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1.

LIMITING FACTOR
The below illustration assumes a shortage of diret labour as the limiting resoure onstraint.
The details of the om!an" three !rodut lines are as follows#
$roduts A % C
&elling !rie# '() '*) '+)
,ariable osts# '-) '-) '-)
nit Contribution# '+) '-) '1)
/0!eted demand 1)))units2 ())units2 3))units
To !rodue 1 unit of !rodut the diret labour hours for eah !rodut is#
$rodut A # 1) hours2 $rodut % # ( hour $rodut C# 1 hour
4ue to una5ailabilit" of labour su!!l" for the forthoming !eriod it is assumed that the o5erall shortage of
labour hours is 11)) hours.
6uestion# 4etermine the !rodution mi0 to ma0imi7e the om!an"8s !rofit.

-. MA9/ OR %:
Com!an" A has to deide whether to manufature internall" or to bu" or ontrat from outsiders.
Com!an" A is able to ontrat with another om!an" to su!!l" them read" ma;e at '( eah.
The details of Com!an" A internal !rodution osts are as follows#
4iret material<unit '-.))
4iret labour<unit '+.))
,ariable !rodution o5erhead ').()
Fi0ed !rodution o5erhead ').()
Total !rodution !er unit ost '3.))
The om!an" also need to !a" for trans!ort harges of '())) for the deli5er" of +))) units of the !rodut.
6uestion# &hould Com!an" A ma;e or bu" the !rodut=

+. &$/CIAL OR4/R
&a" Com!an" A has a!ait" to !rodue 1))))) units of !rodut >. The ost estimate !er unit based on
urrent a!ait" of ?)@ is as follows#
' $er unit
4iret material '-.))
4iret labour '(.))
,ariable !rodution o5erhead '+.))
Fi0ed !rodution o5erhead '*.))
Total '1*.))
The om!an" sells the !rodut > to its regular ustomer at '-).)). owe5er a nonB regular ustomer has
a!!roahed the om!an" to !urhase the e0ess a!ait" at '1? eah.

6uestion# &hould Com!an" A ae!t this s!eial order=

*. ood" Com!an" whih manufatures snea;ers has enough idle a!ait" a5ail able to ae!t a
s!eial order of -)))) !airs of snea;ers at '3.)) a !air. The normal selling !rie is '1).)) a !air
5ariable manufaturing ost are ' *.() a !air and fi0ed manufaturing osts are '1.() a !air. ood"
will not inur an" selling e0!enses as a result of the s!eial order. hat would the effet on
o!erating inome be if the s!eial order ould be ae!ted without affeting normal sales=

(. 4i0on Com!an" manufatures !art +*D for use in one of its main !roduts.

Normal annual !rodution for !art +*D is 1))))) units. The osts !er 1)) units is as follows

Direct material………………... $260


Direct labor………………....... 100
Manufacturing overhead:
Variable ………………............ 120
Fixed ………………................ 160
otal co!t! "er 100 unit!…….. $6#0
Ce0t Com!an" has offered to sell 4i0on all 1))))) units it will need during the oming "ear for
'3)) !er 1))units. If 4i0on ae!ts the often from Ce0t the failities used to manufature !art +*D
ould be used in the !rodution of !art *?+. This hange would sa5e 4i0on 'E)))) in rele5ant osts.
Also a '1))))) ost item inluded in the fi0ed fator" o5erhead that is s!eifiall" related to !art
+*D would be eliminated. &hould 4i0on Com!an" ae!t the offer from Ce0t Com!an"=

3. Rie Cor!oration urrent l" o!erat es two di5isi ons whish had o!erati ng result s for the "ear ende d
4eember +1 1E>- as follows#

ale! %& '()


Variable co!t! D*V**(+ D*V*(+
,ontribution margin $600-000 $00-000
Fixed co!t! for the divi!ion 10-000 200-000
Margin over direct co!t! $2/0-000 $100-000
llocated cor"orate co!t! 110-000 0-000
("eratingincomelo!!3 $140-000 $ 0-000
/0-000 #5-000
$/0-000 $15-0003
&ine the tro" di5ision also sustained an o!erating loss during 1E>1 rie !resident is onsidering the
elimination of this di5ision. A ssume that the tro" di5ision fi0ed ots ould be a5oided if the di5ision
were eliminated. If the tro" di5ision had been eliminated on anuar" 11E0- rie or!oration1E>-
o!erating inome would ha5e been eual to what amount=

D. The !rodution de!artment of Cronin manufaturing om!an" must ma;e a !rodut mi0 deision in
light of a shortage of !ound of diret material. The following data are a5ailable for !rodut 0 and "#

PRODUCT X PRODUCT Y
elling
"rice
"er
unit 12
$ 10
$
Direct
material! #$ 2$
Direct
labor 1 
Variablefactoroverhead  4 2 
,ontribution margin
"er
unit $
# $

77777 77777
,ontribution margin ratio ,M8 ale!3 189
09
+umber of "ound! of direct material
'euire"erunit 2 1
Maximum!ale!inunit!3 2.000 5-000
4etermine the number of units of !roduts 0 and !roduts " to be !rodued if onl" ?))) !ounds of diret
material are a5ailable.

?. %ri;e Com!an" whih manufatures robes has enou gh idle a!a it" a5ail able to ae!t a s!eia l
order of 1)))) robes at '? a robe. A robe !redited inome statement for the "ear without this
s!eial order is as follows#

;&' <+* (=


ale! 12.50
$ $1-250-000
Manufacturing co!t!:
Variable $6.25 $625-000
Fixed 1.5 15-000
otal manufacturing co!t! $ 4.00 $ 400-000
>ro!!"ro?t $#.50 $#50-000
elling &x"en!e!:
Variable $1.40 $140-000
Fixed 1.#5 1#5-000
$
otal elling &x"en!e! $ .25 $ 25-000
("erating*ncome $1.25 $125-000
777777 77777777
Assuming no additional selli ng e0!enses what would be the effet on o!erating inome if the s!eial
order was ae!ted=

E. Linoln Com!an" a glo5e manufaturer has enough idle a!ait" a5ailable to ae!t a s!eial order
of -)))) !airs of glo5es at '1-.)) a !air. The normal selling !rie is '-).))a !air. ,ariable
manufaturing osts are 'E.)) a !air and fi0ed manufaturing osts are '+.)) a !air. Linoln will not
inur an" selling e0!enses as a result of the s!eial order. hat would be the effet on o!erating
inome if the s!eial order ould be ae!ted without affeting normal sales=

1). %o"er Com!an" manu fatures bas;etbal ls. The foreasted inome statement for the "ear before an"
s!eial orders is as follows#

AMONT $/RNIT

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 inluded in the abo5e foreasted inome statement are '1-))))) in manufaturing ost of
goods sold and '1))))) in selling e0!enses.

A s!eial order offering to bu" ()))) bas;etballs for 'D.() eah was made to %o"er. There will be no
additional selling e0!enses if the s!eial order is ae!ted. Assuming %o"er has suffiient a!ait" to
manufature ()))) more bas;et balls b" what amount would o!erating inome be inreased or dereased
as a result of ae!ting the s!eial order=

11. The manufa turing a!ait " of ordan Com!an"s failities is +)))) writs of !rodut a "ear. A
summar" of o!erating results for the "ear ended 4eember +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
ordans osts would be at the same le5els and rates in 1E>+ as in 1E>-. If ordan ae!ted this offer and
reJeted some business from regular ustomers so as not to e0eed a!ait" what would be the total rele5ant
inome from ae!ting the s!eial offer=

1-. %lade 4i5ision of 4ana Com!an" !rodues hardened steel blades. OneBthi rd of the %lades 4i5ision
out!ut is sold to the Lawn $roduts 4i5ision of 4ana# the remainder sold to outside ustomer s. The
%lade 4i5isions estimated sales and standard ost dataBfor the fisal "ear ending une +) 1E>1 are
as follows#

LAN$RO4CT& OT&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 $roduts 4i5ision has an o!!ortunit" to !urhase 1)))) idential 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 !rodut s to outside the ustomer. &hou ld 4ana allow its Lawn $roduts 4i5ision to !urhase the
blades from the outside su!!lier and wh"=

1+. $lainfield Com!an" manufa tures !art G for use in its !rodution "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 ae!ts
,eronas offer the released failities ould be used to sa5e '*())) in rele5ant osts in the manufature of
!art . In addition '( !er unit of the fi0ed fator" o5erhead a!!lied to !art G would be totall" eliminated.
hih alternati5e is more desirable and b" what amount is it more desirable=

1*. %awling Com!an" manufatures footballs and has enough idle a!ait" to ae!t a s!eial order for
-)))) footballs to be sold for '1* eah. The footballs normall" sell for '-) eah. The 5ariable
manufaturing osts are '1) !er balls and fi0ed manufaturing o5erhead is '( !er ball. There will be no
additional selling or administrati5e osts related to the s!eial order and the s!eial order will not affet
normal sales.

