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Chapter 25: Q25-24RQ (page 1407)
What questions should managers answer when considering selling a product as is or processing further?
Answer
The manager must consider the factors associated with therevenues and costswhen considering selling a product as is or processing the same further.
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Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:
Direct materials \(17,590
Direct labor 3,200
Variable overhead 2,080
Fixed overhead 6,300
Total manufacturing costs for 1,900 bindings \)29,170
Suppose Livingston will sell bindings to Snow Ride for \(13 each. Snow Ride would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.
Requirements
1. Snow Ride’s accountants predict that purchasing the bindings from Livingston will enable the company to avoid \)2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings.
2. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Ride’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.
McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.
MCCOLLUM COMPANY
Income Statement
Month Ended June 30, 2018
Total Product A Product B
Net Sales Revenue \(150,000 \)75,000 \(75,000
Variable Costs 90,000 55,000 35,000
Contribution Margin 60,000 20,000 40,000
Fixed Costs 50,000 5,000 45,000
Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)
What is differential analysis?
What is differential analysis?
What is the decision rule concerning products to emphasize when facing a constraint?
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