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Oxford Engineering manufactures small engines. The engines aresold to manufacturers who install them in such products as lawnmowers. The company currently manufactures all the parts used inthese engines but is considering a proposal from an externalsupplier to supply the starter assembly used in these engines.Thestarter assembly is currently manufactured in Division 3 of OxfordEngineering. Last year, Division 3 manufactured 160,000 starterassemblies, but over the next several years, it is expected that200,000 assemblies will be needed each year. Total costs related tothe starter assembly for last year were as follows:

Direct material

$329,600
Direct labor

$179,200
Totaloverhead

$800,000
Total

$1,308,800

Further analysis of overhead revealed the followinginformation:

55% of total overhead was fixed.

$100,000 of the fixed overhead were allocated costs that willcontinue even if the production of the starter assembly isdiscontinued.

Tidnish Electronics, a reliable supplier, has offered to supplystarter assembly units at $5.50 per unit. If the company buys theassembly from Tidnish, sales of another product can be increased,resulting in additional contribution margin of $44,000.

1. By how much will Oxford Engineering's total profits change ifthey decide to buy the starter assembly from Tidnish Electronicsinstead of making itthemselves? (Note: if the buycosts are less than the make costs, enter the difference as apositive number; if the make costs are less than the buy costs,enter the difference as a negative number.)

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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Oxford Engineering manufactures small engines. The engines aresold to manufacturers who install them in such products as lawnmowers. The company currently manufactures all the parts used inthese engines but is considering a proposal from an externalsupplier to supply the starter assembly used in these engines.

The starter assembly is currently manufactured in Division 3 ofOxford Engineering. Last year, Division 3 manufactured 156,000starter assemblies, but over the next several years, it is expectedthat 187,000 assemblies will be needed each year. Total costsrelated to the starter assembly for last year were as follows:

Direct material

$290,160
Direct labor

$184,080
Total overhead

$624,000
Total

$1,098,240


Further analysis of overhead revealed the followinginformation:

55% of total overhead was fixed.

$117,000 of the fixed overhead were allocated costs that willcontinue even if the production of the starter assembly isdiscontinued.

Tidnish Electronics, a reliable supplier, has offered to supplystarter assembly units at $5.00 per unit. If the company buys theassembly from Tidnish, sales of another product can be increased,resulting in additional contribution margin of $42,000.

REQUIRED

1. By how much will Oxford Engineering's total profits change ifthey decide to buy the starter assembly from Tidnish Electronicsinstead of making itthemselves? (Note: if the buycosts are less than the make costs, enter the difference as apositive number; if the make costs are less than the buy costs,enter the difference as a negative number.)

Jackson County Senior Services is a nonprofit organizationdevoted to providing essential services to seniors who live intheir own homes within the Jackson County area. Three services areprovided for seniors—home nursing, Meals On Wheels, andhousekeeping. Data on revenue and expenses for the past yearfollow:

Total Home
Nursing		 Meals On Wheels House-
keeping
Revenues $ 919,000 $ 264,000 $ 402,000 $ 253,000
Variable expenses 468,000 114,000 199,000 155,000
Contribution margin 451,000 150,000 203,000 98,000
Fixed expenses:
Depreciation 69,800 8,400 40,700 20,700
Liability insurance 43,400 20,200 8,000 15,200
Program administrators’ salaries 116,000 40,400 38,800 36,800
General administrative overhead* 183,800 52,800 80,400 50,600
Total fixed expenses 413,000 121,800 167,900 123,300
Netoperating income (loss) $ 38,000 $ 28,200 $ 35,100 $ (25,300)
*Allocated onthe basis of program revenues.

The head administrator of JacksonCounty Senior Services, Judith Miyama, is concerned about theorganization’s finances and considers the net operating income of$38,000 last year to be too small. (Last year’s results were verysimilar to the results for previous years and are representative ofwhat would be expected in the future.) Therefore, she has asked formore information about the financial advisability of discontinuingthe housekeeping program.

The depreciation in housekeepingis for a van that transports housekeepers and their equipment fromjob to job. If the program were discontinued, the van would bedonated to a charitable organization. Depreciation charges assumezero salvage value. None of the general administrative overheadwould be avoided if the housekeeping program were dropped, but theliability insurance and the salary of the program administratorwould be avoided.

Required:
1a.