Required#
Calulated the effet on net inome if the s!eial order is ae!ted.

1(. CleanBit Com!an" !rodues leaning ;its for shotguns. The !rodution a!ait" a5ailable will enable the
firm to !rodue ())))) ;its annuall". A !roJeted inome statement for ne0t "ear shows

&ales K*3)))) ;its '*3)))))


Costs of goods sold -E3))))
Gross !rofit 13*))))
&elling and administrati5e e0!enses 1-())))
Net inome ' +E))))

Fi0ed manufaturing o5erhead osts inluded in the ost of goods sold are ' 11-)))). A 1)@ sales
ommission is !aid to sales re!resentati5es for eah ;it sold. The !urhasing de!artment of a large disount
hain has offered to !urhase +)))) ;its at '3 eah. The CleanBit Com!an" sales manager8s initial res!onse
is to refuse the offer beause he onludes that the '3 !rie is below the firm8s a5erage ost
-E3))))<*3)))). The sales ommission would not be !aid on the s!eial order.
Required:
A. &hould the s!eial offer be ae!ted= hat would be the im!at on net inome=
B. Assume that the offer was for ()))) ;its. &hould it be ae!ted= &how "our
alulations.
C. Ignore !art %. hat is the lowest !rie the firm ould ae!t if it wants to earn annual
net inome of '*?))))=

16. Evaluating a Make-Buy Situation


A manufaturer of tele5ision sets is onsidering wa"s to inrease the firm8s !lant a!ait" utili7ation beause
it has reentl" been o!erating at D)@ of a!ait". One !ro!osal is to ma;e a om!onent whih is urrentl"
being !urhased for 'D( !er unit. %ased on a stud" b" the firm8s ontroller the ost to !rodue the
om!onent is as follows#
4iret materials '-*.))
4iret laborK+ hours '11.-) !er hr ++.3)
Manufaturing o5erheadKa!!lied based on diret labor hrs -*.))
'?1.3)
The antii!ated wor; ati5it" for the "ear is -()))) diret labor hours. Fi0ed manufaturing o5erhead for
the "ear is budgeted at '1.D( million.

Required:
:ou ha5e been as;ed b" the ontroller to determine if the om!onent should be built internall" or !urhased.
Calulate the !er unit ost differential between ma;ing and bu"ing the om!onent.

17. Determining te Be!t "rodu#t Mi$ %it Con!traint!


9o" Com!an" !rodues three t"!es of stereo head!hones 9B11 9B1- and 9B1+. The !rodution of all three
t"!es reuired the use of a s!eial mahine whih an onl" be o!erated +)) hours eah month. The
following data are !ro5ided b" the ontroller#

9B11 9B1- 9B1+


&elling !rie !er unit '?* '11- '1*D

,ariable ost !er unit *E () D)


Mahine time reuired in minutes 3 1) 1(

The demand for all three t"!es has been 5er" strong and the firm an sell as man" head!hones as it an
!rodue.

Required:
A. Gi5en the a!ait" onstraint im!osed b" the s!eial mahine whih t"!e should be made=
B. If all t"!es reuired the same amount of mahine time whih st"le should be !rodued=

1&. Coi#e o' "rodu#t! %it Con!traint!


Foss Com!an" !rodues three !roduts in a highl" automated manufaturing !roess. 4uring a month onl"
3)) mahine hours are a5ailable for !rodution of the three !roduts. Rele5ant finanial and !rodution data
for the three !roduts are#

$rodut $rodut $rodut


A % C
&elling !rie '1- '13 '--
,ariable osts D ? 1)
Contribution margin ' ( '? '1-
Mahine time reuiredBin minutes 1- -) +)

The firm an sell as muh of an" !rodut as it an manufature.


Required:
A. hih !rodut should be manufatured= ow muh total ontribution margin will be earned=
B. ow muh would the selling !rie of the seond most !rofitable !rodut ha5e to inrease to be as
!rofitable as the answer to A=
1(. Evaluating a S)e#ial *rder
4riftwood Com!an" !rodues flower 5ases. The o!erating results of the !reeding "ear were#

&alesKDD))) units '? '313)))


Cost of goods sold
4iret materials 11(())
4iret labor 1(*)))
Manufaturing o5erhead E-*))
tal +31E))
Gross !rofit -(*1))
&elling e0!enses +?())
Administrati5e e0!enses -+1))
Total o!erating e0!enses 313))
Net inome '1E-())

The om!an" has reei5ed a s!eial 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!eial order would be -)@ greater than normal sine some
o5ertime wages would be inurred. Fi0ed manufaturing o5erhead is ()@ of the 5ariable manufaturing
o5erhead at the !resent le5el of !rodution. Fi0ed manufaturing o5erhead would not hange and there
would be no additional 5ariable or fi0ed selling e0!enses. The administrati5e e0!enses whih are all fi0ed
would inrease '-))) if the s!eial order is ae!ted. Current 5ariable selling e0!enses are ').-) !er unit.
The om!an" has a ma0imum a!ait" of ?(.))) 5ases so the om!an" would ha5e to redue its regular
sales b" -))) units if it ae!ts the s!eial order.

Required:
A. &hould the om!an" ae!t the s!eial order= h"=
B. hat would be the effet on the firm8s !rofits=

+,. Evaluating a S)e#ial *rder


Flame Com!an" manufatures gas grills and is onsidering e0!anding !rodution. A distributor has as;ed
the om!an" to !rodue a s!eial order of ?))) grills to be sold o5erseas. The grills would be sold under a
different brand name and would not influene Flame Com!an"8s urrent sales. The !lant is urrentl"
!roduing E())) units !er "ear. The om!an"8s ma0imum a!ait" is 1))))) units !er "ear so the
om!an" would ha5e to redue the !rodution of units sold under its own brand name b" +))) units if the
s!eial order is ae!ted. The om!an"8s inome statement for the !re5ious "ear is !resented below#

&alesKE())) units 'D1-()))


Cost of goods sold#
4iret materials '-+D()))
4iret labor 1E)))))

Manufaturing o5erhead 1*-())) (D)))))


Gross $rofit 1*-()))
&elling e0!enses (D()))
Administrati5e e0!enses -+D()) ?1-())
Net inome ' 31-())

The om!an"8s 5ariable manufaturing o5erhead is ' 1) !er unit and the 5ariable selling e0!ense is '(
!er unit. The administrati5e e0!ense is om)!letel" fi0ed and would inrease b" '())) if the s!eial order
is ae!ted. There would be no 5ariable selling e0!ense assoiated with the s!eial order and 5ariable
manufaturing o5erhead !er unit would remain onstant.
The om!an"8s diret labor ost !er unit for the s!eial order would inrease -)@ while diret materials
ost !er unit for the s!eial order would inrease 1)@. Fi0ed manufaturing o5erhead and fi0ed selling
e0!ense would not hange.

Required:
If the distributor has offered to !a" '3( !er unit for the s!eial order should the om!an" ae!t the offer=
ustif" "our answer.

R/0ER "RAC/CE 2ES/*3S:


2.1 S)e#ial *rder Marshall Com!an" reentl" a!!roahed ohnson Cor!oration regarding manufaturing
a s!eial order of *))) units of !rodut CR%-%. Marshall would reimburse ohnson for all 5ariable
manufaturing osts !lus +(@. The per-unit data follow#
nit sales !rie '-?
,ariable manufaturing osts 1+
,ariable mar;eting osts (
Fi0ed manufaturing osts *
Fi0ed mar;eting osts -
ohnson would ha5e a retooling ost of '1-))) for the s!eial order. ohnson has no alternati5e use of
a!ait".
Required &hould the s!eial order be ae!ted=

6.- S)e#ial *rder Alton In. is wor;ing at full !rodution a!ait" !roduing -)))) units of a uniue
!rodut. Manufaturing osts !er unit for the !rodut are
4iret materials 'E
4iret labor ?
Manufaturing o5erhead 1)
Total manufaturing ost '-D
The unit manufaturing o5erhead ost is based on a '* 5ariable ost !er unit and '1-)))) fi0ed osts. The
nonmanufaturing osts all 5ariable are '? !er unit and the sales !rie is '*( !er unit.
&!orts eaduarters Com!an" K&C has as;ed Alton to !rodue ())) units of a modifiation of the new
!rodut. This modifiation would reuire the same manufaturing !roesses. &C has offered to share the
nonmanufaturing osts euall" with Alton. Alton would sell the modified !rodut to &C for '+( !er unit.

