Determine the appropriate action in each of the following managerial decision situations.
1. Packer Company is operating at 80% of its manufacturing capacity of 100,000 product units per year. A chain store has offered to buy an additional 10,000 units at $22 each and sell them to customers so as not to compete with Packer Company. The following data are available.
|
Costs at 80% Capacity |
Per Unit |
Total |
|
Direct materials |
$ 8.00 |
$ 640,000 |
|
Direct labor |
7.00 |
560,000 |
|
Overhead (fixed and variable) |
12.50 |
1,000,000 |
|
Totals |
$27.50 |
$2,200,000 |
In producing 10,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $3 per unit would be incurred. Should the company accept or reject this order?
2. Green Company uses Part JR3 in manufacturing its products. It has always purchased this part from a supplier for $40 each. It recently upgraded its own manufacturing capabilities and has enough excess capacity (including trained workers) to begin manufacturing Part JR3 instead of buying it. The company prepares the following cost projections of making the part, assuming that overhead is allocated to the part at the normal predetermined rate of 200% of direct labor cost.
|
Direct materials |
$11 |
|
Direct labor |
15 |
|
Overhead (fixed and variable) (200% of direct labor) |
30 |
|
Total |
$56 |
The required volume of output to produce the part will not require any incremental fixed overhead. Incremental variable overhead cost will be $17 per unit. Should the company make or buy this part?
3. Gold Company’s manufacturing process causes a relatively large number of defective parts to be produced. The defective parts can be (a) sold for scrap, (b) melted to recover the recycled metal for reuse, or (c) reworked to be good units. Reworking defective parts reduces the output of other good units because no excess capacity exists. Each unit reworked means that one new unit cannot be produced. The following information reflects 500 defective parts currently available.
|
Proceeds of selling as scrap |
$2,500 |
|
Additional cost of melting down defective parts |
400 |
|
Cost of purchases avoided by using recycled metal from defects |
4,800 |
|
Cost to rework 500 defective parts |
|
|
Direct materials |
0 |
|
Direct labor |
1,500 |
|
Incremental overhead |
1,750 |
|
Cost to produce 500 new parts |
|
|
Direct materials |
6,000 |
|
Direct labor |
5,000 |
|
Incremental overhead |
3,200 |
|
Selling price per good unit |
40 |
Should the company melt the parts, sell them as scrap, or rework them?
4. White Company can invest in one of two projects, TD1 or TD2. Each project requires an initial investment of $100,000 and produces the year-end cash inflows shown in the following table. Use net present values to determine which project, if any, should be chosen. Assume that the company requires a 10% return from its investments.
|
|
Net Cash Flows |
|
|
|
TD1 |
TD2 |
|
Year 1 |
$ 20,000 |
$ 40,000 |
|
Year 2 |
30,000 |
40,000 |
|
Year 3 |
70,000 |
40,000 |
|
Totals |
$120,000 |
$120,000 |