Answer any three (3) of the following questions. Submit your answer in an Excel file, with a separate, labelled tab for each question chosen. Format your spreadsheets so that they are easy to follow and calculations are readily apparent. Verbal answers should be concise and clearly stated. Each question counts 30 points.

  1. XYZ Corporation operates a Marketing Research department. This department compiles information from published sources, and from its own consumer studies, to assist marketing personnel in forecasting product demand and making pricing and promotion decisions. A large marketing research firm has bid $280,000 per year for a three-year contract to perform the same services. For the most recent year, XYZ s controller determined the cost of operating the Marketing Research department to be $346,000:

Salary and fringes:

Senior researcher $68,000

Staff researcher 48,000

Clerical staff 70,000

VP Marketing (1) 62,000

Occupancy (2) 31,000

Subscriptions and travel (3) 67,000

(1) Represents 30% of cost of the VP, who is estimated to spend 30% of his time

on marketing research issues

(2) Occupancy costs are $31/sq ft: depreciation, $14; utilities, $11; maintenance, $6.

Utilities are 70% variable; maintenance is an allocation of fixed costs. There are no plans for alternate use of the space.

(3) Subscriptions and travel costs would be borne by outside research firm.


a. Determine the cost differential to XYZ of outsourcing versus retaining this function.

b. Discuss the factors that XYZ management should consider in making this decision.

2. Lewiston, Inc. is a manufacturer with a calendar accounting year. A physical inventory is taken on January 1, and any items not in inventory are charged to cost of goods sold.
a. In late March, Lewiston signed a $3,600,000 contract with Hawthorn, Inc. for production and installation of custom machinery at Hawthorn s plant. On December 22, Lewiston shipped Hawthorn the completed machinery, and billed Hawthorn $3,600,000, debiting a receivable and crediting revenue. Lewiston also debited COGS and credited inventory for $2,750,000, the cost of producing the machinery. The machinery is of no use to Hawthorn without installation and calibration by Lewiston employees. This work had not begun as of December 31.

b. This year, Lewiston began selling multi-year extended service contracts on some of its products. Lewiston sold $3,800,000 of service contracts, recording the entire amount as revenue. Of that amount, 80% relates to service to be performed in future years.

c. In August, Lewiston signed a lease on an office building to be used for administrative (not manufacturing) purposes. An advance rent payment of $1,000,000 was made and debited to Prepaid Rent. The controller forgot to make the year-end adjusting entry to record the expiration of $450,000 of this prepayment during 2013.

d. In December, Lewiston shipped goods on consignment to a dealer, booking revenue of $350,000 and cost of goods sold of $235,000. None of these goods had actually been sold to customers by year-end.
e. Two years ago, Lewiston acquired another manufacturing company whose operations have been integrated with Lewiston s. The acquisition price included $1,000,000 for customer lists, which has not been amortized. An appraiser with expertise in this industry estimates that the customer lists have lost 40% of their original value due to competitive changes in the industry. Lewiston s management disregarded this appraisal in preparing the financial statements.
For 2013, Lewiston reported operating income (before interest and taxes) of $20,000,000. Compute the correct amount of operating income/loss, showing any necessary calculations and explaining your reasoning.

3. Hinds Industries, Inc. is a manufacturer of soup and condiment products under its own standard and premium labels. The company has been in business for many years, and is a household name . Their Denver soup plant has a capacity of 120,000 cases/month, but has been operating at a normal volume of 75,000 cases/month Hinds has been approached by Mondo Mart, a large discount retailer, about producing a line of soups under a Mondo Mart house label. Mondo would initially place an order for 10,000 cases/month, with the understanding that the order will be expanded if the product is successful. The initial order would be for a reduced line of four relatively simple, standard-label soups, following Hinds normal recipes.

All of these soups have essentially the same production cost of $27 per case, as follows: ingredients and packaging, $14; direct labor, $2; overhead, $11. The overhead is 65% fixed manufacturing costs, 20% variable manufacturing costs, and 15% allocated general corporate overhead. Hinds would incur $2,000/month additional setup costs if the order is accepted. Packaging would cost ten cents/case less because of a cheaper label used by Mondo.
Hinds normally sells these soups for $34/case. Mondo Mart has offered $23/case, arguing that the steep discount is necessary for them to price the product in conformity with their pricing philosophy and customer expectations.
The regional marketing director is inclined to reject the offer, because it is below cost, and therefore Hinds will lose money on the contract. The ultimate decision is up to the regional director of operations. Discuss the factors that the operations director should consider in making the decision.

The factors to be considered are as follows:
a. The relevant cost of the decision. $27 current cost is not relevant as the company is working under capacity, therefore the relevant cost would be as follows:
Direct Material + Direct Labor + 20% variable manufacturing overhead+monthly setup cost-saving in packaging cost = 14+2+2.2+0.2-.1 = 18.3.

b. The benefit per case which is 23-18.3 = $4.7, therefore the project can be accepted as it will increase the monthly profit by $47000,
c. The impact of price reduction on existing customer as they can also ask for reduced selling price.
d. The loss of market share if the b

c. The loss of market share if the buyer is also selling in the same market in which Hinds is selling its product.

Thanks F.Naz for asnwering my question. But I am sorry, Its not correct.

We need to consider un-used capacity also. Plus, we donont have to consider only per unit costs. I think, We need to calcuate this question in little broader prospect.

I would appreciate if Business Tutor could input her review. As I ma already having another solution of F.Naz as well Business Tutor for similar question. But Solution by Business Tutor was little more appealing to me .Thanks

You can see that the unused capacity has been considered therefore the fixed cost has been considered as irrelevant cost. The answer is 100% correct. thanks.

  1. Acme Company manufactures a variety of industrial products which are sold throughout the country. Fred Riley has been manager of the Eastern Branch of Acme Company for the past three years. Starting in year 2, he was able to qualify for a $50,000 annual bonus for meeting a target growth rate of 10% of gross sales. Income statements for Eastern for the three year period are given below. Amounts are in the $ thousands.

Year 1

Year 2

Year 3

Gross sales




Returns and allowances




Net sales








Gross margin




Operating expense:

Manager salary/bonus




Other branch overhead




Selling expense








General and admin








Branch Income (loss)




All advertising is local to the branch, and is controlled by the manager. Selling expense is all such expenses other than advertising, such as sales staff compensation and travel. General and administrative expense represents corporate overhead which is allocated at the rate of 20% of gross sales.


1) Comment on the effectiveness of the bonus plan used by Acme.

2) Because Eastern Branch is showing increasing losses, a senior vice president has suggested that the branch be closed. Comment.