Concept explainers
Activity-Based Supplier Costing
Levy Inc. manufactures tractors for agricultural usage. Levy purchases the engines needed for its tractors from two sources: Johnson Engines and Watson Company. The Johnson engine has a price of $1,000. The Watson engine is $900 per unit. Levy produces and sells 22,000 tractors. Of the 22,000 engines needed for the tractors, 4,000 are purchased from Johnson Engines, and 18,000 are purchased from Watson Company. The production manager, Jamie Murray, prefers the Johnson engine. However, Jan Booth, purchasing manager, maintains that the price difference is too great to buy more than the 4,000 units currently purchased. Booth also wants to maintain a significant connection with the Johnson source just in case the less expensive source cannot supply the needed quantities. Jamie, however, is convinced that the quality of the Johnson engine is worth the price difference.
Frank Wallace, the controller, has decided to use activity costing to resolve the issue. The following activity cost and supplier data have been collected:
Required:
- 1. CONCEPTUAL CONNECTION Calculate the activity-based supplier cost per engine (acquisition cost plus supplier-related activity costs). (Round to the nearest cent.) Which of the two suppliers is the low-cost supplier? Explain why this is a better measure of engine cost than the usual purchase costs assigned to the engines.
- 2. CONCEPTUAL CONNECTION Consider the supplier cost information obtained in Requirement 1. Suppose further that Johnson can only supply a total of 20,000 units. What actions would you advise Levy to undertake with its suppliers?
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Chapter 5 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
- This Little Light, Inc. is a manufacturer of lamps. Little Light makes 40,000 units per year of a part that it uses in the manufacturing of each lamp. At this activity level, the unit production cost is $7.17. Of this amount, $4.71 is for unit variable production costs. The remainder is for fixed production costs and equals $98,400. Little Light has identified an outsider supplier who sells the needed part. If the part is purchased from the outsider supplier, 15% of Little Light's fixed manufacturing costs will be eliminated. Assume Little Light will need 50,000 of the part next year and that the freed up capacity can be rented out to another company for $31,740. At what purchase price will Little Light be economically indifferent between making the part and buying the part? $4.70 $4.86 $5.97 $5.50 $5.64arrow_forwardFlanger is an industrial distributor that sources from hundreds of suppliers. One of these vendors supplies three products—A, B, and C—to Flanger. Annual demand for the three products are 24000, 600, and 600 units respectively. All the three products cost $200 per unit. Flanger uses a trucking company that charges a fixed transportation cost of $4000. An additional fixed cost of $1000 is incurred for receiving and storage. Flanger incurs a holding cost of 20% of the product purchase price. a. Evaluate the lot sizes that Flanger should order if lots for each product are ordered and delivered independently. What is the annual total cost (holding and ordering) of such a policy? b. Suppose the three product managers overseeing the replenishment of products A, B, and C decide to aggregate and order all three products each time they place an order. Evaluate the optimal order size for each product in this case. What is the annual total cost (holding and ordering) of this policy? c. In part…arrow_forwardOwly Corporation’s agriculture division currently produces their own soil mix to grow the plants they sell in. Owly currently makes 200,000 cubic meters of soil mix a year. Each cubic meter of soil mix has direct labour costs of $1.50, direct material costs of $3.15, variable overhead costs of $0.75, and fixed overhead costs of $0.70 for a total cost of $6.10 per cubic meter. An outside supplier has offered to sell Owly soil mix for $5.75 per cubic meter. If Owly purchases the soil mix, 25% of the fixed manufacturing overhead will be eliminated, the remaining 75% will still exist.A. What is the net dollar advantage (disadvantage) of purchasing the soil mix rather than making it?B. What is the maximum amount Owly is willing to pay an outside supplier per cubic meter (to the cent) for the soil mix if the supplier commits to supplying all 200,000 cubic meters?C. After one month of greenhouse growing time Owly can produce 100,000 four inch pot basil plants that can be sold for $2.20 each.…arrow_forward
- The Peace Department of Shalom Company uses 5,000 kilograms per month in its production of Peace products. It presently buys all the kilograms of materials it needs from outside supplier at a cost of P100. The Piss Division of Shalom Company manufactures the exact type of material that the Peace Department requires. The Piss Division is operating at its capacity of 15,000 units per month and sells all its output to a local manufacturer at P108 per unit. The following cost data are available for its 15,000 units: Variable production costs All fixed costs 70 10 If Piss Division sells all units to the local manufacturer, will it accept Peace's offer at P75? Yes or no? Use the underlined words as your choice. Input answers in capital letters.arrow_forwardSE Spring Corp. has two divisions, Daffodil and Tulip. Daffodil produces a gadget that Tulip could use in its production. Tulip currently purchases 195,000 gadgets for $14.40 on the open market. Daffodil's variable costs are $7.90 per widget while the full cost is $12.20. Daffodil sells gadgets for $15 each. If Daffodil is operating at capacity, what would be the maximum transfer price Tulip would pay internally? Multiple Choice $7.90 $12.20 $14.40 $14.90arrow_forwardSteven oversees the production department for a factory that makes plastic outdoor chairs. department sells all of its production to external parties, and the department has an overall production capacity of 150,000 chairs. Their sales data is as follows: Sales (90,000 chairs) a $460,000, Variable Costs are $206,200, and Fixed Costs are $194,350. The internal Resale would like to purchase 26,700 chairs from the Production Department. They will be selling external retailers for $15.49 per chair. If the Resale Division negotiates a deal with the Pro Department to purchase each chair for its absorption cost plus a 2.4% markup, then what amount of Operating Income the Resale Division would report for their sale of 26,700 cha per unit cost to nearest cents. O $291,831 O $351,105 O $198,235 O $3,612arrow_forward
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- Howard Motors manufactures specialty tractors. It has two​ divisions: a Tractor Division and a Tire Division. The Tractor Division can use the tires produced by the Tire Division. The market price per tire is $70. The Tire Division has the following costs per​ tire:   Direct material cost per tire $29  Conversion costs per tire $4​(Assume the $4includes only the variable portion of conversion​ costs.)  Fixed manufacturing overhead cost for the year is expected to total $120,000.The Tire Division expects to manufacture 60,000 tires this year. The fixed manufacturing overhead per tire is $2 ​($120,000 divided by 60,000 ​tires).  Requirements:  1. Assume that the Tire Division has excess​ capacity, meaning that it can produce tires for the Tractor Division without giving up any of its current tire sales to outsiders. If Howard Motors has a negotiated transfer price policy, what is the lowest acceptable transfer​ price? What is the highest acceptable transfer​…arrow_forwardSnow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows: Direct materials                                               $  17,590 Direct laabor                                                          3,200 Variable overhead                                                  2,080 Fixed overhead                                                     6,300    Total manufacturing cost for 1,900 bindings          $     29,170    Suppose Livingston will sell bindings to Snow Ride for $13 each. Snow Ride would pay $3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.50 per binding. Requirments: 1. Snow Ride's accountants predict that purchasing the bindings from livingston will enable the company to avoid $2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings. 2. The facilities freed by purchasing bindings from…arrow_forwardMartinez Products manufactures a line of desk chairs.​ Martinez's production operations are divided into two departments — Department 1 and Department 2. The company uses a process costing system. Martinez incurred the following costs during the year to produce 26,300 ​chairs:  Department 1 $860,500 Department 2 $295,000  If Martinez sells 22,700 chairs during the​ year, what will be the cost per chair​ produced? (Round your answer to two decimal​ places.)  A. $37.91  B. $50.90  C. $43.94  D. 32.72arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning