Professional Documents
Culture Documents
LIMITING FACTOR
The below illustration assumes a shortage of diret labour as the limiting resoure onstraint.
The details of the om!an" three !rodut lines are as follows#
$roduts A % C
&elling !rie# '() '*) '+)
,ariable osts# '-) '-) '-)
nit Contribution# '+) '-) '1)
/0!eted demand 1)))units2 ())units2 3))units
To !rodue 1 unit of !rodut the diret labour hours for eah !rodut is#
$rodut A # 1) hours2 $rodut % # ( hour $rodut C# 1 hour
4ue to una5ailabilit" of labour su!!l" for the forthoming !eriod it is assumed that the o5erall shortage of
labour hours is 11)) hours.
6uestion# 4etermine the !rodution mi0 to ma0imi7e the om!an"8s !rofit.
-. MA9/ OR %:
Com!an" A has to deide whether to manufature internall" or to bu" or ontrat from outsiders.
Com!an" A is able to ontrat with another om!an" to su!!l" them read" ma;e at '( eah.
The details of Com!an" A internal !rodution osts are as follows#
4iret material<unit '-.))
4iret labour<unit '+.))
,ariable !rodution o5erhead ').()
Fi0ed !rodution o5erhead ').()
Total !rodution !er unit ost '3.))
The om!an" also need to !a" for trans!ort harges of '())) for the deli5er" of +))) units of the !rodut.
6uestion# &hould Com!an" A ma;e or bu" the !rodut=
+. &$/CIAL OR4/R
&a" Com!an" A has a!ait" to !rodue 1))))) units of !rodut >. The ost estimate !er unit based on
urrent a!ait" of ?)@ is as follows#
' $er unit
4iret material '-.))
4iret labour '(.))
,ariable !rodution o5erhead '+.))
Fi0ed !rodution o5erhead '*.))
Total '1*.))
The om!an" sells the !rodut > to its regular ustomer at '-).)). owe5er a nonB regular ustomer has
a!!roahed the om!an" to !urhase the e0ess a!ait" at '1? eah.
*. ood" Com!an" whih manufatures snea;ers has enough idle a!ait" a5ail able to ae!t a
s!eial order of -)))) !airs of snea;ers at '3.)) a !air. The normal selling !rie is '1).)) a !air
5ariable manufaturing ost are ' *.() a !air and fi0ed manufaturing osts are '1.() a !air. ood"
will not inur an" selling e0!enses as a result of the s!eial order. hat would the effet on
o!erating inome be if the s!eial order ould be ae!ted without affeting normal sales=
(. 4i0on Com!an" manufatures !art +*D for use in one of its main !roduts.
Normal annual !rodution for !art +*D is 1))))) units. The osts !er 1)) units is as follows
3. Rie Cor!oration urrent l" o!erat es two di5isi ons whish had o!erati ng result s for the "ear ende d
4eember +1 1E>- as follows#
D. The !rodution de!artment of Cronin manufaturing om!an" must ma;e a !rodut mi0 deision in
light of a shortage of !ound of diret material. The following data are a5ailable for !rodut 0 and "#
PRODUCT X PRODUCT Y
elling
"rice
"er
unit 12
$ 10
$
Direct
material! #$ 2$
Direct
labor 1
Variablefactoroverhead 4 2
,ontribution margin
"er
unit $
# $
77777 77777
,ontribution margin ratio ,M8 ale!3 189
09
+umber of "ound! of direct material
'euire"erunit 2 1
Maximum!ale!inunit!3 2.000 5-000
4etermine the number of units of !roduts 0 and !roduts " to be !rodued if onl" ?))) !ounds of diret
material are a5ailable.
?. %ri;e Com!an" whih manufatures robes has enou gh idle a!a it" a5ail able to ae!t a s!eia l
order of 1)))) robes at '? a robe. A robe !redited inome statement for the "ear without this
s!eial order is as follows#
E. Linoln Com!an" a glo5e manufaturer has enough idle a!ait" a5ailable to ae!t a s!eial order
of -)))) !airs of glo5es at '1-.)) a !air. The normal selling !rie is '-).))a !air. ,ariable
manufaturing osts are 'E.)) a !air and fi0ed manufaturing osts are '+.)) a !air. Linoln will not
inur an" selling e0!enses as a result of the s!eial order. hat would be the effet on o!erating
inome if the s!eial order ould be ae!ted without affeting normal sales=
1). %o"er Com!an" manu fatures bas;etbal ls. The foreasted inome statement for the "ear before an"
s!eial orders is as follows#
AMONT $/RNIT
ale! #-000-000
$ 10.00
$
Manufacturing co!t of good! !old $ -200-000 4.00
>ro!!"ro?t $ 400-000 $ 2.00
elling&x"en!e! 00-000 $ .5
("eratingincome $ 500-000 $1.25
HHHHHHHH HHHHHH H
Fi0ed osts inluded in the abo5e foreasted inome statement are '1-))))) in manufaturing ost of
goods sold and '1))))) in selling e0!enses.
A s!eial order offering to bu" ()))) bas;etballs for 'D.() eah was made to %o"er. There will be no
additional selling e0!enses if the s!eial order is ae!ted. Assuming %o"er has suffiient a!ait" to
manufature ()))) more bas;et balls b" what amount would o!erating inome be inreased or dereased
as a result of ae!ting the s!eial order=
11. The manufa turing a!ait " of ordan Com!an"s failities is +)))) writs of !rodut a "ear. A
summar" of o!erating results for the "ear ended 4eember +1 1E>- is as follows#
ale!14-000unit!@$1003 $1-400-000
Variable Manufacturing and !elling co!t! //0-000
,ontribution
co!t! Margin
Fixed $ 410-000
$ #/5-000
("erating*ncome $ 15-000
A foreign distributor has offered to bu" 1())) units at 'E) !er unit during 1E>+. Assume that all of
ordans osts would be at the same le5els and rates in 1E>+ as in 1E>-. If ordan ae!ted this offer and
reJeted some business from regular ustomers so as not to e0eed a!ait" what would be the total rele5ant
inome from ae!ting the s!eial offer=
1-. %lade 4i5ision of 4ana Com!an" !rodues hardened steel blades. OneBthi rd of the %lades 4i5ision
out!ut is sold to the Lawn $roduts 4i5ision of 4ana# the remainder sold to outside ustomer s. The
%lade 4i5isions estimated sales and standard ost dataBfor the fisal "ear ending une +) 1E>1 are
as follows#
LAN$RO4CT& OT&I4/R&
ale! $ 15-000 $#0-000
Variableco!t! 10-0003 20-0003
Fixed co!t! .0003 6.0003
>ro!!
margin 2-000
$ $1#-000
<nit
!ale! 10-000 20-000
The Lawn $roduts 4i5ision has an o!!ortunit" to !urhase 1)))) idential ualif" blades from an outside
su!!lier at a ost of '1.-( !er unit on ontinuing basis. Assume that the %lade 4i5ision annot sell an"
additional !rodut s to outside the ustomer. &hou ld 4ana allow its Lawn $roduts 4i5ision to !urhase the
blades from the outside su!!lier and wh"=
1+. $lainfield Com!an" manufa tures !art G for use in its !rodution "le . The osts units for 1))))
units of !art G are as follows#
Direct material. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $
Direct labor. . . .. . . .. .. . .. .. .. . .. . .. . . .. .. . .. .......... 15
Variable factor
Fixed Factor overhead....
overhead .. .. .. .. .. ……………
……………………………… 6$ 2
AAAAAAAA
,erona Com!an" has offered to sell $lainfield 1)))) units of !art G for '+) !er unit. If $lainfield ae!ts
,eronas offer the released failities ould be used to sa5e '*())) in rele5ant osts in the manufature of
!art . In addition '( !er unit of the fi0ed fator" o5erhead a!!lied to !art G would be totall" eliminated.
hih alternati5e is more desirable and b" what amount is it more desirable=
1*. %awling Com!an" manufatures footballs and has enough idle a!ait" to ae!t a s!eial order for
-)))) footballs to be sold for '1* eah. The footballs normall" sell for '-) eah. The 5ariable
manufaturing osts are '1) !er balls and fi0ed manufaturing o5erhead is '( !er ball. There will be no
additional selling or administrati5e osts related to the s!eial order and the s!eial order will not affet
normal sales.
