Accounting for Decision making

MAKE OR BUY
1. The estimated costs of producing 6,000 units of a component are:
Unit cost
Direct Material
Direct Labor
Applied variable overhead
Applied fixed overhead

39

Total
10
60,000
48,000
9
54,000
12
72,000
234,000

The same component can be purchased from market at a price of $29 per unit. If
the component is purchased from market, 25% of the fixed factory overhead will
be saved.
Should the component be purchased from the market?

CLOSURE OF DEPARTMENT
2. Chadni Fashion operates three departments: Mens, Womens, and
Accessories. It allocates fixed expenses (building depreciation and utilities) based
on the square feet occupied by each department. Departmental operating
income data for the third quarter of 2007 are as follows:
Department
Mens
Sales revenue
$259,000
Variable expenses
170,000

Total
Womens

$105,000

60,000

$54,000

Accessories
$100,000

30,000

80,000

Fixed expenses
70,000

25,000

20,000

25,000

Total expenses
240,000

85,000

50,000

105,000

Operating income (loss)

$20,000

$4,000

$(5,000)

$19,000

(a) The store will remain in the same building regardless of whether any of the
departments is
dropped. Should Chadni Fashion drop any of the departments? Give your reason.

(b) Assume that the fixed expenses assigned to each department include only
direct fixed costs of the department, e.g. salary of the departments manager
and cost of advertising directly related to that department. If Chadni Fashion
drops a department, it will not incur these fixed expenses. In this case, should
Chadni Fashion drop any of the departments? Give your reason.
REPLACEMENT
3. Sleeks Manufacturing is faced with the issue of keeping or replacing an old
machine. The following information will be used in its decision making:
Old machine
New machine
Original cost

$20,000

$14,000

Useful life

5 years

3 years

Current age

2 years

0 years

Remaining useful life

3 years

3 years

Accumulated depreciation
yet

$8,000

Not acquired

Book value

$12,000

Not acquired yet

Current disposal value

yet

$3,000

Not acquired

Salvage value (end of life)

$0

$0

Annual operating cost

$10,000

$8,000

Sleeks uses straight-line depreciation method. Should the company replace the
old machine?
Why or why not?
SPECIAL ORDER
4. Glen Limited has been offered a special order to supply 50,000 units at a
selling price of $2 per unit of one of its popular products, Zeta, to be
exclusively sold in a new market outside Hong Kong. Existing output of Zeta is
200,000 units per month which represents 80 percent of its maximum capacity.
Total costs for last month were $300,000 of which $120,000 were fixed costs.
Fixed costs would be increased by 20% if the special order is accepted. The
selling price for Zeta is $2.5 per unit.
Required:
Should Glen Limited accept this special order?