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5-A1

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The Independence Company had the following manufacturing data for the year 2009 (in thousands of dollars):

 

Beginning and ending inventories                                                                        None

 

Direct material used                                                                                              $400

 

Direct Labor                                                                                                              300

 

Supplies                                                                                                                        20

 

Utilities-variable portion                                                                                           40

 

Utilities-fixed portion                                                                                                 15

 

Indirect Labor-variable portion                                                                                 90

 

Indirect Labor-fixed portion                                                                                       50

 

Depreciation                                                                                                                200

 

Property Taxes                                                                                                               20

 

Supervisory salaries                                                                                                       60

 

 

 

Selling expenses were $300,000 (including $80,000 that were variable) and general administrative expenses were $144,000 (including $25,000 that were variable). Sales were $2.2 million.

 

Direct labor and supplies are regarded as variable costs.

 

1.       Prepare two income statements, one using the contribution approach and one using that absorption approach.

 

2.       Suppose that all variable cost fluctuate directly in proportion to sales and that fixed costs are unaffected over a very wide range of sales. What would operating income have been if sales had been $2.0 million instead of $2.2 million? Which income statement did you use to help obtain your answer? Why?

 

6-A1

Sunshine State Fruit Company sells premium-quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important so the company has designed and produces shipping boxes. The annual cost to make $80,000 boxes is

Materials                                          $112,000

Labor                                                    20,000

Indirect manufacturing cost

                Variable                                 16,000

                Fixed                                      60,000

Total                                                 $208,000                          

Therefore, the cost per box averages $2.60

Suppose Weyerhauser submits a bid to supply Sunshine State with boxes for $2.10 per box. Sunshine State must give Weyerhauser the box design specifications, and the boxes will be made according to those specs.

1.       How much if any, would Sunshine State save by buying the boxes for Weyerhauser?

2.       What subjective factors should affect Sunshine State’s decision about whether to make or buy the boxes?

3.       Suppose all the fixed costs represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its 10-year life. New replacement equipment will cost $800,000 and is also expected to last 10 years. In this case, how much, if any, would Sunshine State save by buying the boxes from Weyerhauser?