Required#
Calulated the effet on net inome if the s!eial order is ae!ted.
1(. CleanBit Com!an" !rodues leaning ;its for shotguns. The !rodution a!ait" a5ailable will enable the
firm to !rodue ())))) ;its annuall". A !roJeted inome statement for ne0t "ear shows
Fi0ed manufaturing o5erhead osts inluded in the ost of goods sold are ' 11-)))). A 1)@ sales
ommission is !aid to sales re!resentati5es for eah ;it sold. The !urhasing de!artment of a large disount
hain has offered to !urhase +)))) ;its at '3 eah. The CleanBit Com!an" sales manager8s initial res!onse
is to refuse the offer beause he onludes that the '3 !rie is below the firm8s a5erage ost
-E3))))<*3)))). The sales ommission would not be !aid on the s!eial order.
Required:
A. &hould the s!eial offer be ae!ted= hat would be the im!at on net inome=
B. Assume that the offer was for ()))) ;its. &hould it be ae!ted= &how "our
alulations.
C. Ignore !art %. hat is the lowest !rie the firm ould ae!t if it wants to earn annual
net inome of '*?))))=
Required:
:ou ha5e been as;ed b" the ontroller to determine if the om!onent should be built internall" or !urhased.
Calulate the !er unit ost differential between ma;ing and bu"ing the om!onent.
The demand for all three t"!es has been 5er" strong and the firm an sell as man" head!hones as it an
!rodue.
Required:
A. Gi5en the a!ait" onstraint im!osed b" the s!eial mahine whih t"!e should be made=
B. If all t"!es reuired the same amount of mahine time whih st"le should be !rodued=
The om!an" has reei5ed a s!eial order to bu" 1)))) 5ases at a unit ost of '3.?). Materials ost !er unit
would not hange but the labor osts for the s!eial order would be -)@ greater than normal sine some
o5ertime wages would be inurred. Fi0ed manufaturing o5erhead is ()@ of the 5ariable manufaturing
o5erhead at the !resent le5el of !rodution. Fi0ed manufaturing o5erhead would not hange and there
would be no additional 5ariable or fi0ed selling e0!enses. The administrati5e e0!enses whih are all fi0ed
would inrease '-))) if the s!eial order is ae!ted. Current 5ariable selling e0!enses are ').-) !er unit.
The om!an" has a ma0imum a!ait" of ?(.))) 5ases so the om!an" would ha5e to redue its regular
sales b" -))) units if it ae!ts the s!eial order.
Required:
A. &hould the om!an" ae!t the s!eial order= h"=
B. hat would be the effet on the firm8s !rofits=
The om!an"8s 5ariable manufaturing o5erhead is ' 1) !er unit and the 5ariable selling e0!ense is '(
!er unit. The administrati5e e0!ense is om)!letel" fi0ed and would inrease b" '())) if the s!eial order
is ae!ted. There would be no 5ariable selling e0!ense assoiated with the s!eial order and 5ariable
manufaturing o5erhead !er unit would remain onstant.
The om!an"8s diret labor ost !er unit for the s!eial order would inrease -)@ while diret materials
ost !er unit for the s!eial order would inrease 1)@. Fi0ed manufaturing o5erhead and fi0ed selling
e0!ense would not hange.
Required:
If the distributor has offered to !a" '3( !er unit for the s!eial order should the om!an" ae!t the offer=
ustif" "our answer.
6.- S)e#ial *rder Alton In. is wor;ing at full !rodution a!ait" !roduing -)))) units of a uniue
!rodut. Manufaturing osts !er unit for the !rodut are
4iret materials 'E
4iret labor ?
Manufaturing o5erhead 1)
Total manufaturing ost '-D
The unit manufaturing o5erhead ost is based on a '* 5ariable ost !er unit and '1-)))) fi0ed osts. The
nonmanufaturing osts all 5ariable are '? !er unit and the sales !rie is '*( !er unit.
&!orts eaduarters Com!an" K&C has as;ed Alton to !rodue ())) units of a modifiation of the new
!rodut. This modifiation would reuire the same manufaturing !roesses. &C has offered to share the
nonmanufaturing osts euall" with Alton. Alton would sell the modified !rodut to &C for '+( !er unit.
Required
1. &hould Alton !rodue the s!eial order for &C= h" or wh" not=
-. &u!!ose that Alton In. had been wor;ing at less than full a!ait" to !rodue 13))) units of the !rodut
when &C made the offer. hat is the minimum !rie that Alton should ae!t for the modified !rodut
under these onditions=
6.+ Ma;e or Buy4 Calista Com!an" manufatures eletroni eui!ment In -))E it !urhased the s!eial
swithes used in eah of its !roduts from an outside su!!lier. The su!!lier harged Calista '- !er swith.
Calista8s C/O onsidered !urhasing either mahine > or mahine : so the om!an" ould manufature its
own swithes. The C/O deided at the beginning of -)1) to !urhase Mahine > based on the following
data#
Ma#ine 5 Ma#ine
Annual fi0ed ost '1+())) '-)*)))
,ariable ost !er swith ).3( ).+)
Required
1. For mahine > what is the indifferene !oint between !urhasing the mahine and !urhasing from the
outside 5endor=
-. At what 5olume le5el should Calista onsider !urhasing Mahine :=
6.* S)e#ial *rder Grant Industries a manufaturer of eletroni !arts has reentl" reei5ed an in5itation
to bid on a s!eial order for -)))) units of one of its most !o!ular !roduts. Grant urrentl" manufatures
*)))) units of this !rodut in its Lo5eland Ohio !lant. The !lant is o!erating at () !erent a!ait". There
will be no mar;eting osts on the s!eial order. The sales manager of Grant wants to set the bid at 'E
beause she is sure that Grant will get the business at that !rie. Others on the e0euti5e ommittee of the
firm obJet sa"ing that Grant would lose mone" on the s!eial order at that !rie.
nits *)))) 3))))
Manufaturing osts
4iret materials ' ?)))) '1-))))
4iret labor 1-)))) 1?))))
Fator" o5erhead -*)))) +)))))
Total manufaturing osts '**)))) '3)))))
nit ost ' 11 ' 1)
Required
1. h" does the unit ost deline from '11 to '1) when !rodution le5el rises from *)))) to 3)))) units=
-. Is the sales manager orret= hat do "ou thin; the bid !rie should be=
+. List some additional fators Grant should onsider in deiding how muh to bid on this s!eial order.
2. "ro'ita8ility Analy!i! %arbour Cor!oration loated in %uffalo New :or; is a retailer of highBteh
!roduts ;nown for its e0ellent ualit" and inno5ation. Reentl" the firm onduted a rele5ant ost anal"sis
of one of its !rodut lines that has onl" two !roduts TB1 and TB-. The sales for TB- are dereasing and the
!urhase osts are inreasing. The firm might dro! TB- and sell onl" TB1.