Required
1. &hould Alton !rodue the s!eial order for &C= h" or wh" not=
-. &u!!ose that Alton In. had been wor;ing at less than full a!ait" to !rodue 13))) units of the !rodut
when &C made the offer. hat is the minimum !rie that Alton should ae!t for the modified !rodut
under these onditions=

6.+ Ma;e or Buy4 Calista Com!an" manufatures eletroni eui!ment In -))E it !urhased the s!eial
swithes used in eah of its !roduts from an outside su!!lier. The su!!lier harged Calista '- !er swith.
Calista8s C/O onsidered !urhasing either mahine > or mahine : so the om!an" ould manufature its
own swithes. The C/O deided at the beginning of -)1) to !urhase Mahine > based on the following
data#
Ma#ine 5 Ma#ine 
Annual fi0ed ost '1+())) '-)*)))
,ariable ost !er swith ).3( ).+)
Required
1. For mahine > what is the indifferene !oint between !urhasing the mahine and !urhasing from the
outside 5endor=
-. At what 5olume le5el should Calista onsider !urhasing Mahine :=

6.* S)e#ial *rder Grant Industries a manufaturer of eletroni !arts has reentl" reei5ed an in5itation
to bid on a s!eial order for -)))) units of one of its most !o!ular !roduts. Grant urrentl" manufatures
*)))) units of this !rodut in its Lo5eland Ohio !lant. The !lant is o!erating at () !erent a!ait". There
will be no mar;eting osts on the s!eial order. The sales manager of Grant wants to set the bid at 'E
beause she is sure that Grant will get the business at that !rie. Others on the e0euti5e ommittee of the
firm obJet sa"ing that Grant would lose mone" on the s!eial order at that !rie.
nits *)))) 3))))
Manufaturing osts
4iret materials ' ?)))) '1-))))
4iret labor 1-)))) 1?))))
Fator" o5erhead -*)))) +)))))
Total manufaturing osts '**)))) '3)))))
nit ost ' 11 ' 1)
Required
1. h" does the unit ost deline from '11 to '1) when !rodution le5el rises from *)))) to 3)))) units=
-. Is the sales manager orret= hat do "ou thin; the bid !rie should be=
+. List some additional fators Grant should onsider in deiding how muh to bid on this s!eial order.

2. "ro'ita8ility Analy!i! %arbour Cor!oration loated in %uffalo New :or; is a retailer of highBteh
!roduts ;nown for its e0ellent ualit" and inno5ation. Reentl" the firm onduted a rele5ant ost anal"sis
of one of its !rodut lines that has onl" two !roduts TB1 and TB-. The sales for TB- are dereasing and the
!urhase osts are inreasing. The firm might dro! TB- and sell onl" TB1.
%arbour alloates fi0ed osts to !roduts on the basis of sales re5enue. hen the !resident of
%arbour saw the inome statement he agreed that TB- should be dro!!ed. If this is done sales of TB1 are
e0!eted to inrease b" 1) !erent ne0t "ear2 the firm8s ost struture 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 inome ' +?))) ' K13)))
Required
1. Find the e0!eted hange in annual o!erating inome b" dro!!ing TB- and selling onl" TB1.
-. hat strategi fators should be onsidered=

6.3 Make or Buy Terr" In. manufatures mahine !arts for airraft engines. C/O %u;" alters is
onsidering an offer from a subontrator to !ro5ide -))) units of !rodut O$?E for '1-)))). If Terr" does
not !urhase these !arts from the subontrator it must ontinue to !rodue them inBhouse with these osts#
Co!t! )er nit
4iret materials '-?
4iret labor 1?
,ariable o5erhead 13
Fi0ed o5erhead *
Required &hould Terr" In. ae!t the offer from the subontrator= h" or wh" not=

6.D Di!)o!alThe
disontinued. o' A!!et! A om!an"
net boo; has an in5entor"
5alue of in5entor" of -))) different
in the aounting reords!arts for a line
is '()))). Theof!arts
ars that haseither
an be been
reBmahined 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!laed with a similar boat osting 'E-))) or rebuilt for 'D()))
and be brand new as far as o!erating harateristis and loo;s are onerned. hat should be done=
6.E "ro'it 'rom "ro#e!!ing urter4eaton Cor!oration manufatures !roduts A % and C from a Joint
!roess. oint osts are alloated on the basis of relati5e sales 5alue at the end of the Joint !roess.
Additional information for 4eaton Cor!oration follows#
A B C /otal
nits !rodued 1-))) ?))) *))) -*)))
oint osts '1**))) ' 3)))) '+3))) '-*))))
&ales 5alue before additional !roessing -*)))) 1))))) 3)))) *)))))
Additional osts for further !roessing -?))) -)))) 1-))) 3))))
&ales 5alue if !roessed further -?)))) 1-)))) D)))) *D))))
Required hih if an" of !roduts A % and C should be !roessed further and then sold=

6.1) Make or Buy /ggers Com!an" needs -)))) units of a !art to use in !roduing one of its !roduts.
If /ggers bu"s the !art from MMillan Com!an" for 'E) instead of ma;ing it /ggers ould not use the
released failities in another manufaturing ati5it". Fift" !erent of the fi0ed o5erhead will ontinue
irres!eti5e of C/O 4onald Mi;e"8s deision. The ost data are
Cost to ma;e the !art
4iret materials '+(
4iret labor 13
,ariable o5erhead -*
Fi0ed o5erhead -)
'E(
Required: 4etermine whih alternati5e is more attrati5e to /ggers and b" what amount.

6.11 Sele#tion o' te Mo!t "ro'ita8le "rodu#t4,4 $rodution Com!an" !rodues two basi t"!es of
5ideo games Flash and Clash. $ertinent data for 4,4 $rodution Com!an" follows#
la! Cla!
&ales !rie '-() '1*)
Costs
4iret materials () -(
4iret labor K'-(<r 1)) ()
,ariable fator" o5erhead  () -(
Fi0ed fator" 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!ait". owe5er labor a!ait" in the !lant is insuffiient to meet the ombined demand
for both games. Flash and Clash are !roessed through the same !rodution de!artments.
Required hih !rodut should be !rodued= %riefl" e0!lain "our answer.

6.1- S)e#ial *rder "ri#ing %arr"8s %arB%B6ue is a !o!ular lunhBtime s!ot. %arr" is onsientious about
the ualit" of his meals and he has a regular rowd of 3)) !atrons for his '( lunh. is 5ariable ost for
eah 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 welomed them sine he has a!ait" to seat D)) diners in

the a5erage
o!erator lunh !eriod
generall" !a"s forand
thehis oo;ing
entire grou!and
onwait staffhe;
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 !rie
to '+.() !er meal for eah of the () bus tour members.
Required &hould %arr" ae!t the '+.() !rie= h" or wh" not= hat if the tour om!an" were willing to
guarantee -)) !atrons Kor four bus loads at least one a month for '+.)) !er meal=
2.19 S)e#ial *rder /arth %ab" In. K/%I reentl" elebrated its tenth anni5ersar". The om!an" !rodues
organi bab" !roduts for healthBonsious !arents. These !roduts inlude food lothing and to"s. /arth
%ab" has reentl" introdued a new line of !remium organi bab" foods. /0tensi5e researh and sientifi
testing indiate that babies raised on the new line of foods will ha5e substantial health benefits. /%I is able
to sell its !roduts at !ries higher than om!etitors8 beause of its e0ellent re!utation for su!erior
!roduts. /%I distributes its !roduts through highBend groer" stores !harmaies and s!eialt" retail bab"
stores.
oan Al5are7 the founder and C/O of /%I reentl" reei5ed a !ro!osal from an old business shool
lassmate Robert %radle" the 5ie !resident of Great 4eal In KG4I a large disount retailer. Mr. %radle"
!ro!oses a Joint 5enture between his om!an" and /%I iting the growing demand for organi !roduts and
the su!erior distribution hannels of his organi7ation. nder this 5enture /%I would ma;e some minor
modifiations to the manufaturing !roess of some of its bestBselling bab" foods and the foods would then
be !a;aged and sold b" G4I. nder the agreement /%I would reei5e '+.1) !er Jar of bab" food and
would !ro5ide G4I a limited right to ad5ertise the !rodut as manufatured for Great 4eal b" /%I. oan
Al5are7 set u! a meeting with Fred &tanle" /arth %ab"8s CFO to disuss the !rofitabilit" of the 5enture.
Mr. &tanle" made some initial alulations and determined that the diret materials diret 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 eui5alent /%I !rodut.
Required &hould /arth %ab" In. ae!t the !ro!osed 5enture from G4I= h" or wh" not=

