ACCOUNTING

Part III
ABC company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and ABC does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow.

 

  Cost Category Job A Job B
  Contract price $ 808,000   $ 691,000  
  Unit-level materials   244,800     225,150  
  Unit-level labor   250,450     306,600  
  Unit-level overhead   18,100     14,400  
  Supervisor’s salary   115,670     115,670  
  Rental equipment costs   25,800     28,400  
  Depreciation on tools (zero market value)   20,900     20,900  
  Allocated portion of companywide facility-sustaining costs   11,000     8,900  
  Insurance cost for job   17,600     17,600  

 

Required:

 

a-1. Calculate the contribution to profit from Job A and Job B.
a-2. Assume that ABC has decided to accept one of the two jobs. Recommend which job to accept?
b-1. Assume that Job A is no longer available. ABC’s choice is to accept or reject Job B alone. Calculate the contribution to profit from Job B.  
b-2. Based on your answer to requirement b-1, recommend whether to accept or reject Job B.  
 

Part IV
Seymour Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Seymour produces a relatively small amount (14,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.70 each. If Seymour purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Seymour’s accountant constructed the following profitability analysis.

 

 

   
  Revenue (14,000 units × $14.0) $ 196,000  
     Unit-level materials costs (14,000 units × $1.70)   (23,800 )
     Unit-level labor costs (14,000 units × $.60)   (8,400 )
     Unit-level overhead costs (14,000 × $.40)   (5,600 )
     Unit-level selling expenses (14,000 × $.20)   (2,800 )
 



  Contribution margin   155,400  
     Skin cream production supervisor’s salary   (57,000 )
     Allocated portion of facility-level costs   (13,900 )
     Product-level advertising cost   (46,000 )
 



  Contribution to companywide income $ 38,500  
 







 

Required:

 

a. Calculate the total avoidable costs.

 

b-1. Calculate the total avoidable cost per unit.

 

b-2. Should Seymour continue to make the product or buy it from the supplier?

 

 

c-1. Suppose that Seymour is able to increase sales by 10,000 units (sales will increase to 24,000 units). Calculate the total avoidable costs.
c-2. At this level of production, should Seymour make or buy the cream?

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