%arbour alloates fi0ed osts to !roduts on the basis of sales re5enue. hen the !resident of
%arbour saw the inome statement he agreed that TB- should be dro!!ed. If this is done sales of TB1 are
e0!eted to inrease b" 1) !erent ne0t "ear2 the firm8s ost struture will remain the same.
/-1 /-+
&ales '-))))) '-3))))
,ariable ost of goods sold D)))) 1+))))
Contribution margin '1+)))) '1+))))
/0!enses
Fi0ed or!orate osts 3)))) D()))
,ariable selling and administration -)))) ())))
Fi0ed selling and administration 1-))) -1)))
Total e0!enses ' E-))) '1*3)))
O!erating inome ' +?))) ' K13)))
Required
1. Find the e0!eted hange in annual o!erating inome b" dro!!ing TB- and selling onl" TB1.
-. hat strategi fators should be onsidered=
6.3 Make or Buy Terr" In. manufatures mahine !arts for airraft engines. C/O %u;" alters is
onsidering an offer from a subontrator to !ro5ide -))) units of !rodut O$?E for '1-)))). If Terr" does
not !urhase these !arts from the subontrator it must ontinue to !rodue them inBhouse with these osts#
Co!t! )er nit
4iret materials '-?
4iret labor 1?
,ariable o5erhead 13
Fi0ed o5erhead *
Required &hould Terr" In. ae!t the offer from the subontrator= h" or wh" not=
6.D Di!)o!alThe
disontinued. o' A!!et! A om!an"
net boo; has an in5entor"
5alue of in5entor" of -))) different
in the aounting reords!arts for a line
is '()))). Theof!arts
ars that haseither
an be been
reBmahined at a total additional ost of '-())) and then sold for '+)))) or sold as is for '-()). hat
should it do=
6.? Re)la#ement o' A!!et An uninsured boat osting 'E)))) was wre;ed the first da" it was used. It an
be either sold as is for 'E))) ash and re!laed with a similar boat osting 'E-))) or rebuilt for 'D()))
and be brand new as far as o!erating harateristis and loo;s are onerned. hat should be done=
6.E "ro'it 'rom "ro#e!!ing urter4eaton Cor!oration manufatures !roduts A % and C from a Joint
!roess. oint osts are alloated on the basis of relati5e sales 5alue at the end of the Joint !roess.
Additional information for 4eaton Cor!oration follows#
A B C /otal
nits !rodued 1-))) ?))) *))) -*)))
oint osts '1**))) ' 3)))) '+3))) '-*))))
&ales 5alue before additional !roessing -*)))) 1))))) 3)))) *)))))
Additional osts for further !roessing -?))) -)))) 1-))) 3))))
&ales 5alue if !roessed further -?)))) 1-)))) D)))) *D))))
Required hih if an" of !roduts A % and C should be !roessed further and then sold=
6.1) Make or Buy /ggers Com!an" needs -)))) units of a !art to use in !roduing one of its !roduts.
If /ggers bu"s the !art from MMillan Com!an" for 'E) instead of ma;ing it /ggers ould not use the
released failities in another manufaturing ati5it". Fift" !erent of the fi0ed o5erhead will ontinue
irres!eti5e of C/O 4onald Mi;e"8s deision. The ost data are
Cost to ma;e the !art
4iret materials '+(
4iret labor 13
,ariable o5erhead -*
Fi0ed o5erhead -)
'E(
Required: 4etermine whih alternati5e is more attrati5e to /ggers and b" what amount.
6.11 Sele#tion o' te Mo!t "ro'ita8le "rodu#t4,4 $rodution Com!an" !rodues two basi t"!es of
5ideo games Flash and Clash. $ertinent data for 4,4 $rodution Com!an" follows#
la! Cla!
&ales !rie '-() '1*)
Costs
4iret materials () -(
4iret labor K'-(<r 1)) ()
,ariable fator" o5erhead () -(
Fi0ed fator" o5erhead -) 1)
Mar;eting osts Kall fi0ed 1) 1)
Total osts '-+) '1-)
O!erating !rofit ' -) ' -)
%ased on laborBhours.
The 4,4 game ra7e is at its height so that either Flash or Clash alone an be sold to ;ee! the !lant
o!erating at full a!ait". owe5er labor a!ait" in the !lant is insuffiient to meet the ombined demand
for both games. Flash and Clash are !roessed through the same !rodution de!artments.
Required hih !rodut should be !rodued= %riefl" e0!lain "our answer.
6.1- S)e#ial *rder "ri#ing %arr"8s %arB%B6ue is a !o!ular lunhBtime s!ot. %arr" is onsientious about
the ualit" of his meals and he has a regular rowd of 3)) !atrons for his '( lunh. is 5ariable ost for
eah meal is about '- and he figures his fi0ed osts on a dail" basis at about '1-)). From time to time
bus tour grou!s with () !atrons sto! b". e has welomed them sine he has a!ait" to seat D)) diners in
the a5erage
o!erator lunh !eriod
generall" !a"s forand
thehis oo;ing
entire grou!and
onwait staffhe;
a single an easil" handle
to sa5e the additional
the wait load. The
staff and ashier the tour
additional
time. 4ue to om!etiti5e onditions in the tour business the o!erator is now as;ing %arr" to lower the !rie
to '+.() !er meal for eah of the () bus tour members.
Required &hould %arr" ae!t the '+.() !rie= h" or wh" not= hat if the tour om!an" were willing to
guarantee -)) !atrons Kor four bus loads at least one a month for '+.)) !er meal=
2.19 S)e#ial *rder /arth %ab" In. K/%I reentl" elebrated its tenth anni5ersar". The om!an" !rodues
organi bab" !roduts for healthBonsious !arents. These !roduts inlude food lothing and to"s. /arth
%ab" has reentl" introdued a new line of !remium organi bab" foods. /0tensi5e researh and sientifi
testing indiate that babies raised on the new line of foods will ha5e substantial health benefits. /%I is able
to sell its !roduts at !ries higher than om!etitors8 beause of its e0ellent re!utation for su!erior
!roduts. /%I distributes its !roduts through highBend groer" stores !harmaies and s!eialt" retail bab"
stores.
oan Al5are7 the founder and C/O of /%I reentl" reei5ed a !ro!osal from an old business shool
lassmate Robert %radle" the 5ie !resident of Great 4eal In KG4I a large disount retailer. Mr. %radle"
!ro!oses a Joint 5enture between his om!an" and /%I iting the growing demand for organi !roduts and
the su!erior distribution hannels of his organi7ation. nder this 5enture /%I would ma;e some minor
modifiations to the manufaturing !roess of some of its bestBselling bab" foods and the foods would then
be !a;aged and sold b" G4I. nder the agreement /%I would reei5e '+.1) !er Jar of bab" food and
would !ro5ide G4I a limited right to ad5ertise the !rodut as manufatured for Great 4eal b" /%I. oan
Al5are7 set u! a meeting with Fred &tanle" /arth %ab"8s CFO to disuss the !rofitabilit" of the 5enture.
Mr. &tanle" made some initial alulations and determined that the diret materials diret labor and other
5ariable osts needed for the G4I order would be about '- !er unit as om!ared to the full ost of '+
Kmaterials labor and o5erhead for the eui5alent /%I !rodut.
Required &hould /arth %ab" In. ae!t the !ro!osed 5enture from G4I= h" or wh" not=
1.
-. 4etermine
$re!are an how man"
anal"sis additional
showing diret laborBhours
the im!at will be
on !rofit before ta0reuired eah month
of ae!ting to fill the
the Glasgow Glasgow order.
order.
