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1 Class problem Look-N-Cook sells uncooked pies that can be heated at home and taste delicious. An income statement for a typical month is given below. Sales (5,000 pies)$ 50,000 Costs: Ingredients$ 19,000 Direct Labor 6,000 Overhead (50% variable) 20,000 45,000 Before-tax Income$ 5,000 A local car dealer, who loves Look-N-Cook pies, has offered to buy 300 pies for an upcoming promotion to launch the new SPEEDY line of sports cars he will carry. While the normal selling price is $10 per pie, the dealer has offered $6 each citing the large volume of the order as the reason for cutting the price. If Look-N-Cook accepts this order, the effect on the company's income, assuming regular sales are unaffected, is a a. $900 decrease.b. $900 increase. c. $300 decrease.d. $300 increase. (Variable costs are $ 7 per unit so each pie will result in a loss of $1 The fixed overhead of $2 per pie a.is irrelevant in making the decision because the total fixed costs are unaffected. b.is irrelevant in making the decision because the fixed costs per unit are unaffected. c.will increase to above $2 per pizza if the order is accepted. d. will increase to above $2 per pizza if the order is not accepted.

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2 Class problem ACE produces cars for both American and Japanese car companies. It currently manufactures the transmissions that go into the cars. SOY Corp. has offered to provide transmissions to ACE for $400 each. ACE produces 5,000 cars per month and has the following costs for the manufacture of the transmissions: Direct materials$150 Direct labor 50 Variable overhead 100 Fixed overhead 150 Total Cost$450 If the transmissions are purchased from SOY, $300,000 of fixed overhead costs per month (supervisors salaries, insurance, etc.) could be eliminated. Given that the quality of the SOY transmissions is equivalent to that of ACE, it should a.buy transmissions from SOY to save $200,000 per month. b.make transmissions to save $200,000 over the cost of buying them. c.buy transmissions from SOY to save $250,000 per month. d.make transmissions to save $250,000 over the cost of buying them

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3 Class problem ACE produces cars for both American and Japanese car companies. It currently manufactures the transmissions that go into the cars. SOY Corp. has offered to provide transmissions to ACE for $400 each. ACE produces 5,000 cars per month and has the following costs for the manufacture of the transmissions: Direct materials$150 Direct labor 50 Variable overhead 100 Fixed overhead 150 Total Cost$450 If the transmissions are purchased from SOY, $300,000 of fixed overhead costs per month (supervisors salaries, insurance, etc.) could be eliminated. Given that the quality of the SOY transmissions is equivalent to that of ACE, it should a.buy transmissions from SOY to save $200,000 per month. b.make transmissions to save $200,000 over the cost of buying them. c.buy transmissions from SOY to save $250,000 per month. d.make transmissions to save $250,000 over the cost of buying them Fixed costs savings are $300,000/5,000 = $60 per unit. Savings = $150 + 50 +100 + 60= $360. Compared to $400 = $40 loss per car x 5,000 = $200,000 loss.

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4 Class problem Podell Corporation has a joint process, which produces three products, A, B, and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year amount to $200,000. Other relevant data are as follows: Separable Processing Sales ValueCosts afterSales Value Productat Split-off Split-offat Completion A$256,000$32,000$320,000 B 100,000 52,000 152,000 C 51,200 40,000 80,000 To maximize profits, which products should Bermuda process further? Product C only Product B only Product A only Products A, B, and C

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5 Class problem Podell Corporation has a joint process, which produces three products, A, B, and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year amount to $200,000. Other relevant data are as follows: Separable Processing Sales ValueCosts afterSales Value Productat Split-off Split-offat Completion A$256,000$32,000$320,000 B 100,000 52,000 152,000 C 51,200 40,000 80,000 To maximize profits, which products should Bermuda process further? Product C only Product B only Product A only Products A, B, and C A $320,000 – 32,000 = $288,000 B $152,000 – 52,000 + $100,000 C $80,000 – 40,000 = $40,000

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Richard McDermott, Ph.D. Accounting 2020

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