Cost Accounting (14th Edition)

2. Now suppose Louisville is currently producing and selling 50,000 bats. If Louisville accepts Ripkin’s
offer it will have to sell 10,000 fewer bats to its regular customers. (a) On financial considerations alone,
should Louisville accept this one-time special order? Show your calculations. (b) On financial considerations
alone, at what price would Louisville be indifferent between accepting the special order and
continuing to sell to its regular customers at $32 per bat. (c) What other factors should Louisville consider
in deciding whether to accept the one-time special order?
11-30 International outsourcing. Bernie’s Bears, Inc., manufactures plush toys in a facility in Cleveland, Ohio.
Recently, the company designed a group of collectible resin figurines to go with the plush toy line. Management
is trying to decide whether to manufacture the figurines themselves in existing space in the Cleveland facility or
to accept an offer from a manufacturing company in Indonesia. Data concerning the decision follows:
Expected annual sales of figurines (in units) 400,000
Average selling price of a figurine $5
Price quoted by Indonesian company, in Indonesian Rupiah (IDR), for each figurine
27,300 IDR
Current exchange rate 9,100 IDR = $1
Variable manufacturing costs
$2.85 per unit
Incremental annual fixed manufacturing costs associated with the new product line $200,000
Variable selling and distribution costs a
$0.50 per unit
Annual fixed selling and distribution costs a $285,000
a Selling and distribution costs are the same regardless of whether the figurines are manufactured in Cleveland or imported.
ASSIGNMENT MATERIAL 425
1. Should Bernie’s Bears manufacture the 400,000 figurines in the Cleveland facility or purchase them
from the Indonesian supplier? Explain.
2. Bernie’s Bears believes that the US dollar may weaken in the coming months against the Indonesian
Rupiah and does not want to face any currency risk. Assume that Bernie’s Bears can enter into a forward
contract today to purchase 27,300 IDRs for $3.40. Should Bernie’s Bears manufacture the
400,000 figurines in the Cleveland facility or purchase them from the Indonesian supplier? Explain.
3. What are some of the qualitative factors that Bernie’s Bears should consider when deciding whether
to outsource the figurine manufacturing to Indonesia?
Required
11-31 Relevant costs, opportunity costs. Larry Miller, the general manager of Basil Software, must
decide when to release the new version of Basil’s spreadsheet package, Easyspread 2.0. Development of
Easyspread 2.0 is complete; however, the diskettes, compact discs, and user manuals have not yet been
produced. The product can be shipped starting July 1, 2011.
The major problem is that Basil has overstocked the previous version of its spreadsheet package,
Easyspread 1.0. Miller knows that once Easyspread 2.0 is introduced, Basil will not be able to sell any more
units of Easyspread 1.0. Rather than just throwing away the inventory of Easyspread 1.0, Miller is wondering
if it might be better to continue to sell Easyspread 1.0 for the next three months and introduce Easyspread 2.0
on October 1, 2011, when the inventory of Easyspread 1.0 will be sold out.
The following information is available:
Easyspread 1.0 Easyspread 2.0
Selling price $160 $195
Variable cost per unit of diskettes, compact discs, user manuals 25 30
Development cost per unit 70 100
Marketing and administrative cost per unit ƒƒ35 ƒƒ40
Total cost per unit ƒ130 ƒ170
Operating income per unit $ƒ30 $ƒ25
Development cost per unit for each product equals the total costs of developing the software product
divided by the anticipated unit sales over the life of the product. Marketing and administrative costs are
fixed costs in 2011, incurred to support all marketing and administrative activities of Basil Software.
Marketing and administrative costs are allocated to products on the basis of the budgeted revenues of each
product. The preceding unit costs assume Easyspread 2.0 will be introduced on October 1, 2011.
1. On the basis of financial considerations alone, should Miller introduce Easyspread 2.0 on July 1, 2011, or wait
until October 1, 2011? Show your calculations, clearly identifying relevant and irrelevant revenues and costs.
2. What other factors might Larry Miller consider in making a decision?
Required