+. Calulate the minimum unit !rie that illiams8 management ould ae!t for the Glasgow order without
reduing net inome.
*. Identif" the strategi fators that illiams should onsider before ae!ting the Glasgow order.
(. Identif" the fators related to international business that illiams should onsider before ae!ting the
Glasgow order.
6.1( *)ening a 3e% Re!taurant4 !e o' Relevant Co!t Analy!i!%rad and ud" %aile" both enJo"
!re!aring food and reating new rei!es. &o the" are ta;ing their !assion to the wor;!lae and !lan to o!en
a new restaurant alled %aile"s8. The" ha5e a twoB"ear renewable lease on a !ro!ert" that was !re5iousl"
used as a fast food restaurant. :ou are a good friend of the ou!le. The" ;now of "our e0!ertise in ost
management so the" ha5e as;ed for "our ad5ie.
Required Gi5e an e0am!le Kno numbers neessar" of how the %aile"s ould use the following ost
management methods in !lanning and o!erating their new restaurant.
1. &!eial order anal"sis.
-. The ma;eBorBbu" deision.
+. &ell now or !roess further.
*. $rofitabilit" anal"sis for urrent and<or new !roduts.
6.13 S)e#ial *rder4 !e o' *))ortunity Co!t n'ormation &harman Athleti Gear In K&AG is
onsidering a s!eial order for 1())) baseball a!s with the logo of /ast Te0as ni5ersit" K/T to be
!urhased b" the /T alumni assoiation. The /T alumni assoiation is !lanning to use the a!s as gifts
and to sell some of the a!s at alumni e5ents in elebration of the uni5ersit"8s reent national ham!ionshi!
b" its baseball team. &harman8s ost !er hat is '+.() whih inludes '1.() fi0ed ost related to !lant
a!ait" and eui!ment. /T has made a firm offer of '+())) for the hats and
&harman onsidering the !rie to be far below !rodution osts deides to deline the offer.
Required
1. 4id &harman ma;e the wrong deision= h" or wh" not=
-. Consider the management deisionBma;ing a!!roah at &harman that resulted in this deision. ow was
o!!ortunit" ost inluded or not inluded in the deision= hat deision biases are a!!arent in this
deision=
6.1D. ;en Doe! Buying a <a! <u==ler Make Sen!e>Gasoline !ries inreased and also flutuated
widel" during -))D and -))? and ar !urhases fell e5en for fuelBeffiient ars. Man" new ars were
selling for a disount and<or s!eial !romotions inluding redued interest rates on ar loans.
These disounts and !romotions were es!eiall" !rominent for &,s and larger ars those with the lowest
gas mileage. The disounts and !romotions were also !rominent for used ars2 in the used ar mar;et it was
hard to find a fuel effiient 5ehile but &,s and larger ars were in abundane.
Required :ou are sho!!ing for a ar for "our "oungest son who has Just reei5ed his dri5er8s liense. %"
lear agreement with "our son and beause of loal legal restritions on new dri5ers suh as those limiting
the time of da" the" an dri5e "ou do not e0!et the ar to be dri5en man" miles in the a5erage month. :our
son will be the onl" one allowed to use the ar and he b" agreement must !urhase the gasoline for it. :ou
will !a" for insurane and for an" mehanial re!airs. :our riteria for the !urhase of the ar are first safet"
and then reliabilit" and the ost of insurane. hat t"!e of ar would "ou onsidera small fuelBeffiient
ar or a large ar=
6.1? &!eial *rder Award $lus Co. manufatures medals for winners of athleti e5ents and other ontests.
Its manufaturing !lant has the a!ait" to !rodue 1)))) medals eah month2 urrent monthl" !rodution
is D()) medals. The om!an" normall" harges '1D( !er medal. ,ariable osts and fi0ed osts for the
urrent ati5it" le5el of D( !erent follow#
Current "rodu#t Co!t!
,ariable osts
Manufaturing
Labor
Material ' +D()))
-3-())
Mar;eting 1?D())
Total 5ariable osts ' ?-()))
Fi0ed osts
Manufaturing ' -D()))
Mar;eting 1D()))
Total fi0ed osts ' *())))
Total osts '1-D()))
Award $lus has Just reei5ed a s!eial oneBtime order for -()) medals at '1)) !er medal. For this !artiular
order no 5ariable mar;eting osts will be inurred. Cath" &enna a management aountant with Award
$lus has been assigned the tas; of anal"7ing this order and reommending whether the om!an" should
ae!t or reJet it. After e0amining the osts &enna suggested to her su!er5isor
Gerard Le$enn who is the ontroller that the" reuest om!etiti5e bids from 5endors for the raw materials
sine the urrent uote seems high. Le$enn insisted that the !ries are in line with other 5endors and told her
that she was not to disuss her obser5ations with an"one else. &enna later diso5ered that Le$enn is a
brotherBinBlaw of the owner of the urrent raw materials su!!l" 5endor.
Required
1. 4etermine if Award $lus Co. should ae!t the s!eial order and wh".
-. 4isuss at least three other onsiderations that Cath" &enna should inlude in her anal"sis of the s!eial
order.
+. /0!lain how Cath" &enna should tr" to resol5e the ethial onflit arising out of the ontroller8s
insistene that the om!an" a5oid om!etiti5e bidding.
2.1( S)e#ial *rder 4u5erno" Industries !rodues highBualit" automobile seat o5ers. Its suess in the
industr" is due to its ualit" although all of its ustomers the automa;ers are 5er" ost onsious and
negotiate for !rie uts on all large orders. Noting that the auto su!!l" business is beoming inreasingl"
om!etiti5e 4u5erno" is loo;ing for a wa" to meet the hallenge. It is negotiating with Chen In. a large
mailBorder auto !arts and aessories retailer to !urhase a large order of seat o5ers. Muh of 4u5erno"8s
business is seasonal and "lial flutuating with the 5ar"ing demands of the large automa;ers. 4u5erno"
would li;e to ;ee! its !lants bus" throughout the "ear b" reduing these seasonal and "lial flutuations.
9ee!ing the flow of !rodut mo5ing through the !lants at a stead" le5el is hel!ful in ;ee!ing osts down2
e0tra o5ertime and mahine setu! and re!air osts are inurred when !rodution le5els flutuate. Chen has
agreed to a large order but onl" at a !rie of '+) !er set. The s!eial order an be !rodued in one bath with
a5ailable a!ait". 4u5erno" !re!ared these data#
Ne0t month8s o!erating information without the s!eial order K!er unit for 1)))) units made in 1) bathes
of 1))) eah
6.-) &!eial *rder: ABC Co!ting ?Continuation o' "ro8lem 1(@Assume the same information as for
$roblem 1E e0e!t that the '*) fi0ed manufaturing o5erhead onsists of '1( !er unit bath related osts
6.--. &!eial *rder %allCards In. sells baseball ards in !a;s of 1( in drugstores throughout the ountr".
It is the third leading firm in the industr". %allCards has been a!!roahed b" $enno; Cereal In. whih
would li;e to order a s!eial edition of ards to use as a !romotion with its ereal.
%allCards
-())) setswould be offered
and has solel" res!onsible
'-+D() forfor
thedesigning and
total order. !roduing
/ah set willthe ards.
onsist of$enno;
++ ards.wants
%allB to order
Cards
urrentl" !rodues ards in sheets of 1+-.
