Accounting homework problem

Part III
ABC company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and ABC does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow.

  Cost Category

Job A

Job B

  Contract price

$

808,000

$

691,000

  Unit-level materials

244,800

225,150

  Unit-level labor

250,450

306,600

  Unit-level overhead

18,100

14,400

  Supervisor’s salary

115,670

115,670

  Rental equipment costs

25,800

28,400

  Depreciation on tools (zero market value)

20,900

20,900

  Allocated portion of companywide facility-sustaining costs

11,000

8,900

  Insurance cost for job

17,600

17,600

Required:

a-1.

Calculate the contribution to profit from Job A and Job B. 

a-2.

Assume that ABC has decided to accept one of the two jobs. Recommend which job to accept?

b-1.

Assume that Job A is no longer available. ABC’s choice is to accept or reject Job B alone. Calculate the contribution to profit from Job B. 

b-2.

Based on your answer to requirement b-1, recommend whether to accept or reject Job B.

Part IV
Seymour Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Seymour produces a relatively small amount (14,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.70 each. If Seymour purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Seymour’s accountant constructed the following profitability analysis.

  Revenue (14,000 units × $14.0)

$

196,000

     Unit-level materials costs (14,000 units × $1.70)

(23,800

)

     Unit-level labor costs (14,000 units × $.60)

(8,400

)

     Unit-level overhead costs (14,000 × $.40)

(5,600

)

     Unit-level selling expenses (14,000 × $.20)

(2,800

)

  Contribution margin

155,400

     Skin cream production supervisor’s salary

(57,000

)

     Allocated portion of facility-level costs

(13,900

)

     Product-level advertising cost

(46,000

)

  Contribution to companywide income

$

38,500

Required:

a.

Calculate the total avoidable costs. 

b-1.

Calculate the total avoidable cost per unit. 

b-2.

Should Seymour continue to make the product or buy it from the supplier?

c-1.

Suppose that Seymour is able to increase sales by 10,000 units (sales will increase to 24,000 units). Calculate the total avoidable costs. 

c-2.

At this level of production, should Seymour make or buy the cream?