What is the impact on net operating income by discontinuinghousekeeping program? (Input the amount as a positivevalue.)
(Click to select)DecreaseIncrease in net operatingincome by $
1b. Should thehousekeeping program be discontinued?
Yes
No
2.

Would a segmented income statement format be more useful tomanagement in assessing the long-run financial viability of thevarious services.
Yes

No

Climate-Control, Inc., manufactures a variety of heating andair-conditioning units. The company is currently manufacturing allof its own component parts. An outside supplier has offered to sella thermostat to Climate-Control for $23 per unit. To evaluate thisoffer, Climate-Control, Inc., has gathered the followinginformation relating to its own cost of producing the thermostatinternally:

Per Unit 14,300
Units per year
Direct materials $ 5 $ 71,500
Direct labor 7 100,100
Variable manufacturing overhead 2 28,600
Fixed manufacturing overhead, traceable 10* 143,000
Fixed manufacturing overhead, common, butallocated 9 128,700
Total cost $ 33 $ 471,900
*40% supervisorysalaries; 60% depreciation of special equipment (no resalevalue).
Required:
1a.

Assuming that the company has no alternative use for thefacilities now being used to produce the thermostat, compute thetotal cost of making and buying the parts. (Round yourFixed manufacturing overhead per unit rate to nearest dollaramount.)
Make Buy
Total relevant cost (14,300 units) $ $
1b. Should theoutside supplier's offer be accepted?
Accept
Reject
2a.

Suppose that if the thermostats were purchased, Climate-Control,Inc., could use the freed capacity to launch a new product. Thesegment margin of the new product would be $91,500 per year.Compute the total cost of making and buying the parts.(Round your Fixed manufacturing overhead per unit rate tonearest dollar amount.)
Make Buy
Total relevant cost (14,300 units) $ $
2b.

Should Climate-Control, Inc., accept the offer to buy thethermostats from the outside supplier for $23 each?
Reject

Accept

Solex Company manufactures three products from a common input ina joint processing operation. Joint processing costs up to thesplit-off point total $100,000 per year. The company allocatesthese costs to the joint products on the basis of their total salesvalue at the split-off point. These sales values are as follows:product X, $55,000; product Y, $93,000; and product Z, $64,000.

Each product may be sold at thesplit-off point or processed further. Additional processingrequires no special facilities. The additional processing costs andthe sales value after further processing for each product (on anannual basis) are shown below:

Product Additional
Processing Costs		 Sales Value after
Further Processing
X $ 38,000 $ 81,000
Y $ 39,000 $ 162,000
Z $ 10,000 $ 82,000
Required:
a.

Compute the incremental profit (loss) for each product.(Loss amounts should be indicated with a minussign.)
Product X Product Y Product Z
Incremental profit (loss) $ $ $

Blueline Tours, Inc., operates tours throughout the UnitedStates. A study has indicated that some of the tours are notprofitable, and consideration is being given to dropping thesetours to improve the company’s overall operating performance.

One such tour is a two-day HistoricMansions bus tour conducted in the southern states. An incomestatement from a typical Historic Mansions tour is given below:


Ticket revenue (105 seat capacity × 40%
occupancy × $70 ticket price perperson)		 $ 2,940 100 %
Variable expenses ($14.00 per person) 588 20
Contribution margin 2,352 80 %
Tourexpenses:
Tour promotion $ 750
Salary of bus driver 380
Fee, tour guide 700
Fuel for bus 200
Depreciation of bus 500
Liability insurance, bus 150
Overnight parking fee, bus 70
Room and meals, bus driver and tourguide 190
Bus maintenance and preparation 220
Total tour expenses 3,160
Netoperating loss $ (808)


The followingadditional information is available about the tour:
a. Bus drivers arepaid fixed annual salaries; tour guides are paid for each tourconducted.
b.

The "Bus maintenance and preparation" cost is an allocation ofthe salaries of mechanics and other service personnel who areresponsible for keeping the company’s fleet of buses in goodoperating condition.
c.

Depreciation of buses is due to obsolescence. Depreciation dueto wear and tear is negligible.
d. Liabilityinsurance premiums are based on the number of buses in thecompany’s fleet.
e.

Dropping the Historic Mansions bus tour would not allow BluelineTours to reduce the number of buses in its fleet, the number of busdrivers on the payroll, or the size of the maintenance andpreparation staff.


Required:

By how much will the profits increase or decrease if this touris discontinued? (Input the amount as a positivevalue.)


Profits would (Click to select)decreaseincrease by $

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