1. Ajay Singh offers gift-wrapping services at the local mall. Ajay wraps each package, regardless of size, in the customer’s choice of wrapping paper and bow for a price of $3. Ajay’s variable costs total $1 per package wrapped, and his fixed costs amount to $600 per month. Due to the anticipated increase in demand over the holiday season, Ajay is considering hiring a helper, at a cost of $8.50 per hour, to help him wrap packages. With the helper, Ajay estimates that he can wrap 110 packages in a 10-hour day. Without the helper, Ajay estimates that he can wrap 60 packages in a 10-hour day. Ajay plans on operating his business for thirty 10-hour days during the holiday season.
a. Does Ajay’s decision deal with excess supply or excess demand?
b. Using the gross approach, determine whether Ajay should hire the helper.
c. Using controllable cost analysis, determine whether Ajay should hire the helper.
d. Assume Ajay’s fixed costs were $1,000 rather than $600. Would this affect Ajay’s decision
to hire a helper?
2. The Déjà Vu Card Company offers greeting cards for every occasion at unmatched prices. The following information comes from Déjà Vu’s accounting records for December of the most recent year: Greeting cards sold 100,000 cards Selling price $1.00 per card Fixed costs:
Manufacturing $0.30 per card
Marketing & administrative $0.21 per card
Manufacturing $0.15 per card
Marketing & administrative $0.08 per card
Déjà Vu has an extra stock of 5,000 holiday greeting cards. The company is considering two options: (1) holding a 50% off sale and (2) holding an 80% off sale. Déjà Vu expects to sell 1,500 cards if it holds a 50% off sale and 4,000 cards if it holds an 80% off sale. The remaining cards would be discarded. Which option should Déjà Vu pursue?
3. Myers Quarry produces coarse gravel and sand in an 8:2 ratio. Joint costs for a month (volume 5 9,000 tons of rocks input) amount to $225,000. Values at the split-off point are $30 per ton for gravel and $40 per ton for sand.
a. Allocate joint costs to the two products using the relative sales value at split off as the allocation basis.
b. Suppose Myers can run the sand through a sieve to remove small rocks and make fine sand used to fill sandboxes. The process will, however, reduce the yield of sand from 1,800 tons to 900 tons. This superior grade of sand (“sandbox” quality) retails for $160 per ton. However, Myers will incur $18,000 to process the sand into “sandbox” quality. Should Myers sell the coarse sand as is or process it further into sandbox quality sand?