8/9/2019 Additional DM Problems
1/3
1. Papa Fred's Pizza store no. 16 has fallen on hard times and
is about to be closed. Thefollowing figures are available for the
period just ended:
ales !"#$%###&ost of sales 6%(##
)uilding occupanc* costs:+ent ,6%$##-tilities 1$%###
upplies used $%6##ages %##/iscellaneous "%0##llocated corporate
overhead 16%2##
ll emplo*ees e3cept the store manager would be discharged. The
manager% who earns!"%### annuall*% would be transferred to store
no. 1( in a neighboring suburb. lso% no.16's furnishings and
e4uipment are full* depreciated and would be removed and
transported to Papa Fred's warehouse at a cost of !"%2##.
+e4uired:A. hat is store no. 16's reported loss for the period
just ended5
B. hould the store be closed5 h*5C. ould Papa Fred's liel* lose
all !"#$%### of sales revenue if store no. 16 were
closed5 73plain.
8/9/2019 Additional DM Problems
3/3
,. &ornell &orporation manufactures faucets. everal wees
ago% the firm received a special@order in4uir* from Cale% ;nc. Cale
desires to maret a faucet similar to &ornell's modelno. $$ and
has offered to purchase ,%### units. The following data are
available:
&ost data for &ornell's model no. $$ faucet: direct
materials% !0$> direct labor% !,#
however% Cale has offered
&ornell onl* !11$ because of the large 4uantit* it is
willing to purchase. Cale re4uires a modification of the design
that will allow a !0 reduction in direct@
material cost. &ornell's production supervisor notes that
the compan* will incur !2%## in
additional set@up costs and will have to purchase a !,%,##
special device tomanufacture these units. The device will be
discarded once the special order iscompleted.
Total manufacturing overhead costs are applied to production at
the rate of !,$
per labor hour. This figure is based% in part% on budgeted
*earl* fi3ed overhead of
!6"0%### and planned production activit* of "0%### labor hours.
&ornell will allocate !$%### of e3isting fi3ed administrative
costs to the order as
?Dpart of the cost of doing business.?
+e4uired:A. Ene of &ornell's staff accountants wants to
reject the special order because
?financiall*% it's a loser.? o *ou agree with this conclusion if
&ornell currentl* hase3cess capacit*5 how calculations to
support *our answer.
B. ;f &ornell currentl* has no e3cess capacit*% should the
order be rejected from afinancial perspective5 )riefl* e3plain.
C. ssume that &ornell currentl* has no e3cess capacit*. ould
outsourcing be an
option that &ornell could consider if management trul*
wanted to do business withCale5 )riefl* discuss% citing several e*
considerations for &ornell in *our answer.