$rodution mar;eting and other osts K!er sheet
4iret materials ' 1.-)
4iret labor ).-)
,ariable o5erhead ).*)
Fi0ed o5erhead ).1(
,ariable mar;eting ).1)
Fi0ed mar;eting ).+(
Insurane ta0es and administrati5e salaries ).1)
Costs for s!eial order
4esign -)))
Other setu! osts (())
%allCards would inur no mar;eting osts for the s!eial order. It has the a!ait" to ae!t this order
without interru!ting regular !rodution.
Required
1. &hould %allards ae!t the s!eial order= &u!!ort "our answer with a!!ro!riate om!utations.
-. hat are the im!ortant strategi issues in the deision=
6.-+ S)e#ial *rder Green Grow In. KGGI manufatures lawn fertili7er and beause of its 5er" high
ualit" often reei5es s!eial orders from agriultural researh grou!s. For eah t"!e of fertili7er sold eah
bag is arefull" filled to ha5e the !reise mi0 of om!onents ad5ertised for that t"!e of fertili7er. GGI8s
o!erating a!ait" is --))) oneBhundredB!ound bags !er month and it urrentl" is selling -)))) bags
manufatured in -) bathes of 1))) bags eah. The firm Just reei5ed a reuest for a s!eial order of ()))
oneBhundredB!ound bags of fertili7er for '1-())) from A$AC a researh organi7ation. The !rodution
osts would be the same although deli5er" and other !a;aging and distribution ser5ies would ause a oneB
time '-))) ost for GGI. The s!eial order would be !roessed in two bathes of -()) bags eah. The
following information is !ro5ided about GGI8s urrent o!erations#
&ales and !rodution ost data for -)))) bags !er bag
&ales !rie '+?
,ariable manufaturing osts 1(
,ariable mar;eting osts -
Fi0ed manufaturing osts 1-
Fi0ed mar;eting osts -
No mar;eting osts would be assoiated with the s!eial order. &ine the order would be used in researh
and onsisten" is ritial A$AC reuires that GGI fill the entire order of ())) bags.
Required
1. &hould GGI ae!t the s!eial order= /0!lain wh" or wh" not.
-. hat would be the hange in o!erating inome if the s!eial order is ae!ted=
+. &u!!ose that after GGI ae!ts the s!eial order it finds that une0!eted !rodution dela"s will not allow
it to su!!l" all ())) units from its own !lants and meet the !romised deli5er" date. It an !ro5ide the same
materials b" !urhasing them in bul; from a om!eting firm. The materials would then be !a;aged in GGI
bags to om!lete the order. GGI ;nows the om!etitor8s materials are 5er" good ualit" but it annot be
sure that the ualit" meets its own e0ating standards. There is not enough time to arefull" test the
om!etitor8s !rodut to determine its ualit". hat should GGI do=
6.-* S)e#ial *rder4 ABC Co!ting ?Continuation o' "ro8lem +9@Assume the same information as for
$roblem -+ e0e!t that the '1- fi0ed manufaturing o5erhead onsists of '? !er unit bath related osts and
'* !er unit failities le5el fi0ed osts. Also assume that eah new bath auses inreased osts of '())) !er
bath2 the remainder of the bath le5el osts onsists of tools and su!er5ision labor that do not 5ar" with the
number of bathes. The remainder of fi0ed osts does not 5ar" with the number of units !rodued or the
number of bathes.
Required
1. Calulate the rele5ant unit and total ost of the s!eial order inluding the new information about bath
related osts.
-. If ae!ted how would the s!eial order affet GGI8s o!erating inome=
6.-(. "ro'ita8ility Analy!i! S#ar#e Re!our#e!&antana Com!an" has met all !rodution reuirements for
the urrent month and has an o!!ortunit" to !rodue additional units of !rodut with its e0ess a!ait".
nit selling !ries and osts for three models of one of its !rodut lines are as follows#
3o rill! Standard *)tion! Su)er
&elling !rie '+) '+( '()
4iret materials E 11 11
4iret labor K'1)<hour ( 1) 1(
,ariable o5erhead + 3 E
Fi0ed o5erhead + 3 3
,ariable o5erhead is harged to !roduts on the basis of diret labor dollars2 fi0ed o5erhead is harged to
!roduts on the basis of mahineBhours.
Required
1. If &antana Com!an" has e0ess mahine a!ait" and an add more labor as needed Kneither mahine
a!ait" nor labor is a onstraint the e0ess !rodution a!ait" should be de5oted to !roduing whih
!rodut or !roduts=
-. If &antana Com!an" has e0ess mahine a!ait" but a limited amount of labor time the !rodution
a!ait" should be de5oted to !roduing whih !rodut or !roduts=
6.-3 "ro'ita8ility Analy!i! PI8m not loo;ing forward to brea;ing the newsQ groaned Charlie ettle the
ontroller of Me"er $aint Com!an". e and 4on &mith state liaison for the firm were returning from a
meeting with re!resentati5es of the ,irginia General &er5ies Administration KG&A the agen" that
administers bidding on state ontrats. Charlie and 4on had e0!eted to get the s!eifiations to bid on the
traffi !aint ontrat soon to be renewed. Instead of !i;ing u! the bid sheets and renewing old friendshi!s
at the G&A howe5er the" were stunned to learn that Me"er8s !aint sam!les had !erformed !oorl" on the
road test and the firm was not eligible to bid on the ontrat.
Me"er8s two main !rodut lines are traffi !aint used for !ainting "ellow and white lines on highwa"s and
ommerial !aints sold through loal retail outlets. The !aint !rodution !roess is fairl" sim!le. Raw
materials are ;e!t in the storage area that ou!ies a!!ro0imatel" half of the !lant s!ae.
Large tan;s that resemble silos are used to store the late0 that is the main ingredient in their !aint.
These tan;s are loated on the loading do; Just outside the !lant so that when a shi!ment of late0 arri5es it
an be !um!ed diretl" from the tan; tru; into these storage tan;s. Late0 is e0tremel" sensiti5e to old. It
annot be stored outside or e5en shi!!ed in the winter without heated tru;s whih are 5er" e0!ensi5e for a
small firm suh as Me"er.
Currentl" Me"er has the traffi !aint ontrats for the states of $enns"l5ania North Carolina 4elaware and
,irginia. Of last "ear8s total !rodution of +?)))) gallons E) !erent was traffi !aint. Of this amount
??))) gallons were for the ,irginia ontrat. /ah state has uniue s!eifiations for olor thi;ness
te0ture dr"ing time and other harateristis of the !aint. For e0am!le !aint sold to $enns"l5ania must
withstand hea5" use of salt on roads during the winter. $aint for North Carolina highwa"s must tolerate
e0tended !eriods of intense heat during summer months.
4ue to the high ost of shi!!ing !aint most !aint !roduers an be om!etiti5e on !rie onl" in loations
fairl" lose to their !rodution failities. Aordingl" Me"er has enJo"ed an ad5antage in bidding on
ontrats in the eastern states lose to ,irginia. owe5er one of their biggest om!etitors
eron $aint Com!an" of ouston Te0as is building a new !lant in North Carolina. ith lower osts due to
their effiient new failit" and their !ro0imit" eron will beome a maJor om!etiti5e threat. Me"er8s
ommerial !aint line inludes interior and e0terior house !aints in a wide range of olors formulated to
a!!ro0imate authenti olonial olors. %eause of the historial assoiation the line has been well reei5ed
in ,irginia. Most of these !aints are sold through !aint and hardware stores as the stores8 seond or third line
of !aint. The large national firms suh as %enJamin Moore or &herwin illiams !ro5ide e0tensi5e ser5ies
to !aint retailers suh as om!uteri7ed olor mathing eui!ment. $artl" beause the" la; the resoures to
!ro5ide suh amenities and !artl" beause the" ha5e alwa"s onsidered the ommerial !aint a sideline
Me"er has ne5er tried to mar;et the ommerial line aggressi5el". Me"er sells +?))) gallons of ommerial
!aint !er "ear.
