Structuring
a Make-or-Buy Problem
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Structuring a Make-or-Buy Problem
Fresh Foods, a large restaurant chain, needed to
determine if it would be cheaper to produce 5,000 units of its main food
ingredient for use in its restaurants or to purchase them from an outside
supplier for $12 each. Cost information on internal production includes the
following:
Fixed overhead will continue whether the ingredient is
produced internally or externally. No additional costs of purchasing will be
incurred beyond the purchase price. If required, round your answers to the
nearest whole number.
Required:
2. List the relevant cost(s) of internal production and
of external purchase.
The input in the box below will not be graded, but may
be reviewed and considered by your instructor.
????
3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
4. Now assume that 40% of the fixed overhead can be
avoided if the ingredient is purchased externally. Which alternative is more
cost effective and by how much? (Use total cost when giving your answer.)
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2.
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Structuring a Special-Order Problem
The Millenium Company has been approached by a new customer
with an offer to purchase 10,000 units of its model F80 at a price of $4.20
each. The new customer is geographically separated from the company's other
customers, and existing sales would not be affected. Millenium normally
produces 75,000 units of F80 per year but only plans to produce and sell
60,000 in the coming year. The normal sales price is $12 per unit. Unit cost
information for the normal level of activity is as follows:
Fixed overhead will not be affected by whether or not
the special order is accepted.
Required:
1. What are the relevant costs and benefits of the two
alternatives?
The input in the box below will not be graded, but may
be reviewed and considered by your instructor.
??????
Should the company accept or reject the special order? _______reject__________
2. By how much will operating income increase or
decrease if the order is accepted?
_______decrease__________ by $ _______?__________ |
4
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Determining the Optimal Product Mix with One Constrained
Resource and a Sales Constraint
Comfy Fit Company manufactures two types of university
sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5
and $15, respectively. Regardless of type, each sweatshirt must be fed
through a stitching machine to affix the appropriate university logo. The
firm leases seven machines that each provides 1,000 hours of machine time per
year. Each Swoop sweatshirt requires 6 minutes of machine time, and each
Rufus sweatshirt requires 30 minutes of machine time.
Assume that a maximum of 47,650 units of each sweatshirt
can be sold.
Required:
If required, round your answers to the nearest whole
number.
1. What is the contribution margin per hour of machine
time for each type of sweatshirt?
2. What is the optimal mix of sweatshirt?
3. What is the total contribution margin earned for the
optimal mix?
$ ________?_________ |
5.
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Special Order
Smooth Move Company manufactures professional
paperweights and has been approached by a new customer with an offer to
purchase 15,000 units at a per-unit price of $9.00. The new customer is
geographically separated from Smooth Move's other customers, and existing
sales will not be affected. Smooth Move normally produces 89,000 units but
plans to produce and sell only 65,000 in the coming year. The normal sales
price is $13 per unit. Unit cost information is as follows:
Suppose a customer wants to have its company logo
affixed to each paperweight using a label. Smooth Move would have to purchase
a special logo labeling machine that will cost $12,000. The machine will be
able to label the 15,000 units and then it will be scrapped (with no further
value). No other fixed overhead activities will be incurred. In addition,
each special logo requires additional direct materials of $0.20.
Required:
Conceptual Connection: Should Smooth Move accept the
special order?
________yes_________
By how much will profit increase or decrease if the
order is accepted? If your answer is decrease, enter negative value.
_________increase________ $ __________?_______ |
6.
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Keep or Buy, Sunk Costs
Heather Alburty purchased a previously owned, 2004 Grand Am
for $8,900. Since purchasing the car, she has spent the following amounts on
parts and labor:
Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following:
In a visit to a used car dealer, Heather has found a
2005 Neon in mint condition for $9,400. Heather has advertised and found that
she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay
cash, but she would need to sell the Grand Am.
Required:
1. Conceptual Connection: In trying to decide whether to
restore the Grand Am or to buy the Neon, Heather is distressed because she
already has spent $11,300 on the Grand Am. The investment seems too much to
give up. How would you react to her concern?
The input in the box below will not be graded, but may
be reviewed and considered by your instructor.
???????????
2. Conceptual Connection: Assuming that Heather would be
equally happy with the Grand Am or the Neon, should she buy the Neon, or
should she restore the Grand Am?
________?_________ |
7.
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Sell or Process Further, Basic Analysis
Shenista Inc. produces four products (Alpha, Beta, Gamma, and
Delta) from a common input. The joint costs for a typical quarter follow:
The revenues from each product are as follows: Alpha,
$100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000.
Management is considering processing Delta beyond the
split-off point, which would increase the sales value of Delta to $75,000.
However, to process Delta further means that the company must rent some
special equipment that costs $15,400 per quarter. Additional materials and
labor also needed will cost $8,500 per quarter.
Required:
1. What is the operating profit earned by the four
products for one quarter?
$ ________?_________
2. Conceptual Connection: Should the division process
Delta further or sell it at split-off?
________company should process delta further_________
What is the effect of the decision on quarterly
operating profit?
Gross profit would _______increase__________ by $
_________________ .
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8.
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Target Costing
H. Banks Company would like to design, produce, and sell
versatile toasters for the home kitchen market. The toaster will have four
slots that adjust in thickness to accommodate both slim slices of bread and
oversized bagels. The target price is $65. Banks requires that new products
be priced such that 24% of the price is profit.
Required:
If required, round your answers to two decimal places.
1. Calculate the amount of desired profit per unit of
the new toaster.
$ ________?_________
2. Calculate the target cost per unit of the new
toaster.
$ ________?_________ |
9.
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Cost-Based Pricing Decision
Jeremy Costa, owner of Costa Cabinets Inc., is preparing
a bid on a job that requires $2,250 of direct materials, $2,025 of direct
labor, and $1,238 of overhead. Jeremy normally applies a standard markup
based on cost of goods sold to arrive at an initial bid price. He then
adjusts the price as necessary in light of other factors (e.g., competitive
pressure). Last year’s income statement is as follows:
Required:
1. Calculate the markup that Jeremy will use.
________?_________ %
2. What is Jeremy's initial bid price?
$ _______?__________ |
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