would you accept or reject the new product line?
Question 1. Alyeska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below:
| Sales | $ | 17,300,000 |
| Net operating income | $ | 5,000,000 |
| Average operating assets | $ | 35,300,000 |
Required:
1. Compute the margin for Alyeska Services Company. (Round your answer to 2 decimal places.)
2. Compute the turnover for Alyeska Services Company. (Round your answer to 2 decimal places.)
3. Compute the return on investment (ROI) for Alyeska Services Company. (Round your intermediate calculations and final answer to 2 decimal places.)
Question 2. Data Span, Inc., automated its plant at the start of the current year and installed a flexible manufacturing system. The company is also evaluating its suppliers and moving toward Lean Production. Many adjustment problems have been encountered, including problems relating to performance measurement. After much study, the company has decided to use the performance measures below, and it has gathered data relating to these measures for the first four months of operations.
| Month | ||||||||
| 1 | 2 | 3 | 4 | |||||
| Throughput time (days) | ? | ? | ? | ? | ||||
| Delivery cycle time (days) | ? | ? | ? | ? | ||||
| Manufacturing cycle efficiency (MCE) | ? | ? | ? | ? | ||||
| Percentage of on-time deliveries | 85 | % | 80 | % | 77 | % | 74 | % |
| Total sales (units) | 2040 | 1953 | 1853 | 1783 | ||||
Management has asked for your help in computing throughput time, delivery cycle time, and MCE. The following average times have been logged over the last four months:
| Average per Month (in days) | |||||||||
| 1 | 2 | 3 | 4 | ||||||
| Move time per unit | 0.7 | 0.4 | 0.5 | 0.5 | |||||
| Process time per unit | 2.5 | 2.4 | 2.3 | 2.2 | |||||
| Wait time per order before start of production | 18.0 | 19.7 | 22.0 | 23.8 | |||||
| Queue time per unit | 4.1 | 4.7 | 5.4 | 6.2 | |||||
| Inspection time per unit | 0.4 | 0.5 | 0.5 | 0.4 | |||||
Required:
1-a. Compute the throughput time for each month.
1-b. Compute the delivery cycle time for each month.
1-c. Compute the manufacturing cycle efficiency (MCE) for each month.
2. Evaluate the company’s performance over the last four months.
3-a. Refer to the move time, process time, and so forth, given for month 4. Assume that in month 5 the move time, process time, and so forth, are the same as in month 4, except that using Lean Production the company can eliminate the queue time during production. Compute the new throughput time and MCE.
3-b. Refer to the move time, process time, and so forth, given for month 4. Assume in month 6 that the move time, process time, and so forth, are again the same as in month 4, except that the company can eliminate both the queue time during production and the inspection time. Compute the new throughput time and MCE.
Question 3.
“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”
Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company’s Office Products Division for this year are given below:
| Sales | $ | 21,750,000 |
| Variable expenses | 13,731,600 | |
| Contribution margin | 8,018,400 | |
| Fixed expenses | 6,025,000 | |
| Net operating income | $ | 1,993,400 |
| Divisional average operating assets | $ | 4,338,800 |
The company had an overall return on investment (ROI) of 18.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,126,350. The cost and revenue characteristics of the new product line per year would be:
| Sales | $9,350,000 |
| Variable expenses | 65% of sales |
| Fixed expenses | $2,560,500 |
Required:
1. Compute the Office Products Division’s ROI for this year.
2. Compute the Office Products Division’s ROI for the new product line by itself.
3. Compute the Office Products Division’s ROI for next year assuming that it performs the same as this year and adds the new product line.
4. If you were in Dell Havasi’s position, would you accept or reject the new product line?
5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
6. Suppose that the company’s minimum required rate of return on operating assets is 14% and that performance is evaluated using residual income.
a. Compute the Office Products Division’s residual income for this year.
b. Compute the Office Products Division’s residual income for the new product line by itself.
c. Compute the Office Products Division’s residual income for next year assuming that it performs the same as this year and adds the new product line.
d. Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product line?
Question 4.
The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
| Total | Dirt Bikes | Mountain Bikes | Racing Bikes | |||||||||
| Sales | $ | 932,000 | $ | 267,000 | $ | 409,000 | $ | 256,000 | ||||
| Variable manufacturing and selling expenses | 467,000 | 113,000 | 203,000 | 151,000 | ||||||||
| Contribution margin | 465,000 | 154,000 | 206,000 | 105,000 | ||||||||
| Fixed expenses: | ||||||||||||
| Advertising, traceable | 69,700 | 8,400 | 40,700 | 20,600 | ||||||||
| Depreciation of special equipment | 43,100 | 20,400 | 7,200 | 15,500 | ||||||||
| Salaries of product-line managers | 114,800 | 40,800 | 38,500 | 35,500 | ||||||||
| Allocated common fixed expenses* | 186,400 | 53,400 | 81,800 | 51,200 | ||||||||
| Total fixed expenses | 414,000 | 123,000 | 168,200 | 122,800 | ||||||||
| Net operating income (loss) | $ | 51,000 | $ | 31,000 | $ | 37,800 | $ | (17,800) | ||||
*Allocated based on sales dollars.
Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.
Required:
1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
2. Should the production and sale of racing bikes be discontinued?
3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.
Question 5.
Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $40 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
| Per Unit | 18,000 Units Per Year | |||||
| Direct materials | $ | 18 | $ | 324,000 | ||
| Direct labor | 9 | 162,000 | ||||
| Variable manufacturing overhead | 2 | 36,000 | ||||
| Fixed manufacturing overhead, traceable | 9 | * | 162,000 | |||
| Fixed manufacturing overhead, allocated | 12 | 216,000 | ||||
| Total cost | $ | 50 | $ | 900,000 | ||
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Required:
1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier?
2. Should the outside supplier’s offer be accepted?
3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $180,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier?
4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?