6.1* S)e#ial *rder4 Strategy nternationalilliams Com!an" loated in southern isonsin


manufatures a 5ariet" of industrial 5al5es and !i!e fittings that are sold to ustomers in nearb" states.
Currentl" the om!an" is o!erating at about D) !erent a!ait" and is earning a satisfator" return on
in5estment.
Glasgow Industries Ltd. of &otland has a!!roahed management with an offer to bu" 1-)))) units of a
!ressure 5al5e. Glasgow Industries manufatures a 5al5e that is almost idential to illiams8 !ressure 5al5e2
howe5er a fire in Glasgow Industries8 5al5e !lant has shut down its manufaturing o!erations. Glasgow
needs the 1-)))) 5al5es o5er the ne0t four months to meet ommitments to its regular ustomers2 the
om!an" is !re!ared to !a" '-1 eah for the 5al5es.
illiams8 !rodut ost for the !ressure 5al5e based on urrent attainable standards is
4iret materials '3
4iret labor K).( hr !er 5al5e ?
Manufaturing o5erhead K1<+ 5ariable E
Total manufaturing ost '-+
Additional osts inurred in onnetion with sales of the !ressure 5al5e are sales ommissions of
( !erent and freight e0!ense of '1 !er unit. owe5er the om!an" does not !a" sales ommissions on
s!eial orders that ome diretl" to management. Freight e0!ense will be !aid b" Glasgow.
In determining selling !ries illiams adds a *) !erent mar;u! to !rodut ost. This !ro5ides
a '+- suggested selling !rie for the !ressure 5al5e. The mar;eting de!artment howe5er has set the urrent
selling !rie at '+) to maintain mar;et share.
$rodution management belie5es that it an handle the Glasgow Industries order without disru!ting its
sheduled !rodution. The order would howe5er reuire additional fi0ed fator" o5erhead of '1-))) !er
month in the form of su!er5ision and lerial osts.
If management ae!ts the order illiams will manufature and shi! +)))) !ressure 5al5es to
Glasgow Industries eah month for the ne0t four months. &hi!ments will be made in wee;l" onsignments
FO% shi!!ing !oint.
Required

1.
-. 4etermine
$re!are an how man"
anal"sis additional
showing diret laborBhours
the im!at will be
on !rofit before ta0reuired eah month
of ae!ting to fill the
the Glasgow Glasgow order.
order.
+. Calulate the minimum unit !rie that illiams8 management ould ae!t for the Glasgow order without
reduing net inome.
*. Identif" the strategi fators that illiams should onsider before ae!ting the Glasgow order.
(. Identif" the fators related to international business that illiams should onsider before ae!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 rei!es. &o the" are ta;ing their !assion to the wor;!lae 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 ad5ie.
Required Gi5e an e0am!le Kno numbers neessar" of how the %aile"s ould use the following ost
management methods in !lanning and o!erating their new restaurant.
1. &!eial order anal"sis.
-. The ma;eBorBbu" deision.
+. &ell now or !roess further.
*. $rofitabilit" anal"sis for urrent and<or new !roduts.

6.13 S)e#ial *rder4 !e o' *))ortunity Co!t n'ormation &harman Athleti Gear In K&AG is
onsidering a s!eial order for 1())) baseball a!s with the logo of /ast Te0as ni5ersit" K/T to be
!urhased b" the /T alumni assoiation. The /T alumni assoiation 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 reent national ham!ionshi!
b" its baseball team. &harman8s ost !er hat is '+.() whih inludes '1.() fi0ed ost related to !lant
a!ait" and eui!ment. /T has made a firm offer of '+())) for the hats and
&harman onsidering the !rie to be far below !rodution osts deides to deline the offer.
Required
1. 4id &harman ma;e the wrong deision= h" or wh" not=
-. Consider the management deisionBma;ing a!!roah at &harman that resulted in this deision. ow was
o!!ortunit" ost inluded or not inluded in the deision= hat deision biases are a!!arent in this
deision=

6.1D. ;en Doe! Buying a <a! <u==ler Make Sen!e>Gasoline !ries inreased and also flutuated
widel" during -))D and -))? and ar !urhases fell e5en for fuelBeffiient ars. Man" new ars were
selling for a disount and<or s!eial !romotions inluding redued interest rates on ar loans.
These disounts and !romotions were es!eiall" !rominent for &,s and larger ars those with the lowest
gas mileage. The disounts and !romotions were also !rominent for used ars2 in the used ar mar;et it was
hard to find a fuel effiient 5ehile but &,s and larger ars were in abundane.
Required :ou are sho!!ing for a ar for "our "oungest son who has Just reei5ed his dri5er8s liense. %"
lear agreement with "our son and beause of loal legal restritions on new dri5ers suh as those limiting
the time of da" the" an dri5e "ou do not e0!et 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 !urhase the gasoline for it. :ou
will !a" for insurane and for an" mehanial re!airs. :our riteria for the !urhase of the ar are first safet"
and then reliabilit" and the ost of insurane. hat t"!e of ar would "ou onsidera small fuelBeffiient
ar or a large ar=

6.1? &!eial *rder Award $lus Co. manufatures medals for winners of athleti e5ents and other ontests.
Its manufaturing !lant has the a!ait" to !rodue 1)))) medals eah month2 urrent monthl" !rodution
is D()) medals. The om!an" normall" harges '1D( !er medal. ,ariable osts and fi0ed osts for the
urrent ati5it" le5el of D( !erent follow#
Current "rodu#t Co!t!
,ariable osts
Manufaturing

Labor
Material ' +D()))
-3-())
Mar;eting 1?D())
Total 5ariable osts ' ?-()))
Fi0ed osts
Manufaturing ' -D()))
Mar;eting 1D()))
Total fi0ed osts ' *())))
Total osts '1-D()))
Award $lus has Just reei5ed a s!eial oneBtime order for -()) medals at '1)) !er medal. For this !artiular
order no 5ariable mar;eting osts will be inurred. Cath" &enna a management aountant with Award
$lus has been assigned the tas; of anal"7ing this order and reommending whether the om!an" should
ae!t or reJet it. After e0amining the osts &enna suggested to her su!er5isor
Gerard Le$enn who is the ontroller that the" reuest om!etiti5e bids from 5endors for the raw materials
sine the urrent uote seems high. Le$enn insisted that the !ries are in line with other 5endors and told her
that she was not to disuss her obser5ations with an"one else. &enna later diso5ered that Le$enn is a
brotherBinBlaw of the owner of the urrent raw materials su!!l" 5endor.
Required
1. 4etermine if Award $lus Co. should ae!t the s!eial order and wh".
-. 4isuss at least three other onsiderations that Cath" &enna should inlude in her anal"sis of the s!eial
order.
+. /0!lain how Cath" &enna should tr" to resol5e the ethial onflit arising out of the ontroller8s
insistene that the om!an" a5oid om!etiti5e bidding.

2.1( S)e#ial *rder 4u5erno" Industries !rodues highBualit" automobile seat o5ers. Its suess in the
industr" is due to its ualit" although all of its ustomers the automa;ers are 5er" ost onsious and
negotiate for !rie uts on all large orders. Noting that the auto su!!l" business is beoming inreasingl"
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 aessories retailer to !urhase a large order of seat o5ers. Muh of 4u5erno"8s
business is seasonal and "lial flutuating with the 5ar"ing demands of the large automa;ers. 4u5erno"
would li;e to ;ee! its !lants bus" throughout the "ear b" reduing these seasonal and "lial flutuations.
9ee!ing the flow of !rodut mo5ing through the !lants at a stead" le5el is hel!ful in ;ee!ing osts down2
e0tra o5ertime and mahine setu! and re!air osts are inurred when !rodution le5els flutuate. Chen has
agreed to a large order but onl" at a !rie of '+) !er set. The s!eial order an be !rodued in one bath with
a5ailable a!ait". 4u5erno" !re!ared these data#
Ne0t month8s o!erating information without the s!eial order K!er unit for 1)))) units made in 1) bathes
of 1))) eah

&ales !rie '?)