Charlie is worried about the future of the om!an". The firm8s strategi goal is to !ro5ide a ualit" !rodut
at the lowest
Charlie !ossible
wondered ost and
whether the in a timel"
firm shouldfashion.
onsiderAfter absorbing
inreasing the sho;
!rodution of of losing the!aints
ommerial ,irginia ontrat
to lessen the
om!an"8s de!endene on traffi !aint ontrats. Carl %unh who manages the da"BtoBda" o!eration of the
firm belie5es the om!an" an double its sales of ommerial !aint if it underta;es a !romotional am!aign
estimated to ost '3)))). The a5erage !rie of traffi !aint sold last "ear was '1) !er gallon. For
ommerial !aint the a5erage !rie was '1-.
Charlie ettle has assembled the following data to e5aluate the finanial !erformane of the two lines of
!aint. The !rimar" raw material used in !aint !rodution is late0. The list !rie for late0 is '13 !er !ound2
*() !ounds of late0 are needed to !rodue 1))) gallons of traffi !aint. Commerial !aint reuires +-(
!ounds of late0 !er 1))) gallons of !aint. In addition to the ost of the late0 other 5ariable osts are as
shown below.
/ra''i# Commer#ial
Raw materials ost !er gallon of !aint#
Camelarb Klimestone ).+? ).(*
&ilia ).+D ).(-
$igment ).1- ).+?
Other ingredients ).)3 ).)+
4iret labor ost !er gallon ).*3 ).?(
Freight ost !er gallon ).D? ).*+
Last "ear fi0ed o5erhead osts attributable to the traffi !aint totaled '?())) inluding an estimated
'-())) of osts diretl" assoiated with the ,irginia ontrat2 the '-())) an be eliminated in
a!!ro0imatel" two "ears. Fi0ed o5erhead osts attributable to the ommerial !aint are '1+))).
Other manufaturing o5erhead osts total '11)))). Charlie estimates that '*)))) of this amount is
in5entor" handling osts that will be a5oided due to the loss of the ,irginia ontrat. %oth the remaining
manufaturing o5erhead and the general and administrati5e osts of '1*)))) are alloated euall" to all
gallons of !aint !rodued.
Required
1. Calulate the ontribution margin for eah t"!e of !aint and total firmBwide ontribution under eah of the
following senarios#
&enario A Current !rodution inluding the ,irginia ontrat
&enario % without either the ,irginia ontrat or the !romotion to e0!and sales of ommerial !aint
&enario C ithout the ,irginia ontrat but with the !romotion to e0!and sales of the ommerial !aint
-. 4etermine whether senario % or C K!er $art 1 abo5e should be hosen b" Me"er and e0!lain wh"
inluding a onsideration of the strategi onte0t.
6.-D S)e#ial *rder New Life In. manufatures s;in reams soa!s and other !roduts !rimaril" for
!eo!le with dr" and sensiti5e s;in. It has Just introdued a new line of !rodut that remo5es the s!otting and
wrin;ling in s;in assoiated with aging. It sells these !roduts in !harmaies and de!artment stores at !ries
somewhat higher than those of other brands beause of New Life8s e0ellent re!utation for ualit" and
effeti5eness.
New Life urrentl" has 5er" low utili7ation of !lant a!ait". Two "ears ago in antii!ation of ra!id growth
the om!an" o!ened a large new manufaturing !lant whih has "et to be utili7ed more than () !erent.
$artl" for this reason New Life has sought new !artners and was able with the hel! of finanial anal"sts to
loate suitable business !artners. The first !otential !artner identified in this searh was a large su!ermar;et
hain &u!er,alue whih is interested in the !artnershi! beause it wants New Life to manufature an age
ream to sell in its stores. The !rodut would be essentiall" the same as the New Life !rodut but !a;aged
with the &u!er,alue brand name.
The agreement would !a" New Life '-.)) !er unit and would allow &u!er,alue a limited right
to ad5ertise the !rodut as manufatured for &u!er,alue b" New Life. New Life8s CFO has made some
alulations and has determined that the diret materials diret labor and other 5ariable osts needed for the
&u!er,alue order would be about '1.)) !er unit as om!ared to the full ost of '-.() Kmaterials labor and
o5erhead for the eui5alent New Life !rodut.
Required &hould New Life ae!t the !ro!osal from &u!er,alue= h" or wh" not=
6.-? "roe#t-Analy!i!
re"led Sale!
!roduts inluding "romotion!
!lastis illside
and wood FurnitureIts
b"B!roduts. Com!an" ma;es !roduts
three furniture outdoor furniture from
are gliders hairs
with footstools and tables. The !roduts a!!eal !rimaril" to ostBonsious onsumers and those who 5alue
the re"ling of materials. The om!an" wholesales its !roduts to retailers and 5arious mass merhandisers.
%eause of the seasonal nature of the !roduts most orders are manufatured during the winter months for
deli5er" in the earl" s!ring. Mihael Cain founder and owner is disma"ed that sales for two of the !roduts
are tra;ing below budget. The following hart shows !ertinent "earBtoBdate data regarding the om!an"8s
!roduts.
Certain that the shortfall was aused b" a la; of effort b" the sales fore Mihael has suggested
to Lisa %o"le the sales manager that the om!an" announe two ontests to orret this situation before it
deteriorates. The first ontest is a tri! to awaii awarded to the to! sales!erson if inremental glider sales
are attained to lose the budget shortfall. The seond ontest is a golf wee;end om!lete with a new set of
golf lubs awarded to the to! sales!erson if inremental sales of hairs with footstools are attained to lose
the budget shortfall. The awaiian 5aation would ost '13()) and the golf tri! would ost '1-()).
2.+( Make or Buy Gian Auto Cor!oration manufatures !arts and om!onents for manufaturers and
su!!liers of !arts for automobiles 5ans and tru;s. &ales ha5e inreased eah "ear based in !art on the
om!an"8s e0ellent reord of ustomer ser5ie and reliabilit". The industr" as a whole has also grown as
auto manufaturers ontinue to outsoure more of their !rodution es!eiall" to ostBeffiient manufaturers
suh as GianAuto. To ta;e ad5antage of lower wage rates and fa5orable business en5ironments around the
world Gian has loated its !lants in si0 different ountries.
Among the 5arious GianAuto !lants is the 4en5er Co5er $lant one of Gian Auto8s earliest !lants.
The 4en5er Co5er $lant !re!ares and sews o5erings made !rimaril" of leather and u!holster" fabri and
shi!s them to other GianAuto !lants where the" are used to o5er seats headboards door !anels and other
GianAuto !roduts.
Ted ,osilo is the !lant manager for the 4en5er Co5er $lant whih was the first GianAuto !lant
in the region. As other area !lants were o!ened Ted was gi5en the res!onsibilit" for managing them in
reognition of his management abilit". e funtions as a regional manager although the budget for him and
his staff is harged to the 4en5er Co5er $lant.
Ted has Just reei5ed a re!ort indiating that GianAuto ould !urhase the entire annual out!ut
of 4en5er Co5er from su!!liers in other ountries for '3) million. e was astonished at the low outside
!rie beause the budget for 4en5er Co5er $lant8s o!erating osts for the oming "ear was set at '?-
million. e belie5es that GianAuto will ha5e to lose o!erations at 4en5er Co5er to reali7e the '-- million
in annual ost sa5ings.
