Special Order: High-Low Cost Estimation
SafeRide, Inc. produces air bag systems that it sells to North American automobile manufacturers. Although the company has a capacity of 300,000 units per year, it is currently producing at an annual rate of 180,000 units. SafeRide, Inc. has received an order from a German manufacturer to purchase 60,000 units at $7.00 each. Budgeted costs for 180,000 and 240,000 units are as follows:
| 180,000 Units | 240,000 Units | |
|---|---|---|
| Manufacturing costs | ||
| Direct materials | $450,000 | $600,000 |
| Direct labor | 315,000 | 420,000 |
| Factory overhead | 1,215,000 | 1,260,000 |
| Total | 1,980,000 | 2,280,000 |
| Selling and administrative | 765,000 | 780,000 |
| Total | $2,745,000 | $3,060,000 |
| Costs per unit | ||
| Manufacturing | $11.00 | $9.50 |
| Selling and administrative | 4.25 | 3.25 |
| Total | $15.25 | $12.75 |
Sales to North American manufacturers are priced at $25 per unit, but the sales manager believes the company should aggressively seek the German business even if it results in a loss of $5.75 per unit. She believes obtaining this order would open up several new markets for the company’s product. The general manager commented that the company cannot tighten its belt to absorb the $345,000 loss ($5.75 × 60,000) it would incur if the order is accepted.
(a) Calculate the net benefit (cost) of accepting the order from the German business.
(b) Calculate the net benefit (cost) of accepting the order from the German business, assuming the company is operating at full capacity.
Outsourcing (Make-or-Buy) Decision
Assume a division of Hewlett-Packard currently makes 16,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $27 per board, consisting of variable costs per unit of $22 and fixed costs per unit of $5. Further assume Sanmina-SCI offers to sell Hewlett-Packard the 16,000 circuit boards for $27 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard’s suppliers for $25,000 per year. In addition, $3 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.
Calculate the net benefit (cost) to HP of outsourcing the component from Samina-SCI. Use a negative sign with your answer, if appropriate.
Make or Buy
Rashad Rahavy, M.D., is a general practitioner whose offices are located in the South Falls Professional Building. In the past, Dr. Rahavy has operated his practice with a nurse, a receptionist/secretary, and a part-time bookkeeper. Dr. Rahavy, like many small-town physicians, has billed his patients and their insurance companies from his own office. The part-time bookkeeper, who works 10 hours per week, is employed exclusively for this purpose.
North Falls Physician’s Service Center has offered to take over all of Dr. Rahavy’s billings and collections for an annual fee of $7,000. If Dr. Rahavy accepts this offer, he will no longer need the bookkeeper. The bookkeeper’s wages and fringe benefits amount to $11 per hour, and the bookkeeper works 50 weeks per year. With all the billings and collections done elsewhere, Dr. Rahavy will have two additional hours available per week to see patients. He sees an average of four patients per hour at an average fee of $30 per visit. Dr. Rahavy’s practice is expanding, and new patients often have to wait several weeks for an appointment. He has resisted expanding his office hours or working more than 50 weeks per year. Finally, if Dr. Rahavy signs on with the center, he will no longer need to rent a records storage facility for $100 per month.
(a) Calculate the net benefit (cost) of outsourcing the bookkeeping.
Outsourcing (Make-or-Buy) Decision
Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the possible production of an air purifier for automobiles. Based on an annual volume of 10,000 units, the predicted cost per unit of an auto air purifier follows.
| Direct materials | $8.00 |
| Direct labor | 1.50 |
| Factory overhead | 5.00 |
| Total | $14.50 |
These cost predictions include $40,000 in facility-level fixed factory overhead averaged over 10,000 units.
One of the component parts of the auto air purifier is a battery-operated electric motor. Although the company does not currently manufacture these motors, the preceding cost predictions are based on the assumption that it will assemble such a motor. Mini Motor Company has offered to supply an assembled battery-operated motor at a cost of $4.50 per unit, with a minimum annual order of 5,000 units. If Mountain Air accepts this offer, it will be able to reduce the variable labor and variable overhead costs of the auto air purifier by 50 percent. The electric motor’s components will cost $3.00 if Mountain Air assembles the motors.
(a) Calculate the net benefit (cost) of outsourcing the electric motors from Mini Motor Company.
(b) Calculate the net benefit (cost) of outsourcing the electric motors from Mini Motor Company, assuming the motor-assembly space could be rented to another company for $22,000 per year.
Sell or Process Further
Port Allen Chemical Company processes raw material D into joint products E and F. Raw material D costs $6 per liter. It costs $100 to convert 100 liters of D into 60 liters of E and 40 liters of F. Product F can be sold immediately for $6 per liter or processed further into Product G at an additional cost of $5 per liter. Product G can then be sold for $16 per liter.
Determine whether Product F should be sold or processed further into Product G. Calculate the net benefit (cost) of further processing. The answer needs to be per liter.
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