The management of Borealis Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier

ACC 560 Week 5 Assignment

P7-2A The management of Borealis Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called WISCO, is a component of the company's finished product.

The following information was collected from the accounting records and production data for the year ending December 31, 2008.
1. 7,000 units of WISCO were produced in the Machining Department.
2. Variable manufacturing costs applicable to the production of each WISCO unit were: direct materials $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40.
3. Fixed manufacturing costs applicable to the production of WISCO were:
Cost Item Direct Allocated
Depreciation $2,100 $ 900
Property taxes 500 200
Insurance 900 600
$3,500 $1,700

All variable manufacturing and direct fixed costs will be eliminated if WISCO is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 7,000 WISCO units from a supplier is $70,000.
5. If WISCO units are purchased, freight and inspection costs would be $0.40 per unit, and receiving costs totaling $1,250 per year would be incurred by the Machining Department.

Hint: Make incremental analysis related to make or buy, consider opportunity cost, and identify nonfinancial factors.

Instructions
(a) Prepare an incremental analysis for WISCO. Your analysis should have columns for (1) Make WISCO, (2) Buy WISCO, and (3) Net Income Increase/(Decrease).
(b) Based on your analysis, what decision should management make?
(c) Would the decision be different if Borealis Company has the opportunity to produce $5,000 of net income with the facilities currently being used to manufacture WISCO? Show computations.
(d) What nonfinancial factors should management consider in making its decision?

Click here for the solution: The management of Borealis Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier

Bumper Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 1.5/15, net 40

Bumper Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 1.5/15, net 40. If the firm chooses to pay on time but does not take the discount, assuming a 365 day-year, what is the

a. nominal interest cost for passing up (not taking) the credit

b. effective annual percentage cost of its non-free trade credit

Click here for the solution: Bumper Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 1.5/15, net 40

On July 1, 20x1, Littleton Inc. loaned a key supplier of raw material $2,000,000 to construct a new processing facility

On July 1, 20x1, Littleton Inc. loaned a key supplier of raw material $2,000,000 to construct a new processing facility. The loan is due on July 1, 20x3 and pays interest each December 31 and June 30. The supplier insisted on a variable rate loan. The controller of Littleton wants to avoid the risk of variable rate fluctuation and entered into an interest rate swap in which it will pay the variable rate on $2,000,000 in exchange for a fixed rate of 8.3%. The swap is settled on the interest payment dates. Variable interest rates and the value of the swap on selected dates are as follow:

Variable rate Value of the swap
July1, 20x1 7.9%
December 31, 20x1 7.75% 10,400

Prepare all journal entries to record this hedge through December 20x1.

Click here for the solution: On July 1, 20x1, Littleton Inc. loaned a key supplier of raw material $2,000,000 to construct a new processing facility