4en5er Co5er8s budget for o!erating osts for the oming "ear follows#
6.+). Make or Buy %ernard8s &!eialt" Manufaturing K%&M !rodues ustom 5ehileslimousines
buses on5ersion 5ans and small tru;sfor s!eial order ustomers. It ustomi7es eah 5ehile to the
ustomer8s s!eifiations. %&M has been growing at a stead" rate in reent "ears in !art beause of the
inreased demand for s!eialt" lu0ur" 5ehiles. The inreased demand has also aused new om!etitors to
enter the mar;et for these t"!es of 5ehiles. %&M management onsiders its om!etiti5e ad5antage to be the
high ualit" of its manufaturing. Muh of the wor; is handmade and the om!an" uses onl" the best !arts
and materials. Man" !arts are made inBhouse to ontrol for highest ualit". %eause of the inreased
om!etition !rie om!etition is beginning to beome a fator for the industr" and %&M is beoming more
onerned about ost ontrols and ost redution. It has ontrolled them b" !urhasing materials and !arts in
bul; !a"ing areful attention to effiien" in sheduling and wor;ing different Jobs and im!ro5ing
em!lo"ee !roduti5it".
The inreased om!etition has also aused %&M to reonsider its strateg". !on re5iew with the hel! of a
onsultant %&M management has deided that it om!etes most effeti5el" as a differentiator based on
ualit" of !rodut and ser5ie. To reinfore the differentiation strateg" %&M has im!lemented a 5ariet" of
ualit" ins!etion and re!orting s"stems. 6ualit" re!orts are 5iewed at all le5els of management inluding
to! management.
To derease osts and im!ro5e ualit" %&M has begun to loo; for new outside su!!liers for ertain !arts.
For e0am!le %&M an !urhase a ritial sus!ension !art now manufatured inBhouse from $erformane
/ui!ment In. for a !rie of '1)(. %u"ing the !art would sa5e %&M 1) !erent of the labor and 5ariable
o5erhead osts and '3? of materials osts. The urrent manufaturing osts for the sus!ension assembl" are
as follows#
Materials '1E-
Labor D(
,ariable o5erhead 1()
Fi0ed o5erhead 1()
Total ost for sus!ension assembl" '(3D
Required
1. ow would total osts be affeted if %&M hose to !urhase the !art rather than to ontinue to
manufature it=
-. &hould %&M !urhase or manufature the !art= Inlude strategi onsiderations in "our answer.
6.+1 Make or Buy Revie% o' earning Curve!enderson /ui!ment Com!an" has !rodued a !ilot run
of () units of a reentl" de5elo!ed "linder used in its finished !roduts. The "linder has a oneB"ear life
and the om!an" e0!ets to !rodue and sell 13() units annuall". The !ilot run reuired 1*.-( diret laborB
hours for the () "linders a5eraging ).-?( diret laborBhours !er "linder.
enderson has e0!eriened an ?) !erent learning ur5e on the diret laborBhours needed to !rodue new
"linders. $ast e0!eriene indiates that learning tends to ease b" the time ?)) !artsare !rodued.
6.+- CC Ltd manufatures four t"!es of amera whih all use PlensQ a om!onent made onl" in one
fator". /ah PlensQ osts '() to !urhase. 4ue to a !rolonged stri;e of wor;ers in the PlensQ fator" CC
Ltd will onl" be able to !urhase -) ))) this "ear.
The following information relates to eah t"!e of amera manufatured b" CC Ltd.
$rofit!eramera () D) (- *E)
RE2RED:
a Calulate the numbers of eah t"!e of amera to be !rodued and sold that would ma0imise the
!rofit of CC Ltd.
b $re!are a marginal ost statement showing the !rofit for the "ear.
Calulate the total annual sales re5enue reuired b" CC Ltd to brea;Be5en this "ear.
6.++. "ro'ita8ility Analy!i!4 Revie% o' Ma!ter BudgetRa"Lo; Inor!orated has in5ented a seret
!roess to im!ro5e light intensit" and manufatures a 5ariet" of !roduts related to this !roess. /ah
!rodut is inde!endent of the others and is treated as a se!arate !rofit<loss di5ision. $rodut Kdi5ision
managers ha5e a great deal of freedom to manage their di5isions as the" thin; best. Failure to !rodue target
di5ision inome is dealt with se5erel"2 howe5er rewards for e0eeding one8s !rofit obJeti5e are as one
di5ision manager desribed them la5ish.
The 4imLo; 4i5ision sells an addBon automoti5e aessor" that automatiall" dims a 5ehile8s headlights
b" sensing a ertain intensit" of light oming from a s!eifi diretion. 4imLo; has had a new manager in
eah of the
has Just beenthree !re5ious
!romoted "ears beause
to manager and iseah manager
stud"ing wa"sfailed to reah
to meet Ra"Lo;8s
the urrent target
target !rofit.
!rofit 4onna %arnes
for 4imLo;.
4imLo;8s two !rofit targets for the oming "ear are '?))))) K-) !erent return on the in5estment in the
annual fi0ed osts of the di5ision !lus an additional !rofit of '-) for eah 4imLo; unit sold. Other
onstraints on di5ision o!erations are
$rodution annot e0eed sales beause Ra"Lo;8s or!orate ad5ertising !rogram stresses om!letel" new
!rodut models eah "ear although the models might ha5e onl" osmeti hanges.
4imLo;8s selling !rie annot 5ar" abo5e the urrent selling !rie of '-)) !er unit but ma" 5ar" as muh
as 1) !erent below '-)).
A di5ision manager an elet to e0!and fi0ed !rodution or selling failities2 howe5er the target obJeti5e
related to fi0ed osts is inreased b" -) !erent of the ost of suh e0!ansion. Furthermore a manager
annot e0!and fi0ed failities b" more than +) !erent of e0isting fi0ed ost le5els without a!!ro5al from
the board of diretors.
4onna is now e0amining data gathered b" her staff to determine whether 4imLo; an ahie5e its target
!rofits of '?))))) and '-) !er unit. A summar" of these re!orts shows the following#
Last "ear8s sales were +)))) units at '-)) !er unit.
4imLo;8s urrent manufaturing failit" a!ait" is *)))) units !er "ear but an be inreased to ?))))
units !er "ear with an inrease of '1)))))) in annual fi0ed osts.
$resent 5ariable osts amount to '?) !er unit but 4imLo;8s 5endors are willing to offer raw materials
disounts amounting to '-) !er unit beginning with unit number 3)))1.
&ales an be inreased u! to 1))))) units !er "ear b" ommitting large blo;s of !rodut to institutional
bu"ers at a disounted unit !rie of '1?). owe5er this disount a!!lies onl" to sales in e0ess of *))))
units !er "ear.
4onna belie5es that these !roJetions are reliable and is now tr"ing to determine what 4imLo; must do to
meet the !rofit obJeti5es that Ra"Lo;8s board of diretors assigned to it.
Required
1. 4etermine the dollar amount of 4imLo;8s !resent annual fi0ed osts.
-. 4etermine the number of units that 4imLo; must sell to ahie5e both !rofit obJeti5es. %e sure to
onsider all onstraints in determining "our answer.
+. ithout regard to "our answer in $art - assume that 4onna deides to sell *)))) units at '-)) !er unit
and -*))) units at '1?) !er unit. $re!are a master budget inome statement for 4imLo; showing whether
her deision will ahie5e 4imLo;8s !rofit obJeti5es.
*. Assess 4imLo;8s om!etiti5e strateg".
(. Identif" the strategi fators that 4imLo; should onsider.