$er unit osts
,ariable manufaturing osts -)
,ariable mar;eting osts ?
Fi0ed manufaturing osts *)
Fi0ed mar;eting osts +
&!eial order information
&ales -))) units
&ales !rie !er unit '+)
No 5ariable mar;eting osts are assoiated with this order but Mar ones the firm8s !resident has s!ent
'3))) during the !ast three months tr"ing to get Chen to !urhase the s!eial order.
Required
1. ow muh will the s!eial order hange 4u5erno" Industries8 total o!erating inome=
-. ow might the s!eial order fit into 4u5erno"8s om!etiti5e situation=

6.-) &!eial *rder: ABC Co!ting ?Continuation o' "ro8lem 1(@Assume the same information as for
$roblem 1E e0e!t that the '*) fi0ed manufaturing o5erhead onsists of '1( !er unit bath related osts

and '-( !er


'1())) !er unit failities
bath2 le5el fi0ed
the remainder osts.
of the Also
fi0ed assume
osts that5ar"
does not eahwith
newthe
bath auses
number of inreased osts or
units !rodued of the
number of bathes.
Required
1. Calulate the rele5ant unit and total ost of the s!eial order inluding the new information about bath
related osts.
-. If ae!ted how would the s!eial order affet 4u5erno"8s o!erating inome=
+. &u!!ose that Chen notifies 4u5erno" it must redue its order to 1))) units beause of hanges in orders
it has reei5ed. ow would this hange affet "our answer in $arts 1 and -=
6.-1 Make or Buy Martens In. manufatures a 5ariet" of eletroni !roduts. It s!eiali7es in
ommerial and residential !roduts with moderate to large eletri motors suh as !um!s and fans. Martens
is now loo;ing losel" at its !rodution of atti fans whih inluded 1)))) units in the !rior "ear and had
the following osts. These osts inluded '1))))) of alloated fi0ed manufaturing o5erhead. Martens has
a!ait" to manufature 1())) atti fans !er "ear.
Martens belie5es demand in the oming "ear will be -)))) atti fans. The om!an" has loo;ed into the
!ossibilit" of !urhasing the atti fans from another manufaturer to hel! it meet this demand. arris
$roduts a stead" su!!lier of ualit" !roduts would be able to !ro5ide u! to E))) atti fans !er "ear at a
!rie of '*3 !er fan deli5ered to Martens8s failit".
For eah unit of !rodut that Martens sells regardless of whether the !rodut has been !urhased from
arris or is manufatured b" Martens there is an additional selling and administrati5e ost of '-) whih
inludes an alloated '3 fi0ed o5erhead ost !er unit. The following is based on the !rodution of 1))))
units in the !rior "ear.
&elling !rie !er unit 'D-.))
Costs !er unit
/letri motor ' 3.))
Other !arts ?.))
4iret labor K'1(<hr. 1(.))
Manufaturing o5erhead 1(.))
&elling and administrati5e ost -).)) 3*.))
$rofit !er unit ' ?.))
Required
1. Assuming Martens !lans to meet the e0!eted demand for -)))) atti fans how man" should it
manufature and how man" should it !urhase from arris $roduts= /0!lain "our reasoning with
alulations.
-. Inde!endent of $art 1 abo5e assumes that %eth ohnson Martens8s !rodut manager has suggested that
the om!an" ould ma;e better use of its fan de!artment a!ait" b" manufaturing marine !um!s instead
of fans. ohnson belie5es that Martens ould e0!et to use the !rodution a!ait" to !rodue and sell
-())) !um!s annuall" at a !rie of '3) !er !um!. ohnson8s estimate of the osts to manufature the
!um!s is !resented below. If ohnson8s suggestion is not ae!ted Martens would sell -)))) atti fans
instead. &hould Martens manufature !um!s or atti fans= Information on the sales !rie and osts for the
marine !um!s follows.

&elling !rie !er !um! '3).))


Costs !er unit
/letri motor ' (.()
Other !arts D.))
4iret labor K'1(<hr. D.()
Manufaturing o5erhead E.))
&elling and administrati5e ost -).)) *E.))
$rofit !er !um! '11.))

6.--. &!eial *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!!roahed b" $enno; Cereal In. whih
would li;e to order a s!eial 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. !roduing
/ah set willthe ards.
onsist of$enno;
++ ards.wants
%allB to order
Cards
urrentl" !rodues ards in sheets of 1+-.
$rodution mar;eting and other osts K!er sheet
4iret materials ' 1.-)
4iret labor ).-)
,ariable o5erhead ).*)
Fi0ed o5erhead ).1(
,ariable mar;eting ).1)
Fi0ed mar;eting ).+(
Insurane ta0es and administrati5e salaries ).1)
Costs for s!eial order
4esign -)))
Other setu! osts (())
%allCards would inur no mar;eting osts for the s!eial order. It has the a!ait" to ae!t this order
without interru!ting regular !rodution.
Required
1. &hould %allards ae!t the s!eial order= &u!!ort "our answer with a!!ro!riate om!utations.
-. hat are the im!ortant strategi issues in the deision=
6.-+ S)e#ial *rder Green Grow In. KGGI manufatures lawn fertili7er and beause of its 5er" high
ualit" often reei5es s!eial orders from agriultural researh grou!s. For eah t"!e of fertili7er sold eah
bag is arefull" filled to ha5e the !reise mi0 of om!onents ad5ertised for that t"!e of fertili7er. GGI8s
o!erating a!ait" is --))) oneBhundredB!ound bags !er month and it urrentl" is selling -)))) bags
manufatured in -) bathes of 1))) bags eah. The firm Just reei5ed a reuest for a s!eial order of ()))
oneBhundredB!ound bags of fertili7er for '1-())) from A$AC a researh organi7ation. The !rodution
osts would be the same although deli5er" and other !a;aging and distribution ser5ies would ause a oneB
time '-))) ost for GGI. The s!eial order would be !roessed in two bathes of -()) bags eah. The
following information is !ro5ided about GGI8s urrent o!erations#
&ales and !rodution ost data for -)))) bags !er bag
&ales !rie '+?
,ariable manufaturing osts 1(
,ariable mar;eting osts -
Fi0ed manufaturing osts 1-
Fi0ed mar;eting osts -
No mar;eting osts would be assoiated with the s!eial order. &ine the order would be used in researh
and onsisten" is ritial A$AC reuires that GGI fill the entire order of ())) bags.
Required
1. &hould GGI ae!t the s!eial order= /0!lain wh" or wh" not.
-. hat would be the hange in o!erating inome if the s!eial order is ae!ted=
+. &u!!ose that after GGI ae!ts the s!eial order it finds that une0!eted !rodution 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" !urhasing 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 e0ating standards. There is not enough time to arefull" test the
om!etitor8s !rodut 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 -+ e0e!t that the '1- fi0ed manufaturing o5erhead onsists of '? !er unit bath related osts and
'* !er unit failities le5el fi0ed osts. Also assume that eah new bath auses inreased osts of '())) !er
bath2 the remainder of the bath le5el osts onsists of tools and su!er5ision labor that do not 5ar" with the
number of bathes. The remainder of fi0ed osts does not 5ar" with the number of units !rodued or the
number of bathes.
Required
1. Calulate the rele5ant unit and total ost of the s!eial order inluding the new information about bath
related osts.

