This problem consists of two independent mini-problems.

A. Pep Manufacturing produces Product K in batches of 4,000 gallons at $.60 per gallon. Product K can be sold without further processing for $0.80 per gallon. Product K can be processed further to yield Product G, which can be sold for $1.25 per gallon. Product G requires additional processing costs at $1,650 per batch.

Instructions

Compute the incremental income from further production of one batch of Product K.

B. Parker Manufacturers produces can openers. For the first six months of 2011, the company reported the following operating results while operating at 80% of plant capacity.

Sales

Cost of goods sold

Gross profit

Operating expenses

Net income

$4,000,000

2,500,000

1,500,000

1,000,000

$ 500,000

Cost of goods sold was 70% variable and 30% fixed. Operating expenses were 70% variable and 30% fixed. In September 2011, Parker Manufacturers receives a special order for 15,000 can openers at $7.50 from a foreign company. The can openers normally sell for $8.00. Acceptance of the special order would result in $5,000 of shipping costs but no increase in fixed operating expenses.

Instructions: Prepare an incremental analysis for the special order.

Peterson Company incurred the following high and low maintenance costs totals during 2011:

$432,000 at 20,000 units of activity during March and $320,000 at 12,000 units during August. Instructions: Answer parts (a) through (c) below, presenting carefully labeled supporting

calculations in all cases.

(a) Use the high-low method to compute the variable cost per unit and the total fixed cost element of the mixed cost component.

(b) Based on the above analysis, express the total maintenance cost in formula format.

(c) Compute the total maintenance cost for May when activity is 16,000 units.

Harder Company manufactures a product that sells for $50 per unit. Harder incurs a variable cost per unit of $30 and $3,400,000 in total fixed costs to produce this product. It is currently selling 200,000 units.

Instructions: Complete each of the following requirements, presenting labeled supporting computations.

(a) Compute and label the contribution margin per unit and contribution margin ratio.

(b) Using the contribution margin per unit, compute the break-even point in units.

(c) Using the contribution margin ratio, compute the break-even point in dollars.

(d) Compute the margin of safety and margin of safety ratio.

(e) Compute the number of units that must be sold in order to generate net income of $400,000 using the contribution margin per unit.

(f) Should Harder give a commission to its salesmen based on 10% of sales, if it will decrease fixed costs by $400,000 and increase sales volume 10%? Support your answer with labeled computations.

For two years, Annette Larson has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose “clothes” are made of acetate, and stay on the doll with static electricity. The company’s sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future.

The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Ms. Larson is considering two options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs to $35,000.

Required:

Given the fact that sales are increasing, make a short (one paragraph) recommendation to Ms. Larson about which option she should choose. Support your recommendation with a calculation showing her how profitability will change with each option

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