6.+* Motiwala ewelers is onsidering a s!eial order for 1) handrafted gold braelets to be gi5en as gifts
to members of a wedding !art". The normal selling !rie of a gold braelet is '+?E.E( and its unit !rodut
ost is '-3*.)) as shown below#
4iret materials . . . . . . . . . . . . . . '1*+.))
4iret labor . . . . . . . . . . . . . . . . . ?3.))
Manufaturing o5erhead . . . . . . . +(.))
nit !rodut ost . . . . . . . . . . . . . '-3*.))
Most of the manufaturing o5erhead is fi0ed and unaffeted b" 5ariations in how muh Jewelr" is !rodued
in an" gi5en !eriod. owe5er 'D of the o5erhead is 5ariable with res!et to the number of braelets
!rodued. The ustomer who is interested in the s!eial braelet order would li;e s!eial filigree a!!lied to
the braelets. This filigree would reuire additional materials osting '3 !er braelet and would also reuire
auisition of a s!eial tool osting '*3( that would ha5e no other use one the s!eial order is om!leted.
This order would ha5e no effet on the om!an"8s regular sales and the order ould be fulfilled using the
om!an"8s e0isting a!ait" without affeting an" other order.
Required:
hat effet would ae!ting this order ha5e on the om!an"8s net o!erating inome if a s!eial !rie of
'+*E.E( is offered !er braelet for this order= &hould the s!eial order be ae!ted at this !rie=
6.+( "ro'ita8ility Analy!i!4 "ri#ingome &uites Inn is a national hain of highBualit" hotels whih is
!o!ular with business tra5elers. Man" of ome &uites8 best ustomers will sta" for a wee; or longer during
their business tri!. To! management of the hotel hain made a strategi mo5e in the !rior "ear to raise
!rofitabilit" b" raising room rates an a5erage of 1) !erent from an a5erage of '?) to '??. ome &uites8
main om!etitors Kthe total mar;et for hotels that om!ete with omeB &uites is about ())))))) dail"
room ou!an" !er "ear res!onded b" ;ee!ing their rates low and as a result ome &uites8 sales fell from
()))))) annual room ou!an" to *)))))) rooms
a -) !erent fall in room sales and a new low in ou!an" rate for the firm. The fall in room sales was
greater than e0!eted so ome &uites onsulted a mar;eting e0!ert who e0!lained that ustomers in this
mar;et are 5er" sensiti5e to !rie hanges and furthermore that while a redution in !rie inreases 5olume
and an inrease in !rie redues 5olume the effet is not !ro!ortional2 !rie dereases im!ro5e sales at a
faster rate than !rie inreases redue sales. ome &uites is now onsidering a redution in !rie to 'D3
with the e0!etation of inreasing sales b" as muh as () !erent o5er the urrent le5el of *)))))) rooms.
The onsultant assures ome &uites that if it returned to the '?) !rie sales would return to the ())))))
le5el. The table below shows the room osts !er ou!ied rooms at 5arious annual ou!an" le5els.
Room *##u)an#y ?tou!and!@
,,, ,, ,,, ,, 6,,, 6,,
"er Room Co!t!
&u!!lies ' +.+) ' +.+- ' +.-? ' +.+1 ' +.+1 ' +.+)
4iret labor 1(.*1 1(.+D 1(.*1 1(.*) 1(.+? 1(.+1
O5erhead Ksee note
Room le5el 1).(( 1).*? 1).*3 1).** 1).(E 1).*?
otel le5el -+.+( -1.)1 1E.1- 1?.)1 13.++ 1(.11
Total o!erating ost '(-.31 '().1? '*?.-D '*D.13 '*(.3* '**.-)
&elling and administrati5e +).11 -D.33 -(.1- --.?? -1.)1 1E.*+
Total ost '?-.D- 'DD.?* 'D+.+E 'D).)* '33.3( '3+.3+
Note# RoomBle5el o5erhead osts are laundr" house;ee!ing and su!!lies whih 5ar" with the number of
rooms ou!ied2whih
other e0!enses hotelBle5el
do noto5erhead
5ar" withinludes general
the number maintenane
of rooms registration
ou!ied. staff
&elling and !ool e0!ense
administrati5e and is
e0!ense
the ost of hotel management the reser5ation networ; and other fi0ed osts.
Required hat do "ou thin; is the best strateg" for ome &uites regarding room !riing= 4e5elo! a
s!readsheet anal"sis that shows what would be the effet on ontribution of the different !riing !oliies
ome &uites has used or is onsidering.
6.+3 Make or Buy The Midwest 4i5ision of the $aibe Cor!oration manufatures subassemblies used in
$aibe8s final !roduts. L"nn ardt of Midwest8s !rofit !lanning de!artment has been assigned the tas; of
determining whether Midwest should ontinue to manufature a subassembl" om!onent
MTRB-))) or !urhase it from Marle" Com!an" an outside su!!lier. Marle" has submitted
a bid to manufature and su!!l" the +-))) units of MTRB-))) that $aibe will need for -)1) at a unit !rie
of '1D.+). Marle" has assured $aibe that the units will be deli5ered aording to $aibe8s !rodution
s!eifiations and needs. The ontrat !rie of '1D.+) is a!!liable onl" in -)1) but Marle" is interested in
entering into a longBterm arrangement be"ond -)1).
L"nn has submitted the following information regarding Midwest8s ost to manufature +)))) units of
MTRB-))) in -))E.
4iret material '1E()))
4iret labor 1-))))
Fator" s!ae rental ?*)))
/ui!ment leasing osts +3)))
Other manufaturing osts --()))
Total manufaturing osts '33))))
L"nn has olleted the following information related to manufaturing MTRB-)))#
/ui!ment leasing osts re!resent s!eial eui!ment used to manufature MTRB-))). Midwest an
terminate this lease b" !a"ing the eui5alent of one month8s lease !a"ment for eah of the two "ears left on
its lease agreement.
Fort" !erent of the other manufaturing o5erhead is onsidered 5ariable. ,ariable o5erhead hanges with
the number of units !rodued and this rate !er unit is not e0!eted to hange in -)1). The fi0ed
manufaturing o5erhead osts are not e0!eted to hange whether Midwest manufatures or !urhases
MTRB-))). Midwest an use eui!ment other than the leased eui!ment in its other manufaturing
o!erations.
4iret materials ost used in the !rodution of MTRB-))) is e0!eted to inrease ? !erent in
-)1).
Midwest8s diret labor ontrat alls for a ( !erent wage inrease in -)1).
The failities used to manufature MTRB-))) are rented under a monthBtoBmonth rental agreement.
Midwest would ha5e no need for this s!ae if it does not manufature MTRB-))). Thus
Midwest an withdraw from the rental agreement without an" !enalt".
ohn $orter Midwest di5isional manager sto!!ed b" L"nn8s offie to 5oie his o!inion regarding the
outsouring of MTRB-))). e ommented PI am reall" onerned about outsouring MTRB -))). I ha5e a
sonBinBlaw and a ne!hew not to mention a member of our bowling team who wor; on MTRB-))). The"
ould lose their Jobs if we bu" that om!onent from Marle". I reall" would a!!reiate an"thing "ou an do
to ma;e sure the ost anal"sis shows that we should ontinue ma;ing MTRB-))). Cor!orate is not aware of
materials ost inreases and ma"be "ou an lea5e out some of those fi0ed osts. I Just thin; we should
ontinue ma;ing MTRB-))).Q
Required
$re!are a rele5ant ost anal"sis that shows whether the Midwest 4i5ision should ma;e MTRB-))) or
!urhase it from Marle" Com!an" for -)1).