . . 1,152,000
Warehousing costs. . . . . . .1,674,000
Energy to run machines . . .756,000
Shipping. . . . . . . . . . . . . . .648,000
Contribution margin. . . . . . . . . 9,954,000
Fixed overhead
Plant administration. . . . . . .1,760,000
Other fixed overhead. . . . . .2,800,000

PMIs chief financial officer (CFO) hired a consultant to recommend cost allocation bases. The consultant recommended the following:

Activity Level
ActivityCost Driver Route 66 Main Street Alley Cat
Setting up machines . . Number of production runs 223 444
Processing orders . . . Number of sales orders received 400 600 600
Warehousing . . . . . . . Number of units held in inventory 200 200 400
Using energy. . . . . . . Machine-hours10000 16,000 24,000
Shipping. . . . . . . . . . . Number of units shipped1,000 4,000 10,000

The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products.

Required:
a. Using machine-hours to allocate production overhead, complete the income statement for Pickle Motorcycles. (See the "using energy" activity for machine-hours.) Do not attempt to allocate plant administration of other fixed overhead.
b. Complete the income statement using the bases recommended by the consultant.
c. How might activity-based costing result in better decisions by Pickle Motorcycles' management?
d. After hearing the consultant's recommendations, the CFO decides to adopt activity-based costing but expresses concern about not allocating some of the overhead to the products (plant administration and other fixed overhead). In the CFO's view, "Products have to bear a fair share of all overhead or we won't be covering all of the costs." How would you respond to this comment?


Click here for the solution: Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models

Louder Company manufactures part MNO used in several of its truck models

Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows:

Direct materials $ 45,000
Direct manufacturing labor 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000

Louder Company has the option of purchasing part MNO from an outside supplier at $11.20 per unit. If MNO is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.

Question 1: What amount of the MNO production costs is avoidable?

Question 2: Should the company outsource MNO? Why or why not?

Question 3: What other items should the company consider before outsourcing any of the parts it manufactures?


Click here for the solution: Louder Company manufactures part MNO used in several of its truck models

Garth Brooks Specialty Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles

P9-9 (Statement and Note Disclosure, LCM, and Purchase Commitment) Garth Brooks Specialty Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1975, Brooks has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Brooks’s fiscal year, November 30, 2007, are shown below. The inventories are stated at cost before any year-end adjustments.

Finished goods $647,000

Work-in-process 112,500

Raw materials 240,000

Factory supplies 69,000

The following information relates to Brooks’s inventory and operations.

1. The finished goods inventory consists of the items analyzed below.

Cost Market

Down tube shifter

Standard model $ 67,500 $ 67,000

Click adjustment model 94,500 87,000

Deluxe model 108,000 110,000

Total down tube shifters 270,000 264,000

Bar end shifter

Standard model 83,000 90,050

Click adjustment model 99,000 97,550

Total bar end shifters 182,000 187,600

Head tube shifter

Standard model 78,000 77,650

Click adjustment model 117,000 119,300

Total head tube shifters 195,000 196,950

Total finished goods $647,000 $648,550

2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment.

3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan.

4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent above the current market price. The market value of the rest of the raw materials is $127,400.

5. The total market value of the work-in-process inventory is $108,700.

6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900.

7. Brooks applies the lower-of-cost-or-market method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Brooks applies the lower-of-cost-or-market method to the total of each inventory account.

8. Consider all amounts presented above to be material in relation to Brooks’ financial statements taken as a whole.

Instructions
(a) Prepare the inventory section of Brooks’s balance sheet as of November 30, 2007, including any required note(s).
(b) Without prejudice to your answer to (a), assume that the market value of Brooks’ inventories is less than cost. Explain how this decline would be presented in Brooks’ income statement for the fiscal year ended November 30, 2007.
(c) Assume that Brooks has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2007, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Brooks after November 30, 2007. Discuss the impact, if any, that this purchase commitment would have on Brooks’s financial statements prepared for the fiscal year ended November 30, 2007.


Click here for the solution: Garth Brooks Specialty Company, a division of Fresh Horses Inc., manufactures three models of gear shift components for bicycles

Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets

P9-9 (Statement and Note Disclosure, LCM, and Purchase Commitment) Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1978, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox's fiscal year, November 30, 2010, are shown below. The inventories are stated at cost before any year-end adjustments.

Finished goods $647,000
Work-in-process 112,500
Raw materials 264,000
Factory supplies 69,000

AND SO ON

a. Prepare the inventory section of Maddox's balance sheet as of November 30, 2010.
b. Without prejudice to your answer to P9-9 (a), assume that the market value of Maddox's inventories is less than cost. Explain how this decline would be presented in Maddox's income statement for the fiscal year ended November 30, 2010.
c. Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2010, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2010. Discuss the impact, if any, that this purchase commitment would have on Maddox's financial statements prepared for the fiscal year ended November 30, 2010.

Click here for the solution: Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets

Anna Bellatorre, Inc. manufactures five models of kitchen appliances at its Mesa plant

Anna Bellatorre, Inc. manufactures five models of kitchen appliances at its Mesa plant. The company is installing activity-based costing and has identified the following activities performed at its Mesa plant.

1. Designing new models.
2. Purchasing raw materials and parts.
3. Storing and managing inventory.
4. Receiving and inspecting raw materials and parts.
5. Interviewing and hiring new personnel.
6. Machine forming sheet steel into appliance parts.
7. Manually assembling parts into appliances.
8. Training all employees of the company.
9. Insuring all tangible fixed assets.
10. Supervising production.
11. Maintaining and repairing machinery and equipment.
12. Painting and packaging finished appliances.

Having analyzed its Mesa plant operations for purposes of installing activity-based costing, Anna Bellatorre, Inc. identified its activity cost centers. It now needs to identify relevant activity cost drivers in order to assign overhead costs to its products.

Instructions
Using the activities listed above, identify for each activity one or more cost drivers that might be used to assign overhead to Anna Bellatorre's five products.

Click here for the solution: Anna Bellatorre, Inc. manufactures five models of kitchen appliances at its Mesa plant