USE THE ATTACHED INSTRUCTIONS TO COMPLETE THE ASSIGNMENT.
a..Exercise #1: (Make or Buy) S Company needs about 200,000 units of a component each year for the next
5 years to use in manufacturing a variety of products. It is considering three different alternatives as follows:
Alternative #1: It can buy the components from a vendor at a cost of $2 each.
Alternative #2: It can purchase machinery costing $675,000 and be able to make the units itself for a cost of
$.65 each. (This machine would have a 5-year life with no salvage, so would result in $135,000 fixed cost,
straight-line depreciation each year.) Cash costs to operate and maintain the machine would be $10,000 per
year for each of the 5 years.
Alternative #3: It can purchase machinery costing $1,030,000 and be able to make the units itself for a cost of
$.30 each. (This machine would have a 5-year life with no salvage, so would result in $204,000 fixed cost,
straight-line depreciation each year.) Cash costs to operate and maintain this machine would be $12,000 per
year for each of the 5 years.
REQUIRED: (a) Provide a relevant cost analysis providing dollar amounts to consider for each of the three
alternatives. (b) Then write a sentence telling which alternative should be chosen. (c) Then write several
sentences explaining why you are recommending that particular alternative AND including the dollar advantage
over the second best option. (NOTE: For this exercise, ignore income tax effects and the time value of
money.)
b..Exercise #2: (Keep or Drop a Segment) G Company has three stores known as Big, Medium, and Small
respectively. Total Sales from the three stores were $1,500,000 this last year. Information from the
accounting information system on recent performance is as follows:
Big Medium Small
Sales 25,000 units @ $30 = $750,000
(this is 50% of company sales)
18,750 units @ $32 = $600,000
(this is 40% of company sales)
3,750 units @ $40 = $150,000
(this is 10% of company sales)
Big Medium Small
Variable Cost Per Unit $24 $24 $36
Traceable Fixed Costs
(Advertising) $20,000 $10,000 $ 5,000
Allocated Companywide
Fixed Costs $69,000 $55,200 $13,800
($138,000 total allocated
By sales 50%, 40%, 10%)
REQUIRED: (a) Prepare G Company’s Segment Margin Income Statement with a column for each subunit,
and a fourth column to “Total” for the entire company. (b) Then write a sentence telling whether “Small” store
should be closed or not. (c) Then write several sentences explaining why or why not it should be closed AND
what the relevant dollar amount change in total company income would be if it was closed.
c..Exercise #3: (Special Order) M Company operates a factory that is currently operating at 50% capacity. It
is on track to make 40,000 units this year, but recently received a special order to make and sell 20,000 units
for a selling price per unit of $9. There will be no marketing costs on this special order. Current costs at the
40,000-unit level as well as proposed costs at the 60,000-unit level are as follows:
40,000 units 60,000 units
Direct Materials Cost $ 80,000 $120,000
Direct Labor Cost 120,000 180,000
Factory Overhead
(fixed and variable) 240,000 300,000
Total Manufacturing Costs $440,000 $600,000
Cost Per Unit $11 $10
REQUIRED: (a) From the information provided, present the detailed dollar amounts of relevant costs to
consider in making this decision, including the total amount of change in company income or loss (please
label) the company would incur if it accepts this special order. (b) Then write a sentence telling whether the
Special Order should be accepted or not. (c) Then write several sentences explaining why you recommend
the Special Order be accepted or not.
