HW 2-2

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University of Illinois, Springfield *

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509B

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Accounting

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Apr 3, 2024

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docx

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ACC 509B – Module 2 Assignments (100 points) Due date: March 30 Spring 2024 3-19 (25 points) Variable and fixed costs, profitability of order, opportunity cost: Healthy Hearth specializes in lunches for health-conscious people. The company produces a small selection of lunch offerings each day. The menu selection may vary from day to day, but Healthy Hearth charges the same price per menu selection because it adjusts the portion sizes according to the cost of producing the selection. Healthy Hearth currently sells 5,000 meals per month. Variable costs are $3 per meal, and fixed costs total $5,000 per month. A government agency recently proposed that Healthy Hearth provide 1,000 meals next month for senior citizens at $3.30 per meal. Volunteers will deliver the meals to the senior citizens at no charge. Required a. (10 points) Suppose Healthy Hearth has sufficient idle capacity to accommodate the government order for next month. What will be the impact on Healthy Hearth’s operating income if it accepts this order? b. (15 points) Suppose that Healthy Hearth would have to give up regular sales of 500 meals, at a price of $4.50 each, to accommodate the government order for next month. What will be the impact on Health Hearth’s operating income if it accepts the government order? 3-20 (25 points) Relevant and sunk costs: Don Baxter’s 6-year-old Chevrolet Impala requires repairs estimated at $5,400 to make it roadworthy again. His friend Aaron Bloom suggested that he buy a 6-year- old Ford Escort instead for $5,400 cash. Aaron estimated the following costs for the two cars: Costs Impala Escort Acquisition cost $24,000 $5,400 Repairs 5,400 0 Annual operating costs: gas, maintenance, insurance 2,900 1,800 Required a. (8 points) What costs are and are not relevant to this decision? Why? b. (9 points) What should Don do? Explain. c. (8 points) What quantitative and qualitative factors are relevant to his decision? Why? 3-25 (25 points) Make-or-buy, relevant costs, and opportunity cost: Fab Motors has manufactured compressor parts at its plant in Pitcairn, Indiana, for the past 25 years. An outside supplier, Superior Compressor Company, has offered to supply compressor model C38 at a price of $200 per unit. Current unit manufacturing costs for C38 are as follows: Direct materials ................................................... $80 Direct labor .......................................................... 60 Variable overhead ................................................ 56 Fixed overhead .................................................... 17 Total costs ............................................................ $213

Required a. (15 points) Should Superior Compressor’s offer be accepted if the Pitcairn plant is presently operating below capacity? b. (10 points) What is the maximum acceptable purchase price if the plant facilities are fully used at present and if any additional available capacity can be deployed for the production of other compressors? 3-34 (25 points) Special order: Centrum Manufacturing makes a single product with the following attributes: Product Per-Unit Data Price $130.00 Variable costs per unit Direct materials $30.00 Direct labor 40.00 70.00 Contribution margin per unit $60.00 Fixed costs per unit 20.00 Gross margin per unit $40.00 Direct labor is paid $20 per hour, and each unit of the product requires 2 labor hours. Fixed manufacturing overhead applied to products at the rate of $10 per direct labor hour. Required a. (10 points) Centrum Manufacturing has received an offer from a new customer to buy 20 units of a modified version of the existing product. The modification would require an additional $15 of direct materials cost and an additional 0.50 labor hours for each unit. Centrum Manufacturing has enough idle direct labor capacity to fill this order without disrupting existing production and sales. What is the minimum price that Centrum Manufacturing should accept per unit for this modified product? b. (15 points) Assume now that Centrum Manufacturing is operating at its direct labor hour capacity and would need to displace some of its existing production to accept this offer to purchase 20 units of the modified product. What is the minimum price that Centrum Manufacturing should accept per unit for this modified product?

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