1. The Dear Division of Zimmer Company sells all of its output to the Finishing Division of the company.

The
only product of the Dear Division is chair legs that are used by the Finishing Division. The retail price of the
legs is $20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity
and cost data for 2021 are as follows:

Chair legs 30,000

Direct materials $135,000
Direct labor $ 90,000
Overhead (25% is variable) $ 90,000

Required: Compute the transfer price for a chair leg using:

A. market price.
B. variable product costs plus a fixed fee of 20%.
C. full cost plus 20% markup.
D. variable costs.

ANS:

A. $20

B. 1.20 x [$135,000 + $90,000 + (0.25 x $90,000)]/30,000 = $9.90

C. 1.20 x ($135,000 + $90,000 + $90,000)/30,000 = $12.60

D. [$135,000 + $90,000 + (0.25 x $90,000)]/30,000 = $8.25

2. Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit.
Recently the supplier informed Junior Company that a 20% increase will take effect next year. Junior has
some additional space and could produce the units for the following per-unit costs (based on 30,000 units):

Direct materials $16

Direct labor 12
Variable overhead 12
Fixed overhead 10
Total $50

If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In
addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.

Required: Should Junior Company buy the part externally or make it internally?

ANS:
Produce internally; it saves $120,000. ($1,620,000  $1,500,000)

If purchased externally:
 Purchase price (30,000 x $40 x 1.20) $1,440,000
Fixed costs 200,000
Rent received (20,000)
Net cost to purchase $1,620,000

If produced internally:
Cost to produce (30,000 x $50) $1,500,000

3. Tyler Company has been approached by a new customer with an offer to purchase 6,000 units of its product
KR200 at a price of $11 each. The existing sales would not be affected by this special order. Tyler normally
produces 40,000 units but plans to produce and sell 30,000 in the coming year. The normal sales price is $18
per unit. Unit cost information is as follows:

Direct materials $4.00

Direct labor $2.75
Variable overhead $1.50
Fixed overhead $3.25
Total $11.50

If Tyler accepts the order, no fixed manufacturing activities will be affected because there is sufficient
excess capacity.

Required:
A. By how much will profit increase or decrease if the order is accepted?
B. Should Tyler accept the special order?

ANS:
A.
Direct materials $4.00
Direct labor $2.75
Variable overhead $1.50
$8.25
$11 - $8.25 = $2.75
$2.75 x 6,000 = $16,500 increase

B. Yes the order should be accepted.

4. The operations of Grant Corporation are divided into the Fix Division and the Roach Division. Projections
for the next year are as follows:

Fix Roach
Division Division Total
Sales revenue $60,000 $40,000 $100,000
Variable expenses 20,000 15,000 35,000
 Contribution margin $40,000 $25,000 $ 65,000
Direct fixed expenses 12,500 30,000 42,500
Segment margin $27,500 $ (5,000) $ 22,500
Allocated common costs 10,000 7,500 17,500
Total relevant benefit (loss) $17,500 $(12,500) $ 5,000
Required:
A. Determine operating income for Grant Corporation as a whole if the Roach Division is
dropped.
B. Should the Roach Division be eliminated?

ANS:

A. Sales $60,000
Variable costs 20,000
Contribution margin $40,000
Direct fixed costs 12,500
Segment margin $27,500
Allocated common costs:
($10,000 + $7,500) 17,500
Operating income $10,000

B. Yes. The Roach division should be dropped, since it has a negative segment margin of
$5,000. Dropping the Roach Division increases the firm's income by $5,000.

5. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is $30,000.
Information about the three products follows:

X Y Z
Anticipated production 5,600 lbs. 10,000 lbs. 2,500 lbs.
Selling price/lb. at split-off $2.00 $1.00 $3.00
Additional processing costs/lb. after split-off
(all variable) $1.50 $1.25 $.75
Selling price/lb. after further processing $2.50 $3.75 $6.25
Allocated joint costs $12,000 $10,500 $7,500

Required:
A. Determine whether each product should be sold at split-off or processed further.
B. Determine the firm's income if the firm processed all three products beyond split-off.

ANS:

A. Sell at Process Further

Split-Off Then Sell Decision
X $11,200 $14,000
(8,400) Sell at split-off
 $ 5,600

Y $10,000 $37,500
(12,500) Process further
$25,000

Z $ 7,500 $15,625
(1,875) Process further
$13,750

The joint costs are not relevant to the decision.

B. $14,350 ($13,750 + $25,000 + $5,600  $30,000)