1.Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso’s plant manager is considering making the headlights now being purchased from an outside supplier for $

1.Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso’s plant

manager is considering making the headlights now being purchased from an outside supplier for $11

each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design

engineer estimates that each headlight requires $4 of direct materials, $3 of direct labor, and $6.00 of

manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be

unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result

in a net gain (loss) for each headlight of:

2. Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside

supplier. The company uses 13,000 of the components each year. The unit product cost of the

component according to the company’s cost accounting system is given as follows:

direct material………………………………………………….8.80

direct labor……………………………………………………….5.80

varianle manufacturing overhead………………………1.60

fixed manufacturing overhead…………………………..3.60

unit product cost………………………………………………19.80

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the

component were bought from the outside supplier. In addition, making the component uses 1 minute on

the machine that is the company’s current constraint. If the component were bought, this machine time

would be freed up for use on another product that requires 2 minutes on this machine and that has a

contribution margin of $5.20 per unit.

When deciding whether to make or buy the component, what cost of making the component should be

compared to the price of buying the component?

3Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20

each. Product W68’s unit product cost is $18.50, determined as follows:

direct material……………………………………………………2.20

direct labor………………………………………………………..7.90

variable manufacturing over head………………………1.50

fixed manufacturing overhead……………………………6.90

Unit product cost……………………………………………….18.50

Direct labor is a variable cost. The special order would have no effect on the company’s total fixed

manufacturing overhead costs. The customer would like modifications made to product W68 that would

increase the variable costs by $7.90 per unit and that would require an investment of $31,000 in special

molds that would have no salvage value.

This special order would have no effect on the company’s other sales. The company has ample spare

capacity for producing the special order. If the special order is accepted, the company’s overall net

operating income would increase (decrease) by:

4.The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of

$720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total

of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.

a.The sunk cost in this situation is

b.Using the same facts as Question 16, what is the net advantage or disadvantage to the company from

upgrading the computers rather than selling them in their present condition?

A. $110,000 advantage

B. $660,000 disadvantage

C. $10,000 advantage

D. $60,000 advantage

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