-. If ae!ted how would the s!eial order affet GGI8s o!erating inome=
6.-(. "ro'ita8ility Analy!i! S#ar#e Re!our#e!&antana Com!an" has met all !rodution reuirements for
the urrent month and has an o!!ortunit" to !rodue additional units of !rodut with its e0ess a!ait".
nit selling !ries and osts for three models of one of its !rodut lines are as follows#
3o rill! Standard *)tion! Su)er
&elling !rie '+) '+( '()
4iret materials E 11 11
4iret labor K'1)<hour ( 1) 1(
,ariable o5erhead + 3 E
Fi0ed o5erhead + 3 3
,ariable o5erhead is harged to !roduts on the basis of diret labor dollars2 fi0ed o5erhead is harged to
!roduts on the basis of mahineBhours.
Required
1. If &antana Com!an" has e0ess mahine a!ait" and an add more labor as needed Kneither mahine
a!ait" nor labor is a onstraint the e0ess !rodution a!ait" should be de5oted to !roduing whih
!rodut or !roduts=
-. If &antana Com!an" has e0ess mahine a!ait" but a limited amount of labor time the !rodution
a!ait" should be de5oted to !roduing whih !rodut or !roduts=

6.-3 "ro'ita8ility Analy!i! PI8m not loo;ing forward to brea;ing the newsQ 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 &er5ies Administration KG&A the agen" that
administers bidding on state ontrats. Charlie and 4on had e0!eted to get the s!eifiations to bid on the
traffi !aint ontrat 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 ontrat.
Me"er8s two main !rodut lines are traffi !aint used for !ainting "ellow and white lines on highwa"s and
ommerial !aints sold through loal retail outlets. The !aint !rodution !roess is fairl" sim!le. Raw
materials are ;e!t in the storage area that ou!ies a!!ro0imatel" half of the !lant s!ae.
Large tan;s that resemble silos are used to store the late0 that is the main ingredient in their !aint.
These tan;s are loated on the loading do; Just outside the !lant so that when a shi!ment of late0 arri5es it
an be !um!ed diretl" 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 whih are 5er" e0!ensi5e for a
small firm suh as Me"er.
Currentl" Me"er has the traffi !aint ontrats for the states of $enns"l5ania North Carolina 4elaware and
,irginia. Of last "ear8s total !rodution of +?)))) gallons E) !erent was traffi !aint. Of this amount
??))) gallons were for the ,irginia ontrat. /ah state has uniue s!eifiations for olor thi;ness
te0ture dr"ing time and other harateristis 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 !roduers an be om!etiti5e on !rie onl" in loations
fairl" lose to their !rodution failities. Aordingl" Me"er has enJo"ed an ad5antage in bidding on
ontrats 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 effiient new failit" and their !ro0imit" eron will beome a maJor om!etiti5e threat. Me"er8s
ommerial !aint line inludes interior and e0terior house !aints in a wide range of olors formulated to
a!!ro0imate authenti olonial olors. %eause of the historial assoiation the line has been well reei5ed
in ,irginia. Most of these !aints are sold through !aint and hardware stores as the stores8 seond or third line
of !aint. The large national firms suh as %enJamin Moore or &herwin illiams !ro5ide e0tensi5e ser5ies
to !aint retailers suh as om!uteri7ed olor mathing eui!ment. $artl" beause the" la; the resoures to
!ro5ide suh amenities and !artl" beause the" ha5e alwa"s onsidered the ommerial !aint a sideline
Me"er has ne5er tried to mar;et the ommerial line aggressi5el". Me"er sells +?))) gallons of ommerial
!aint !er "ear.
Charlie is worried about the future of the om!an". The firm8s strategi goal is to !ro5ide a ualit" !rodut

at the lowest
Charlie !ossible
wondered ost and
whether the in a timel"
firm shouldfashion.
onsiderAfter absorbing
inreasing the sho;
!rodution of of losing the!aints
ommerial ,irginia ontrat
to lessen the
om!an"8s de!endene on traffi !aint ontrats. Carl %unh who manages the da"BtoBda" o!eration of the
firm belie5es the om!an" an double its sales of ommerial !aint if it underta;es a !romotional am!aign
estimated to ost '3)))). The a5erage !rie of traffi !aint sold last "ear was '1) !er gallon. For
ommerial !aint the a5erage !rie was '1-.
Charlie ettle has assembled the following data to e5aluate the finanial !erformane of the two lines of
!aint. The !rimar" raw material used in !aint !rodution is late0. The list !rie for late0 is '13 !er !ound2
*() !ounds of late0 are needed to !rodue 1))) gallons of traffi !aint. Commerial !aint reuires +-(
!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#
Camelarb Klimestone ).+? ).(*
&ilia ).+D ).(-
$igment ).1- ).+?
Other ingredients ).)3 ).)+
4iret labor ost !er gallon ).*3 ).?(
Freight ost !er gallon ).D? ).*+

Last "ear fi0ed o5erhead osts attributable to the traffi !aint totaled '?())) inluding an estimated
'-())) of osts diretl" assoiated with the ,irginia ontrat2 the '-())) an be eliminated in
a!!ro0imatel" two "ears. Fi0ed o5erhead osts attributable to the ommerial !aint are '1+))).
Other manufaturing 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 ontrat. %oth the remaining
manufaturing o5erhead and the general and administrati5e osts of '1*)))) are alloated euall" to all
gallons of !aint !rodued.
Required
1. Calulate the ontribution margin for eah t"!e of !aint and total firmBwide ontribution under eah of the
following senarios#
&enario A Current !rodution inluding the ,irginia ontrat
&enario % without either the ,irginia ontrat or the !romotion to e0!and sales of ommerial !aint
&enario C ithout the ,irginia ontrat but with the !romotion to e0!and sales of the ommerial !aint
-. 4etermine whether senario % or C K!er $art 1 abo5e should be hosen b" Me"er and e0!lain wh"
inluding a onsideration of the strategi onte0t.

6.-D S)e#ial *rder New Life In. manufatures s;in reams soa!s and other !roduts !rimaril" for
!eo!le with dr" and sensiti5e s;in. It has Just introdued a new line of !rodut that remo5es the s!otting and
wrin;ling in s;in assoiated with aging. It sells these !roduts in !harmaies and de!artment stores at !ries
somewhat higher than those of other brands beause of New Life8s e0ellent re!utation for ualit" and
effeti5eness.
New Life urrentl" has 5er" low utili7ation of !lant a!ait". Two "ears ago in antii!ation of ra!id growth
the om!an" o!ened a large new manufaturing !lant whih has "et to be utili7ed more than () !erent.
$artl" for this reason New Life has sought new !artners and was able with the hel! of finanial anal"sts to
loate suitable business !artners. The first !otential !artner identified in this searh was a large su!ermar;et
hain &u!er,alue whih is interested in the !artnershi! beause it wants New Life to manufature an age
ream to sell in its stores. The !rodut would be essentiall" the same as the New Life !rodut 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 !rodut as manufatured for &u!er,alue b" New Life. New Life8s CFO has made some
alulations and has determined that the diret materials diret 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 eui5alent New Life !rodut.
Required &hould New Life ae!t the !ro!osal from &u!er,alue= h" or wh" not=

6.-? "roe#t-Analy!i!
re"led Sale!
!roduts inluding "romotion!
!lastis illside
and wood FurnitureIts
b"B!roduts. Com!an" ma;es !roduts
three furniture outdoor furniture from
are gliders hairs
with footstools and tables. The !roduts a!!eal !rimaril" to ostBonsious onsumers and those who 5alue
the re"ling of materials. The om!an" wholesales its !roduts to retailers and 5arious mass merhandisers.
%eause of the seasonal nature of the !roduts most orders are manufatured during the winter months for
deli5er" in the earl" s!ring. Mihael Cain founder and owner is disma"ed that sales for two of the !roduts
are tra;ing below budget. The following hart shows !ertinent "earBtoBdate data regarding the om!an"8s
!roduts.
Certain that the shortfall was aused b" a la; of effort b" the sales fore Mihael has suggested
to Lisa %o"le the sales manager that the om!an" announe two ontests to orret this situation before it
deteriorates. The first ontest is a tri! to awaii awarded to the to! sales!erson if inremental glider sales
are attained to lose the budget shortfall. The seond ontest is a golf wee;end om!lete with a new set of
golf lubs awarded to the to! sales!erson if inremental sales of hairs with footstools are attained to lose
the budget shortfall. The awaiian 5aation would ost '13()) and the golf tri! would ost '1-()).

<lider Cair %it oot!tool /a8le


A#tual Budget A#tual Budget A#tual Budget
Number of units -3)) *))) 3E)) ?))) +()) ++))
A5erage sales !rie '?).)) '?(.)) '31.)) '3(.)) '-*.)) '-(.))
,ariable osts
4iret labor
ours of labor -.() -.-( +.-( +.)) ).3) ).()
Cost !er hour '11.)) '1).)) ' E.() ' E.-( ' E.)) ' E.))
4iret material '13.)) '1(.)) '11.)) '1).)) ' 3.)) ' (.))
&ales ommission '1(.)) '1(.)) '1).)) '1).)) ' (.)) ' (.()
Required
1. /0!lain whether either ontest is desirable or not.
-. /0!lain the strategi issues guiding "our hoie about these ontests.

