Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Chapter 18, Problem 18E
Otero Fibers, Inc., specializes in the manufacture of synthetic fibers that the company uses in many products such as blankets, coats, and uniforms for police and firefighters. Otero has been in business since 1985 and has been profitable every year since 1993. The company uses a
Otero has recently received a request to bid on the manufacture of 800,000 blankets scheduled for delivery to several military bases. The bid must be stated at full cost per unit plus a return on full cost of no more than 10 percent after income taxes. Full cost has been defined as including all variable costs of manufacturing the product, a reasonable amount of fixed overhead, and reasonable incremental administrative costs associated with the manufacture and sale of the product. The contractor has indicated that bids in excess of $30 per blanket are not likely to be considered.
In order to prepare the bid for the 800,000 blankets, Andrea Lightner, cost accountant, has gathered the following information about the costs associated with the production of the blankets.
*Direct machine costs consist of items such as special lubricants, replacement of needles used in stitching, and maintenance costs. These costs are not included in the normal overhead rates.
**Otero recently developed a new blanket fiber at a cost of $750,000. In an effort to recover this cost, Otero has instituted a policy of adding a $0.50 fee to the cost of each blanket using the new fiber. To date, the company has recovered $125,000. Lightner knows that this fee does not fit within the definition of full cost, as it is not a cost of manufacturing the product.
Required:
- 1. Calculate the minimum price per blanket that Otero Fibers could bid without reducing the company’s operating income.
- 2. Using the full-cost criteria and the maximum allowable return specified, calculate Otero Fibers’ bid price per blanket.
- 3. Without prejudice to your answer to Requirement 2, assume that the price per blanket that Otero Fibers calculated using the cost-plus criteria specified is greater than the maximum bid of $30 per blanket allowed. Discuss the factors that Otero Fibers should consider before deciding whether or not to submit a bid at the maximum acceptable price of $30 per blanket. (CMA adapted)
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Otero Fibers, Inc., specializes in the manufacture of synthetic fibers that the company uses in many products such as blankets, coats, and uniforms for police and firefighters. Otero has been in business since 1985 and has been profitable every year since 1993. The company uses a
standard cost system and applies overhead on the basis of direct labor hours.
Otero has recently received a request to bid on the manufacture of 800,000 blankets scheduled for delivery to several military bases. The bid must be stated at full cost per unit plus a return on full cost of no more than 10 percent after income taxes. Full cost has been defined as
including all variable costs of manufacturing the product, a reasonable amount of fixed overhead, and reasonable incremental administrative costs associated with the manufacture and sale of the product. The contractor has indicated that bids in excess of $30 per blanket are not likely
to be considered.
In order to prepare the bid for the 800,000 blankets,…
Penagos Corporation is presently making part Z43 that is used in one of its
products. A total of 5,000 units of this part are produced and used every year. The
company's Accounting Department reports the following costs of producing the
part at this level of activity:
Direct materials.
Direct labor
Variable overhead
Supervisor's salary
Depreciation of special equipment
Allocated general overhead
An outside supplier has offered to produce and sell the part to the company for
$20.80 each. If this offer is accepted, the supervisor's salary and all of the variable
costs, including direct labor, can be avoided. The special equipment used to make
the part was purchased many years ago and has no salvage value or other use.
The allocated general overhead represents fixed costs of the entire company. If
the outside supplier's offer were accepted, only $4,000 of these allocated general
overhead costs would be avoided.
If management decides to buy part Z43 from the outside supplier rather than to…
Borges Machine Shop, Inc., has a 1-year contract for the production of 75,000 gear housings for a new off-road vehicle. Owner Luis Borges hopes the contract will be extended and the
volume increased next year. Borges has developed costs for three alternatives. They are general-purpose equipment (GPE), flexible manufacturing system (FMS), and expensive, but
efficient, dedicated machine (DM) The cost data follow
General Purpose
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Flexible Manufacturing
System (FMS)
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$15.00
Annual contracted units
Annual fixed cost
Per unit vanable cost
Based on the total cost, the process that is best suited for the current contracted volume is
Suppose the contracted volume changes to 275,000 gear housings. Based on the total cost, the process that is best suited for the new volume is
Suppose the contracted volume changes to 375,000 gear housings. Based on the total cost, the process that is best suited for the new volume is
Dedicated
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Chapter 18 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 18 - Define price elasticity of demand. Give an example...Ch. 18 - What are the features of a perfectly competitive...Ch. 18 - How do you calculate the markup on cost of goods...Ch. 18 - Prob. 4DQCh. 18 - Prob. 5DQCh. 18 - Prob. 6DQCh. 18 - What is price discrimination? Is it legal?Ch. 18 - Prob. 8DQCh. 18 - Prob. 9DQCh. 18 - Suppose that Alpha Company has four product lines,...
Ch. 18 - How does absorption costing differ from variable...Ch. 18 - What are some advantages and disadvantages of...Ch. 18 - Prob. 13DQCh. 18 - Prob. 14DQCh. 18 - Describe the product life cycle. How do unit-level...Ch. 18 - Ventana Window and Wall Treatments Company...Ch. 18 - Kaune Food Products Company manufactures canned...Ch. 18 - Pattison Products, Inc., began operations in...Ch. 18 - Refer to Cornerstone Exercise 18.3. Required: 1....Ch. 18 - Saginaw Company is a garden products wholesale...Ch. 18 - Iliff, Inc., produces and sells two types of...Ch. 18 - Iliff, Inc., produces and sells two types of...Ch. 18 - Refer to Cornerstone Exercise 18.6. Required: 1....Ch. 18 - Budgeted unit sales for the entire countertop oven...Ch. 18 - Prob. 10ECh. 18 - Prob. 11ECh. 18 - Prob. 12ECh. 18 - Prob. 13ECh. 18 - Many different businesses employ markup on cost to...Ch. 18 - Flaherty, Inc., has just completed its first year...Ch. 18 - During its first year of operations, Snobegon,...Ch. 18 - Prob. 17ECh. 18 - Otero Fibers, Inc., specializes in the manufacture...Ch. 18 - Data for Torleson Company are as follows:...Ch. 18 - Eastman, Inc., manufactures and sells three...Ch. 18 - Prob. 21ECh. 18 - The following information pertains to three...Ch. 18 - Thebes Company had the following information: What...Ch. 18 - Banwood Company has the following information for...Ch. 18 - Jasmine Companys expected sales were 2,000 units...Ch. 18 - Prob. 26PCh. 18 - Snyder Company produced 90,000 units during its...Ch. 18 - The following information pertains to Vladamir,...Ch. 18 - Jellison Company had the following operating data...Ch. 18 - San Mateo Optics, Inc., specializes in...Ch. 18 - Haysbert Company provides management services for...Ch. 18 - Sulert, Inc., produces and sells gel-filled ice...Ch. 18 - Prob. 33PCh. 18 - Dana Baird was manager of a new Medical Supplies...Ch. 18 - Bill Fremont, division controller and CMA, was...Ch. 18 - Dantrell Palmer has just been appointed manager of...Ch. 18 - Prob. 37PCh. 18 - Porter Insurance Company has three lines of...Ch. 18 - Porter Insurance Company has three lines of...Ch. 18 - Olin Company manufactures and distributes...Ch. 18 - Shannon, Inc., has two divisions. One produces and...Ch. 18 - Prob. 42P
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