Terminus Industries is operating at 85% of its manufacturing capacity of 50,000

Question

Terminus Industries is operating at 85% of its manufacturing capacity of 50,000 product units per year. A customer has offered to buy an additional 4,000 units at $25 each and sell them outside the country so as not to compete with Terminus. The following data are available: In producing 4,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $4 per unit would be incurred. What is the effect on income if Terminus accepts this order? A. Income will decrease by $6 per unit. B. Income will increase by $6 per unit. C. Income will increase by $7 per unit. I). Income will decrease by $3 per unit. E. Income will increase by $3 per unit. 8. Wave-Zone Company has 10,000 units of its sole product that it produced last year at a cost of $50 each. This year's model is superior to last year's and the 10,000 units cannot be sold for their regular selling price of $75 each. Wave-Zone has two alternatives for these items: (1) they can be sold to a wholesaler for $5 each, or (2) they can be reworked at a total cost of $190,000 and then sold for $22.50 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the company's profits the most? A. Reworking, because profit will increase by $35,000 more than scrapping. B. Scrapping, because profit will increase by $50,000 more than reworking. C. Reworking, because profit will increase by $15,000 more than scrapping. D. Scrapping, because profit will increase by $15,000 more than reworking. E. Reworking because profit will increase by $50,000 more than scrapping. 9. Tecco Systems Inc. has a limited amount of direct material available for products 1A1 and 2B2. Each unit of 1 Al has a contribution margin of $12 and each unit of 2B2 has a contribution margin of $30 A unit of 2B2 uses three times as much direct material as a unit of IA1. W hat is Tecco's most profitable sales mix. assuming there is unlimited demand for either product? A. Make all 2B2. B. Make all 1A1. C. Make equal number of units of 1A1 and 2B2. D. Make three times as many 1A1 as 2B2. E. Make three times as many 2B2 as 1A1.

Explanation / Answer

Solution 1:

Option E is correct.

Capacity = 50,000 units – 0.85 (50,000) units = 7,500 unit capacity remaining

Relevant costs = $10 + $8 + $4 = $22/unit

Effect on income = $25 - $22 = $3 increase per unit

Solution 2:

Option D is correct.

Scrapping: $5(10,000) = $50,000

Reworking: $22.50(10,000) - $190,000 = $35,000

Scrapping yields a greater profit: $50,000 - $35,000 = $15,000

Solution 3:

Option B is correct.

Contribution margin of 1 unit of 2B2 = 1 x $30 = $30

Contribution margin of 3 units of 1A1 = 3 x $12 = $36

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.