2.+( Make or Buy Gian Auto Cor!oration manufatures !arts and om!onents for manufaturers and
su!!liers of !arts for automobiles 5ans and tru;s. &ales ha5e inreased eah "ear based in !art on the
om!an"8s e0ellent reord of ustomer ser5ie and reliabilit". The industr" as a whole has also grown as
auto manufaturers ontinue to outsoure more of their !rodution es!eiall" to ostBeffiient manufaturers
suh as GianAuto. To ta;e ad5antage of lower wage rates and fa5orable business en5ironments around the
world Gian has loated 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 !roduts.
Ted ,osilo is the !lant manager for the 4en5er Co5er $lant whih 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
reognition of his management abilit". e funtions as a regional manager although the budget for him and
his staff is harged to the 4en5er Co5er $lant.
Ted has Just reei5ed a re!ort indiating that GianAuto ould !urhase the entire annual out!ut
of 4en5er Co5er from su!!liers in other ountries for '3) million. e was astonished at the low outside
!rie beause 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#

DE3ER C*ER "A3/


Budget 'or *)erating Co!t!
or te ear Ending De#em8er 91 +,1,
?,,,! omitted@
Materials ' +-)))
Labor
4iret ' -+)))
&u!er5ision +)))
Indiret !lant *))) +))))
O5erhead
4e!reiationeui!ment ' ()))
4e!reiationbuilding +)))
$ension e0!ense *)))
$lant manager and staff -)))
Cor!orate alloation 3))) -))))
Total budgeted osts ' ?-)))
Additional fats regarding the !lant8s o!erations are as follows#
 4ue to 4en5er Co5er8s ommitment to use highBualit" fabris in all its !roduts the !urhasing
de!artment !laed blan;et !urhase orders with maJor su!!liers to ensure the reei!t of suffiient materials
for the oming "ear. If these orders are aneled as a result of the !lant losing termination harges would
amount to 1( !erent of the ost of diret materials.
 A!!ro0imatel" *)) !lant em!lo"ees will lose their Jobs if the !lant is losed. This inludes all diret
laborers and su!er5isors as well as the !lumbers eletriians and other s;illed wor;ers lassified as indiret
!lant wor;ers. &ome would be able to find new Jobs but man" would ha5e diffiult" doing so. All
em!lo"ees would ha5e diffiult" mathing 4en5er Co5er8s base !a" of '1*.*) !er hour the highest in the
area. A lause in 4en5er Co5er8s ontrat with the union ould hel! some em!lo"ees2 the om!an" must
!ro5ide em!lo"ment assistane to its former em!lo"ees for 1- months after a !lant losing. The estimated
ost to administer this ser5ie is '1 million for the "ear.
 &ome em!lo"ees would !robabl" elet earl" retirement beause GianAuto has an e0ellent !lan.
In fat '+ million of the -)1) !ension e0!ense would ontinue whether 4en5er Co5er is o!en or not.
 Ted and his staff would not be affeted b" losing 4en5er Co5er. The" would still be res!onsible for
managing three other area !lants.
 4en5er Co5er onsiders eui!ment de!reiation to be a 5ariable ost and uses the unitsBof !rodution
method to de!reiate its eui!ment and the ustomar" straightBline method to de!reiate its building.
Required
1. /0!lain GianAuto8s om!etiti5e strateg" and how this strateg" should be onsidered with regard to the
4en5er $lant deision. Identif" the ;e" strategi fators that should be onsidered in the deision.
-. GianAuto Cor!oration !lans to !re!are a strategi anal"sis to use in deiding whether to lose the 4en5er
Co5er $lant. In "our anal"sis use the abo5e information and inlude onsideration of global om!etition
and GianAuto8s om!etiti5e strateg".

6.+). Make or Buy %ernard8s &!eialt" Manufaturing K%&M !rodues ustom 5ehileslimousines
buses on5ersion 5ans and small tru;sfor s!eial order ustomers. It ustomi7es eah 5ehile to the
ustomer8s s!eifiations. %&M has been growing at a stead" rate in reent "ears in !art beause of the
inreased demand for s!eialt" lu0ur" 5ehiles. The inreased demand has also aused new om!etitors to
enter the mar;et for these t"!es of 5ehiles. %&M management onsiders its om!etiti5e ad5antage to be the
high ualit" of its manufaturing. Muh 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". %eause of the inreased
om!etition !rie om!etition is beginning to beome a fator for the industr" and %&M is beoming more
onerned about ost ontrols and ost redution. It has ontrolled them b" !urhasing materials and !arts in
bul; !a"ing areful attention to effiien" in sheduling and wor;ing different Jobs and im!ro5ing
em!lo"ee !roduti5it".
The inreased om!etition has also aused %&M to reonsider its strateg". !on re5iew with the hel! of a
onsultant %&M management has deided that it om!etes most effeti5el" as a differentiator based on
ualit" of !rodut and ser5ie. To reinfore the differentiation strateg" %&M has im!lemented a 5ariet" of

ualit" ins!etion and re!orting s"stems. 6ualit" re!orts are 5iewed at all le5els of management inluding
to! management.
To derease osts and im!ro5e ualit" %&M has begun to loo; for new outside su!!liers for ertain !arts.
For e0am!le %&M an !urhase a ritial sus!ension !art now manufatured inBhouse from $erformane
/ui!ment In. for a !rie of '1)(. %u"ing the !art would sa5e %&M 1) !erent of the labor and 5ariable
o5erhead osts and '3? of materials osts. The urrent manufaturing 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 affeted if %&M hose to !urhase the !art rather than to ontinue to
manufature it=
-. &hould %&M !urhase or manufature the !art= Inlude strategi onsiderations in "our answer.

6.+1 Make or Buy Revie% o' earning Curve!enderson /ui!ment Com!an" has !rodued a !ilot run
of () units of a reentl" de5elo!ed "linder used in its finished !roduts. The "linder has a oneB"ear life
and the om!an" e0!ets to !rodue and sell 13() units annuall". The !ilot run reuired 1*.-( diret laborB
hours for the () "linders a5eraging ).-?( diret laborBhours !er "linder.
enderson has e0!eriened an ?) !erent learning ur5e on the diret laborBhours needed to !rodue new
"linders. $ast e0!eriene indiates that learning tends to ease b" the time ?)) !artsare !rodued.

enderson8s manufaturing osts for "linders follows#


4iret labor '1-.)) !er hour
,ariable o5erhead 1).)) !er hour
Fi0ed o5erhead 13.3) !er hour
Materials *.)( !er unit
enderson has reei5ed a uote of 'D.() !er unit from L"tel Mahine Com!an" for the additional 13))
"linders needed. enderson freuentl" subontrats this t"!e of wor; and has alwa"s been satisfied with
the ualit" of the units !rodued b" L"tel.
Required
1. If enderson manufatures the "linders determine
a. The a5erage diret laborBhours !er unit for the first ?)) "linders Kinluding the !ilot run !rodued.
Round off alulations to three deimal !laes.
b. The total diret laborBhours for the first ?)) "linders Kinluding the !ilot run !rodued.
-. After om!leting the !ilot run enderson must manufature an additional 13)) units to fulfill the annual
reuirement of 13() units. ithout regard to "our answer in reuirement 1 assume that
 The first ?)) "linders !rodued Kinluding the !ilot run reuired 1)) diret laborBhours.
 The ?))th unit !rodued Kinluding the !ilot run reuired ).)DE hours.
Calulate the total manufaturing osts for enderson to !rodue the additional 13)) "linders reuired.
+. 4etermine whether enderson should manufature the additional 13)) "linders or !urhase them from
L"tel. &u!!ort "our answer with a!!ro!riate alulations.

6.+- CC Ltd manufatures four t"!es of amera whih all use PlensQ a om!onent made onl" in one
fator". /ah PlensQ osts '() to !urhase. 4ue to a !rolonged stri;e of wor;ers in the PlensQ fator" CC
Ltd will onl" be able to !urhase -) ))) this "ear.
The following information relates to eah t"!e of amera manufatured b" CC Ltd.

4igital Cine Closed


ameras ameras Ciruit Medial
ameras ameras
Ma0imum 1)))) *))) +))) ())
demandKunits
Costs
!er
amera ' ' ' '
Lens () 1)) -)) +()

Other diret *) E) E? +))


materials
4iret
labour -) +) +) ((
Fi0ed
osts 3) ?) *) D)

$rofit!eramera () D) (- *E)

&elling !rie !er --) +D) *-) -3(


1
amera

RE2RED:
a Calulate the numbers of eah t"!e of amera to be !rodued and sold that would ma0imise the
!rofit of CC Ltd.
b $re!are a marginal ost statement showing the !rofit for the "ear.
 Calulate the total annual sales re5enue reuired b" CC Ltd to brea;Be5en this "ear.

