[Anonymous]

Do I understand these correctly?

When it is excess capacity, you will accept the price that is over variable cost per units.

When it is full capacity, you will accept the price that is over variable cost per units + Opportunity Cost (contribution margin in dollars forego divided by order volume).

Also, when it is excess capacity, it implies that the company can manufacture more products.

when it is full capacity, it implies that the company can no longer manufacture more products.

As I read this matter from Becker text, I takes its concept this way if I remembber correctly…

When I see a question from Wiley test bank PLAN-0071, it turns out to be a opposite way….

Well, I am so confused…please help..Thank you in advance!!!

[Anonymous]

Can you post the Wiley question and correct answer?

I think your analysis is correct, but the small details can make a huge difference…so the Wiley question might help to clarify the difference and then we can determine which one is right!

[Anonymous]

Can you post the Wiley question and correct answer?

I think your analysis is correct, but the small details can make a huge difference…so the Wiley question might help to clarify the difference and then we can determine which one is right!

[Jferjamey]

You are correct. 🙂

When a company is operating at full capacity, they must chose one project or the other since they can't do both. The computation for this is the price over VC/unit + opportunity cost (the cost of not taking the other project).

When a company is operating with excess capacity, they can do both projects. There is no opportunity cost, because they aren't giving anything up. So they should accept if the price > VC/unit.

B - 81 (8/31/13) first attempt!
A - 80 (2/3/14) first attempt!
R - 89 (7/31/13) first attempt!
F - 86 (7/2/13) first attempt!
Licensed CPA: 12/31/14

Becker rocks!

"Discipline is choosing between what you want now, and what you want most." -Abraham Lincoln

[Jferjamey]

You are correct. 🙂

When a company is operating at full capacity, they must chose one project or the other since they can't do both. The computation for this is the price over VC/unit + opportunity cost (the cost of not taking the other project).

When a company is operating with excess capacity, they can do both projects. There is no opportunity cost, because they aren't giving anything up. So they should accept if the price > VC/unit.

B - 81 (8/31/13) first attempt!
A - 80 (2/3/14) first attempt!
R - 89 (7/31/13) first attempt!
F - 86 (7/2/13) first attempt!
Licensed CPA: 12/31/14

Becker rocks!

"Discipline is choosing between what you want now, and what you want most." -Abraham Lincoln

[Anonymous]

Thank you guys for your help.

well, I kinda got an idea when I see your comments, Jferjamey.

I was not sure how to recognize if company R is in full or excess capacity…

when it says “alternative use for production capacity” that would imply that the company can do one or the other project.

Am I taking ok for this time?

As Lilla mentioned, I agree that the small details can REALLY make a huge difference!!

anyway, here is a question. thank you all!!!!

Wiley testbank (PLAN-0071).

Company R manufactures a component in a router assembly. The selling price and unit cost data for the component are as folllows:

Selling price $15, DM $3, DL $3, VOH $3, FOH $2, Fixed Selling and Admin Cost $1.

Company received a special onetime order for 1000 components. Company R has an alternative use for production capacity for the 1000 components that would produce a contribution margin of $5000. What amount is the lowest unit price company R should accept for the component?

A $9

B $12

C $24

D $14

Answer D, $14 (Variable cost of $9 + Opportunity cost of $5)

[Anonymous]

Thank you guys for your help.

well, I kinda got an idea when I see your comments, Jferjamey.

I was not sure how to recognize if company R is in full or excess capacity…

when it says “alternative use for production capacity” that would imply that the company can do one or the other project.

Am I taking ok for this time?

As Lilla mentioned, I agree that the small details can REALLY make a huge difference!!

anyway, here is a question. thank you all!!!!

Wiley testbank (PLAN-0071).

Company R manufactures a component in a router assembly. The selling price and unit cost data for the component are as folllows:

Selling price $15, DM $3, DL $3, VOH $3, FOH $2, Fixed Selling and Admin Cost $1.

Company received a special onetime order for 1000 components. Company R has an alternative use for production capacity for the 1000 components that would produce a contribution margin of $5000. What amount is the lowest unit price company R should accept for the component?

A $9

B $12

C $24

D $14

Answer D, $14 (Variable cost of $9 + Opportunity cost of $5)

[Anonymous]

I would agree with the WTB answer, and also with your summary up above. I think the assumption is that this 1000 units will put it at full capacity, cause they're saying that with this 1000 units of production, the company can either do the special-order or the alternative use. If it wasn't at full capacity, then it could do both. This is one of those where it isn't clearly spelled out, and you have to try to think through what is the best indication from the facts given.

[Anonymous]

I would agree with the WTB answer, and also with your summary up above. I think the assumption is that this 1000 units will put it at full capacity, cause they're saying that with this 1000 units of production, the company can either do the special-order or the alternative use. If it wasn't at full capacity, then it could do both. This is one of those where it isn't clearly spelled out, and you have to try to think through what is the best indication from the facts given.

[Author]

Replies