Question #1 Tennessee Beer Company prints the labels for all of its beer bottles
ID: 2578385 • Letter: Q
Question
Question #1
Tennessee Beer Company prints the labels for all of its beer bottles. Tennesse Beer's costs to produce 1,000,000 labels annually are:
Direct materials...........................
$30,000
Direct labor..................................
$50,000
Variable overhead.......................
$20,000
Fixed overhead............................
$70,000
An outside supplier has offered to print Tennessee Beer’s labels for 13 cents per label. If the labels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the space now being used for printing could be rented to another company for $45,000 per year.
What is the change in net annual operating income if Tennessee Beer chooses to buy the labels from the outside supplier and rents the available space? Should Tennessee Beer proceed with this offer? (Ignore the impact of selling any of Tennessee’s printing equipment.)
Question #2
Two products, alcohol and sodium, emerge from a joint process. The alcohol has been allocated $30,800 of the total joint costs of $44,000. A total of 2,000 gals. of alcohol are produced from the joint process. The alcohol can be sold at the split-off point for $20 per gal., or it can be processed further into mouthwash for an additional total cost of $14,000 and then sold for $22 per gal. If the alcohol is processed further and sold as mouthwash, what would be the effect on the overall profit of the company compared with sale in its unprocessed form as alcohol? Do you recommend selling the alcohol or processing it into and selling it as mouthwash? (Show your calculations)
Direct materials...........................
$30,000
Direct labor..................................
$50,000
Variable overhead.......................
$20,000
Fixed overhead............................
$70,000
Explanation / Answer
Make Buy Direct materials 30000 Direct labor 50000 Variable overhead 20000 Fixed overhead 15000 Opportunity cost 45000 Purchase cost 130000 Total 160000 130000 Annual operating income will increase by $30000 if Tennessee Beer chooses to buy the labels from the outside supplier Yes., the offer should be accepted 2 Revenue if processed further 44000 Revenue if sold as is 40000 Incremental revenue 4000 Less: Addditional costs 14000 Incremental income(loss) -10000 Overall profit of the company will decrease by $10000 Selling the alcohol is recommended