Acct 610
Spring 2016 (First half)
1. Austin LTD. Manufactures a component that is used in the fans it produces. A supplier has
offered to supply the component for $25 per part. The annual requirements of Austin are
20,000 components. Austin’s cost detail of manufacturing the component is as follows:
per unit
direct materials
direct labor
variable overhead
depreciation of
supervisor’s salary
general factory


It was determined that the special equipment has no resale value and cannot be used for another
process. The factory overhead is an allocation and would be unaffected by the decision. The
costs above are based on the same 20,000 units that the supplier would supply.
Should Austin continue to manufacture the component or purchase it from the outside supplier?
Be sure to support your work with numbers. (20 points)

2. The financial information for Jamison drug store by business line is as follows:
variable expenses
contribution margin








fixed expenses









net income/ loss





It was determined that the associated salaries, advertising and insurance would all be eliminated
if Jamison drops the housewares segment. The utilities, depreciation, rent and general and
administrative fees are all allocations.
Jamison is currently deciding whether the company would benefit overall if the housewares
business line was dropped completely, since it is losing money consistently each month. Using
what you know about avoidable and unavoidable costs, advise Jamison as their outside
consultant as to which is the better business decision. (Support your work with numbers.)
(20 points).

3. Under a special licensing arrangement, Swinyard Company has an opportunity to market a
new product for a 5 year period. The product would be purchased from the manufacturer and
Swinyard would be responsible for promotion and distribution costs. (25 points)
cost of equipment needed
working capital needed
overhaul of equipment in 4 years
salvage value of equipment in 5
annual revenues and costs
sales revenues
cost of goods sold
other operating costs



At the end of the 5 year period, the working capital would be released for investment
elsewhere. Swinyard uses a 14% discount rate.
a. Calculate the NPV of the investment. (support your work with numbers)
b. Calculate the IRR of the investment (support your work with numbers)
c. Would you recommend investment in this project?

4. Eber Wares is a division of a major corporation. The following data are for the latest year of

Required: (be sure to show your work). (20 points).
i. What is the division’s margin?

ii. What is the division’s turnover?

iii. What is the division’s return on investment (ROI)?

iv. What is the division’s residual income?

5. Division A of Friedman Inc. transfers its product to Division B or sells it to outside firms.
Division B can either buy the item internally from Division A or externally at a cost of $73
each. Division A has just completed its annual cost update as follows:
Direct material $25.00
Direct labor 18.00
Variable manufacturing overhead 6.00
Fixed manufacturing overhead 3.50
Variable selling expenses 4.00
Fixed selling and administrative expenses 8.50
Total costs $65.00
Division A is operating at 60 percent of its 400,000 unit capacity.
a. What is the minimum transfer price Division A should charge for internal transfers?
(Minimum transfer price)
b. What is the maximum price Division B would be willing to pay? (Maximum price)
(15 points)