Dallas Co inventory control system

Dallas Co. has three product lines, A, B, and C. The following financial information is available for this year:

  Product A Product B Product C
Sales revenue 75,000 60,000 50,000
Total variable costs 50,000 35,000 40,000
Contribution Margin      
Fixed costs      
    Avoidable 12,000 10,000 8,000
    Unavoidable 10,000 8,000 5,000
Operating Income      


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a) Total operating income of the company is:

b) Assuming the company drops Product Line C because it generates a loss without replacing it, operating income for the firm will:  c) Product Line C is discontinued and the manufacturing space formerly devoted to this line is used to expand the sales of Product Line A by 20%.  Assuming that both the variable costs and avoidable fixed costs were increased by 30%, operating income for the company will:

d) Assuming that Product Line C is discontinued and the manufacturing space formerly devoted to this line is rented for $6,000 per year, operating income for the company will:


Dallas Kitchen replaced the convection oven two years ago. Today, the company found that a new convection oven that cooks more quickly with lower operating expenses was aailable. The company is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased.

Selected information about the two ovens is given below:

  Current Oven  New Oven
Original cost $80,000 $70,000
Accumulated depreciation $32,000 ?
Current salvage value $40,000 ?
Remaining life 5 years 5 years
Annual operating expenses $25,000 $20,000
Disposal vale in 5 years $0 $0



a. What costs are sunk?   b. What costs are relevant? c. What are the net cash flows over the next 5 years assuming the company purchases the new convection oven? d. What other items should the company consider when making this decision?

In an effort to improve its competitive position, Dallas Co. recently introduced a new inventory control system. Its management accountant assembled the following data regarding the recent change:

Item Before new system After new system
Production cycle time 50 days 40 days
Inventory level $200,000 $120,000
Total sales $1,800,000 $2,000,000
Estimated cost data, % of sales    
  Direct materials 35% 30%
  Direct labor 20% 15%
  Variable overhead 15% 10%
  Fixed overhead 10% 5%


The company’s inventory financing cost is estimated as 10% per year.


1. Estimate the net financial benefit (expressed in terms of operating income) that the company realized from the switch to a new inventory control system. 2. List four (4) non-financial benefits the company might expect as a result to its move to new inventory control system. 3. What are the primary expected costs of implementing a new inventory control system?

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