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Question: ACC 2234 Hand-In Assignment 4 v3 QUESTION 1 Utilization of a Constrained Resource Westburne Compa...

ACC 2234 Hand-In Assignment 4 v3

QUESTION 1

Utilization of a Constrained Resource

Westburne Company produces three products: Alpha, Omega and Beta. Data (per unit) concerning the three products follow:

Alpha             Omega           Beta

Selling price                                                  $160               $112               $140

Less variable expenses:

            Direct materials                                    48                    30                    18

            Labour and overhead                         48                    54                    80

Total variable expenses                                  96                    84                    98

Contribution margin                                                $64               $28               $42

Contribution margin ratio                           40%              25%              30%

Demand for the company\'s products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $6 per kilogram, with a maximum of 10,000 kilograms available each month.

Required:

Which orders would you advise the company to accept first, those for Alpha, Omega or Beta? Which orders second? Third?

SUB-QUESTION 2

Dropping or Retaining a Tour

A study has indicated that some of the bus tours operated by Clear Water Tours Inc. are not profitable. As a result, consideration is being given to dropping these unprofitable tours to improve the company\'s overall operating performance.

One such tour is a three-day Majestic Islands bus tour. Additional information and an income statement from a typical Majestic Islands tour are given below.

The following additional information is available about the tour:

Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.

The \"Bus maintenance and preparation\" cost in the statement is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company\'s fleet of buses in good operating condition.

Ticket revenue (100 seat capacity X 40% occupancy X

$70 ticket price per person)                                          $2,800            100%

Variable expenses ($21.00 per person)                          840 30     

Contribution margin                                                                        1,960            70%

Tour expenses:

Tour promotion                                                                   540            

Salary of bus driver                                                           320

Fee, tour guide                                                                   630

Fuel for bus                                                                        110

Depreciation of bus                                                           410

Liability insurance, bus                                                    180

Overnight parking fees, bus                                              50             

Room and meals, bus driver and tour guide                             160

Bus maintenance and preparation                                 270

Total tour expenses                                                       2,670

Operating loss                                                                $(710)           

Depreciation of buses is due to obsolescence.

Liability insurance premiums are based on the number of buses in the company\'s fleet.

Dropping the Majestic Islands bus tour would not allow Clear Water Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.

Required:

Prepare an analysis showing what the impact will be on the company\'s profits if this tour is discontinued.

The company\'s tour director has been criticized because only about 50% of the seats on Clear Water\'s tours are being filled, compared to an industry average of 60%. The tour director has explained that Clear Water\'s average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.

SUB-QUESTION 3

Accept or Reject a Special Order

Moore Company manufactures and sells a single product called a Lop. Operating at capacity, the company can produce and sell 30,000 Lops per year. Costs associated with this level of production and sales are given below:

Unit                     Total

Direct materials                                            $15                    $450,000

Direct labour                                                                 8                       240,000

Variable manufacturing overhead                            3                         90,000

Fixed manufacturing overhead                     9                       270,000

Variable selling expense                                4                       120,000

Fixed selling expense                                     6                       180,000

Total cost                                                       $45                 $1,350,000

The Lops normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Lops per year.

Required:

Assume that due to a recession, Moore Company expects to sell only 25,000 Lops through regular channels next year. A large retail chain has offered to purchase 5,000 Lops if Moore is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; so variable selling expenses would be slashed by 75%. However, Moore Company would have to purchase a special machine to engrave the retail chain\'s name on the 5,000 units. This machine would cost $10,000. Moore Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.

Refer to the original data. Assume again that Moore Company expects to sell only 25,000 Lops through regular channels next year. The provincial government would like to make a one-time- only purchase of 5,000 Lops. The government would pay a fixed fee of $1.80 per Lop, and it would reimburse Moore Company for all costs of production (variable and fixed) associated with the units. Since the government would pick up the Lops with its own trucks, there would be no variable selling expenses associated with this order. If Moore Company accepts the order, by how much will profits increase or decrease for the year?

Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Lops through regular channels next year, so accepting the government\'s order would require giving up regular sales of 5,000 Lops. If the government\'s order is accepted, by how much will profits increase or decrease from what they would be if the 5,000 Lops were sold through regular channels?

Solution

Answer-I

Note: As per Chegg policy only first question can be solved .

	Alpha	Omega	Beta
Contribution margin per unit	$64.00	$28.00	$42.00
Material pound Require per unit ( Material Cost per Unit/ Material Require per Unit)	8	5	3
Contribution margin per Material pound (Contribution Margin Per Unit/ Material Require per Unit)	$8.00	$5.60	$14.00
Rank	2	3	1