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QUESTION 1

ABC Company makes part 16E in house for the following costs
Rs.
Materials 40,000
Labor 290,000
Managers Salary 48,000
Allocated Office Space Cost 10,000
Depreciation on Equipment 32,500
Miscellaneous Expenses 25,000
Allocated Administrative Overheads 30,000
Total Cost 475,500

The company can acquire the same part from an outside supplier for Rs. 410,000. The price of
Rs. 410,000 was based on signing a 4 year agreement.

The following information is available for the various costs:


1. The material includes 15,000 worth of generic material and 25,000 worth of specialty
material. Five years worth of the specialty material was purchased a year ago for
125,000. Hence currently we have four years worth of material left in inventory. The
new price of this material is 110% of the old price. The current re-sale price of this
material is 60% of original cost.
2. Out of the total labor cost ABC would still require labor worth 60,000 to maintain its
other operations. The company has two managers who are paid 24000 each. If part 16E is
outsourced, one of the managers will replace a retiring manager in another division and
the other manager will be retained for the companys other operations.
3. If ABC shuts down the production of part 16E, it can expand its other operations to earn
an additional profit of Rs. 24,000 per year.
4. We could also avoid paying Rs. 2000 worth of Allocated Office Space costs if production
of part 16E was stopped.
5. The current machine was acquired for Rs 260,000 four years ago (book value = 130000),
could be sold off for Rs 80,000 if production was stopped.
6. We are paying Rs. 12,000 a year to rent additional warehouse space for another product.
If production of 16E was outsourced we would not need to rent out this space any more.
Based on the above given information please advise the company on the course of action to
be followed. Please show all relevant calculations to support your decision.
QUESTION 2

St. Joseph Hospital has been hit with a number of complaints about its food service from
patients, employees, and cafeteria customers. These complaints, coupled with a very
tight local labor market, have prompted the organization to contact Nationwide
Institutional Food Service (NIFS) about the possibility of an outsourcing arrangement.

The hospital's business office has provided the following information for food service for
the year just ended: food costs, $890,000; labor, $85,000; variable overhead, $35,000;
allocated fixed hospital overhead, $60,000; and cafeteria food sales, $80,000.

Conversations with NIFS personnel revealed the following information:


NIFS will charge St. Joseph Hospital $14 per day for each patient served. Note: This
figure has been "marked up" by NIFS to reflect the firm's cost of operating the
hospital cafeteria.
St. Joseph's 250-bed facility operates throughout the year and typically has an average
occupancy rate of 70%.
Labor is the primary driver for variable overhead. If an outsourcing agreement is
reached, hospital labor costs will drop by 90%. NIFS plans to use St. Joseph facilities
for meal preparation.
Cafeteria food sales are expected to increase by 15% because NIFS will offer an
improved menu selection.

Required:
A. Should St. Joseph outsource its food-service operation to NIFS?
QUESTION 3
Cornell Corporation manufactures faucets. Several weeks ago, the firm received a
special-order inquiry from Yale, Inc. Yale desires to market a faucet similar to Cornell's
model no. 55 and has offered to purchase 3,000 units. The following data are available:

Cost data for Cornell's model no. 55 faucet: direct materials, $45; direct labor, $30 (2
hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour).
The normal selling price of model no. 55 is $180; however, Yale has offered Cornell
only $115 because of the large quantity it is willing to purchase.
Yale requires a modification of the design that will allow a $4 reduction in direct-
material cost.
Cornell's production supervisor notes that the company will incur $8,700 in additional
set-up costs and will have to purchase a $3,300 special device to manufacture these
units. The device will be discarded once the special order is completed.
Total manufacturing overhead costs are applied to production at the rate of $35 per
labor hour. This figure is based, in part, on budgeted yearly fixed overhead of
$624,000 and planned production activity of 24,000 labor hours.
Cornell will allocate $5,000 of existing fixed administrative costs to the order as
"part of the cost of doing business."

Required:
Currently Cornell manufactures 18000 units of model no. 55 and has a total capacity of
20000 units. Should the order be accepted?
QUESTION 4
Papa Fred's Pizza store no. 16 has fallen on hard times and is about to be closed. The
following figures are available for the period just ended:

Sales $205,000
Cost of sales 67,900
Building occupancy costs:
Rent 36,500
Utilities 15,000
Supplies used 5,600
Wages 77,700
Miscellaneous 2,400
Allocated corporate overhead 16,800

All employees except the store manager would be discharged. The manager, who earns
$27,000 annually, would be transferred to store no. 19 in a neighboring suburb. Also, no.
16's furnishings and equipment are fully depreciated and would be removed and
transported to Papa Fred's warehouse at a cost of $2,800.

Required:
A. What is store no. 16's reported loss for the period just ended?
B. Should the store be closed? Why?