Essay Questions

54. The following production costs are provided for Glenislay Co., a manufacturer of PDA’s.

Manufacturing Costs:

It has been determined that the PDA’s could be purchased from Integrated Labs at a cost of $90 plus $5 shipping costs. Considering the offer from Integrated Labs, show whether Glenislay should make or buy the product.

(a.) Assume 40% of fixed overhead allocated to making PDA’s relates to a production manager who would not be retained if the PDA’s were not produced by Glenislay.

(b.) How would your analysis change if Glenislay could use capacity resources for alternative activities that would produce a contribution of $27 per unit?

(c.) What is your understanding of the term outsourcing. Briefly explain.

55. Digger Company realizes three products from a single mining process: Products J1, A2, and V3. Each product may be sold as is in its raw form or processed further into a more refined state. The additional processing requires no expanded capacity and production costs are entirely variable. Sales values and cost information are presented below:

(a.) Determine whether Digger Company should sell each product as is or after further processing.

56. The market price for low-end laser printers is well established at $400 per unit. ABC Technologies is considering entering this market and has enough available space in their plant to accommodate a new production line. However, several pieces of new manufacturing equipment would be required which are estimated to cost $28,000,000. ABC Technologies requires a minimum ROI of 15% on any product line investment and estimate that they can capture 100,000 units of the low-end laser printer market at the prevailing market price.

(a.) Calculate the target cost per unit for ABC Technologies if it is to enter the low-end laser printer market while earning the minimum 15% ROI.

57. The following product line information is for the Swiss Watch Company. The company is considering dropping its Children’s product line due to poor operating income performance. Fixed expenses are allocated to each product line based on sales revenue.

(a.) Calculate the effect on the Swiss Company’s operating income if the Children’s watch product line is discontinued. Comment on your analysis.

(b.) Assume the Swiss Company discontinues its Children’s product line. Calculate the total operating income for the Swiss Company.

58. Marshall, Inc., produces three products but weekly demand for the three products exceeds the available amount of machine time. Following is information about each product:

(a.) Determine how many units each of Product A, Product B, and Product C that Marshall, Inc., should produce each week assuming 1,000 hours of available machine time.

59. Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions.

(a.) What is the present value of $100,000 in ten years using a discount rate of 8%?

(b.) How much should be invested today at a return on investment of 16% compounded annually to have $60,000 in ten years?

60. Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions.

(a.) Yoko Co.’s common stock is expected to have a dividend of $3 per share for each of the next four years, and it is estimated that the market value per share will be $42 at the end of four years. If an investor requires a return on investment of 12%, what is the maximum price the investor would be willing to pay for a share of Yoko Co. common stock today?

(b.) Lashana bought a bond with a face amount of $1,000, a stated interest rate of 10%, and a maturity date 20 years in the future for $1,025. The bond pays interest on a semi-annual basis. Five years have gone by and the market interest rate is now 12%. What is the market value of the bond today?