Question

Assessment Module 9 – Marginal Analysis

Please create a tab in your Excel Workbook and name it “Module 9 Marginal Analysis.” You have same basic templates in your Resources workbook, but you may need to modify these to fit the individual business problem. I am evaluating your professional ability to do so, and to create professional models and reports, so take your time, think through a logical, clear, well-structured, well-formatted model. Remember, assumption tables (like T-accounts) are your friends!

Be sure I can find your answers (and identify them as answers to specific questions) and see how you solved them!

Problem Set

Fuzion Company produces 100,000 units of Part 34B, used in one of its snowblower engines, each year. An outside supplier has offered to supply the part for $4.75. The unit cost is:

Direct materials	$0.50
Direct labor	2.40
Variable overhead (power)	0.90
Fixed overhead	1.05
Total unit cost	$4.85

Overhead is applied on the basis of Machine hours: Part 34B requires 30,000 machine hours per year.

Which alternative is more cost effective and why? (Assume that none of the fixed cost is avoidable)

WHAT IF? $60,000 of the fixed overhead is supervision for Part 34B that is avoided if the part is purchased? Which alternative is more cost effective and by how much?

Wrong Way Roger Co. makes three types of GPS devices. The Basic GPS model is an entry-level automotive GPS device; it is sold through discounters and Amazon.com. The Runner’s GPS is a miniaturized model that allows the runner to track mileage, steps, and heart rate while running; it is sold through athletic stores and on sports gear websites. The Chart Plotter is a specialized GPS device for sailors; it can be customized with maps of the sea floor and specific geographic areas of coastline and deep water. It is sold via the Web on dedicated GPS sites. RWR is considering dropping the Basic GPS line and keeping the Runner’s GPS and Chart Plotter. The segmented income statement is presented below.

	Basic GPS	Runner’s GPS	Chart Plotter	Total
Sales	$450,000	$980,000	$1,670,000	$3,100,000
Less variable costs	324,000	372,000	601,600	1,297,600
Contribution margin	$126,000	$608,000	$1,068,400	$1,802,400
Less direct fixed costs:
Advertisings	85,000	124,000	130,000	339,000
Supervision	60,000	115,000	135,000	310,000
Segment margin	$(19,000)	$369,000	$803,400	$1,153,400
Less common fixed expenses				915,000
Operating income				$238,400

Which alternative is more cost effective and by how much?

WHAT IF? Dropping the Basic GPS line would mean a 10 percent loss of volume for the Runner’s GPS device and a 2 percent loss in volume for the Chart Plotter? Which alternative would be more cost effective and by how much?

Purple Porcupine Inc., an ice-cream company, is operating at 80 percent of its productive capacity, 10 million one-quart units. An ice-cream distributor from a different geographic region has offered to buy 2 million units of premium ice cream at $1.75 per unit, provided its own label can be attached to the product. Normal selling price is $2.50 per unit. Cost information for the premium ice cream follows:

	Total of 8,000,000 Units	Unit Cost
Variable costs:
Direct materials	$7,600,000	$0.95
Direct labor	2,000,000	0.25
Packaging	1,600,000	0.20
Commissions	160,000	0.02
Distribution	240,000	0.03
Other variable costs	400,000	0.05
Non-unit-level costs:
Purchasing ($8 x 40,000 purchase orders)	320,000	0.04
Receiving ($6 x 80,000 receiving orders)	480,000	0.06
Setting up ($8,000 x 50 setups)	400,000	0.05
Fixed costs	1,600,000	0.20
Total Costs	$14,800,000	$1.85

The special order will not require commissions or distribution (the buyer will pick up the order at Purple Porcupine’s factory). The order will require 10,000 purchase orders, 20,000 receiving orders, and 13 setups. In addition, a one-time cost for the special order’s label template will be required at $24,500.

Which alternative is more cost effective and by how much?

What if? Accepting the special order upset a regular customer who was considering expanding into the new geographical region and decided, then, to take their regular annual order of 2 million units of premium ice cream to another company? Which alternative would be better?

Compostela Farms, Inc. grows and sells tomatoes and tomato products. Each plot yields 1,500 pounds of tomatoes, referred to as a load; of the 1,500 pounds, 1,000 pounds are Grade A tomatoes and 500 are Grade B. The cost of growing and harvesting the tomatoes is $200 per load. Compostela can sell the 1,000 pounds of Grade A tomatoes in a load to grocers for $0.40 per pound. Alternatively, the tomatoes could be processed into hot sauce. Each bottle of hot sauce sells for $1.50 and requires one pound of tomatoes. The cost of additional processing averages $1 per bottle; this amount includes the remaining ingredients, bottles, labor, and needed processing activities.

Which alternative is more cost effective and by how much?

WHAT IF? the best of the Grade A tomatoes, Premium As, could be sold to grocers for $0.80 per pound? Of the 1,000 pounds of Grade A tomatoes in a load, about 30 percent are Premium As. The grocers, however, will not buy the Premium As unless they are also sold the regular Grade A tomatoes. (They will deal with another supplier instead.) It will cost an additional $50 per load to separate the Premium As from the regular Grade As. Which alternative would be better?

Watauga Inc. has a idle capacity. Recently Watauga received an offer to sell 2,000 units of one of its products to a new customer in a geographic region not normally serviced. The offering price is $10 per unit. The product normally sells for $14. The activity-based accounting systems provides the following information:

				Activity Rate
	Cost Driver	Unused Capacity	Quantity Demanded	Fixed	Variable
Direct materials	Units	0	2,000		$3.00
Direct labor	Direct labor hours	0	400		7.00
Setups	Setup hours	0	25	$50.00	8.00
Machining	Machine hours	6,000	4,000	4.00	1.00

• Quantity demanded represents only the amount of resources demanded by the special order being considered.
• Fixed Activity Rate is the price that must be paid per unit of activity capacity; Variable Activity Rate is the price per unit of resource for resources acquired as needed.

Although the fixed activity rate for setups is $50 per hour, any expansion of this resource must be acquired in blocks. The unit of purchase for setups is 100 hours of setup servicing. Thus, any expansion of setup activity must be done 100 hours at a time. The price per hour is the fixed activity rate.

Should the order be accepted? What is the change in income?

(NOTE: Fixed activity rates are to acquire NEW blocks of capacity – if you have sufficient unused available, you don’t have to acquire more. Variable activity rates are per unit of cost driver).

What if? the setup activity had 50 hours of unused capacity. How does this affect your analysis?

Answer 1