6.++. "ro'ita8ility Analy!i!4 Revie% o' Ma!ter BudgetRa"Lo; Inor!orated has in5ented a seret
!roess to im!ro5e light intensit" and manufatures a 5ariet" of !roduts related to this !roess. /ah
!rodut is inde!endent of the others and is treated as a se!arate !rofit<loss di5ision. $rodut Kdi5ision
managers ha5e a great deal of freedom to manage their di5isions as the" thin; best. Failure to !rodue target
di5ision inome is dealt with se5erel"2 howe5er rewards for e0eeding one8s !rofit obJeti5e are as one
di5ision manager desribed them la5ish.
The 4imLo; 4i5ision sells an addBon automoti5e aessor" that automatiall" dims a 5ehile8s headlights
b" sensing a ertain intensit" of light oming from a s!eifi diretion. 4imLo; has had a new manager in

eah of the
has Just beenthree !re5ious
!romoted "ears beause
to manager and iseah manager
stud"ing wa"sfailed to reah
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-) !erent return on the in5estment in the
annual fi0ed osts of the di5ision !lus an additional !rofit of '-) for eah 4imLo; unit sold. Other
onstraints on di5ision o!erations are
 $rodution annot e0eed sales beause Ra"Lo;8s or!orate ad5ertising !rogram stresses om!letel" new
!rodut models eah "ear although the models might ha5e onl" osmeti hanges.
 4imLo;8s selling !rie annot 5ar" abo5e the urrent selling !rie of '-)) !er unit but ma" 5ar" as muh
as 1) !erent below '-)).
 A di5ision manager an elet to e0!and fi0ed !rodution or selling failities2 howe5er the target obJeti5e
related to fi0ed osts is inreased b" -) !erent of the ost of suh e0!ansion. Furthermore a manager
annot e0!and fi0ed failities b" more than +) !erent of e0isting fi0ed ost le5els without a!!ro5al from
the board of diretors.
4onna is now e0amining data gathered b" her staff to determine whether 4imLo; an ahie5e 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 manufaturing failit" a!ait" is *)))) units !er "ear but an be inreased to ?))))
units !er "ear with an inrease of '1)))))) in annual fi0ed osts.
 $resent 5ariable osts amount to '?) !er unit but 4imLo;8s 5endors are willing to offer raw materials
disounts amounting to '-) !er unit beginning with unit number 3)))1.
 &ales an be inreased u! to 1))))) units !er "ear b" ommitting large blo;s of !rodut to institutional
bu"ers at a disounted unit !rie of '1?). owe5er this disount a!!lies onl" to sales in e0ess of *))))
units !er "ear.
4onna belie5es that these !roJetions are reliable and is now tr"ing to determine what 4imLo; must do to
meet the !rofit obJeti5es that Ra"Lo;8s board of diretors 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 ahie5e both !rofit obJeti5es. %e sure to
onsider all onstraints in determining "our answer.
+. ithout regard to "our answer in $art - assume that 4onna deides to sell *)))) units at '-)) !er unit
and -*))) units at '1?) !er unit. $re!are a master budget inome statement for 4imLo; showing whether
her deision will ahie5e 4imLo;8s !rofit obJeti5es.
*. Assess 4imLo;8s om!etiti5e strateg".
(. Identif" the strategi fators that 4imLo; should onsider.
6.+* Motiwala ewelers is onsidering a s!eial order for 1) handrafted gold braelets to be gi5en as gifts
to members of a wedding !art". The normal selling !rie of a gold braelet is '+?E.E( and its unit !rodut
ost is '-3*.)) as shown below#
4iret materials . . . . . . . . . . . . . . '1*+.))
4iret labor . . . . . . . . . . . . . . . . . ?3.))
Manufaturing o5erhead . . . . . . . +(.))
nit !rodut ost . . . . . . . . . . . . . '-3*.))
Most of the manufaturing o5erhead is fi0ed and unaffeted b" 5ariations in how muh Jewelr" is !rodued
in an" gi5en !eriod. owe5er 'D of the o5erhead is 5ariable with res!et to the number of braelets
!rodued. The ustomer who is interested in the s!eial braelet order would li;e s!eial filigree a!!lied to
the braelets. This filigree would reuire additional materials osting '3 !er braelet and would also reuire
auisition of a s!eial tool osting '*3( that would ha5e no other use one the s!eial order is om!leted.
This order would ha5e no effet on the om!an"8s regular sales and the order ould be fulfilled using the
om!an"8s e0isting a!ait" without affeting an" other order.
Required:
hat effet would ae!ting this order ha5e on the om!an"8s net o!erating inome if a s!eial !rie of
'+*E.E( is offered !er braelet for this order= &hould the s!eial order be ae!ted at this !rie=

6.+( "ro'ita8ility Analy!i!4 "ri#ingome &uites Inn is a national hain of highBualit" hotels whih 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) !erent 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 ou!an" !er "ear res!onded b" ;ee!ing their rates low and as a result ome &uites8 sales fell from
()))))) annual room ou!an" to *)))))) rooms
a -) !erent fall in room sales and a new low in ou!an" rate for the firm. The fall in room sales was
greater than e0!eted so ome &uites onsulted a mar;eting e0!ert who e0!lained that ustomers in this
mar;et are 5er" sensiti5e to !rie hanges and furthermore that while a redution in !rie inreases 5olume
and an inrease in !rie redues 5olume the effet is not !ro!ortional2 !rie dereases im!ro5e sales at a
faster rate than !rie inreases redue sales. ome &uites is now onsidering a redution in !rie to 'D3
with the e0!etation of inreasing sales b" as muh as () !erent o5er the urrent le5el of *)))))) rooms.
The onsultant assures ome &uites that if it returned to the '?) !rie sales would return to the ())))))
le5el. The table below shows the room osts !er ou!ied rooms at 5arious annual ou!an" le5els.
Room *##u)an#y ?tou!and!@
,,, ,, ,,, ,, 6,,, 6,,
"er Room Co!t!
&u!!lies ' +.+) ' +.+- ' +.-? ' +.+1 ' +.+1 ' +.+)
4iret 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 whih 5ar" with the number of

rooms ou!ied2whih
other e0!enses hotelBle5el
do noto5erhead
5ar" withinludes general
the number maintenane
of rooms registration
ou!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 !riing= 4e5elo! a
s!readsheet anal"sis that shows what would be the effet on ontribution of the different !riing !oliies
ome &uites has used or is onsidering.
6.+3 Make or Buy The Midwest 4i5ision of the $aibe Cor!oration manufatures subassemblies used in
$aibe8s final !roduts. L"nn ardt of Midwest8s !rofit !lanning de!artment has been assigned the tas; of
determining whether Midwest should ontinue to manufature a subassembl" om!onent
MTRB-))) or !urhase it from Marle" Com!an" an outside su!!lier. Marle" has submitted
a bid to manufature and su!!l" the +-))) units of MTRB-))) that $aibe will need for -)1) at a unit !rie
of '1D.+). Marle" has assured $aibe that the units will be deli5ered aording to $aibe8s !rodution
s!eifiations and needs. The ontrat !rie of '1D.+) is a!!liable 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 manufature +)))) units of
MTRB-))) in -))E.
4iret material '1E()))
4iret labor 1-))))
Fator" s!ae rental ?*)))
/ui!ment leasing osts +3)))
Other manufaturing osts --()))
Total manufaturing osts '33))))
L"nn has olleted the following information related to manufaturing MTRB-)))#
 /ui!ment leasing osts re!resent s!eial eui!ment used to manufature MTRB-))). Midwest an
terminate this lease b" !a"ing the eui5alent of one month8s lease !a"ment for eah of the two "ears left on
its lease agreement.
 Fort" !erent of the other manufaturing o5erhead is onsidered 5ariable. ,ariable o5erhead hanges with
the number of units !rodued and this rate !er unit is not e0!eted to hange in -)1). The fi0ed
manufaturing o5erhead osts are not e0!eted to hange whether Midwest manufatures or !urhases
MTRB-))). Midwest an use eui!ment other than the leased eui!ment in its other manufaturing
o!erations.
 4iret materials ost used in the !rodution of MTRB-))) is e0!eted to inrease ? !erent in
-)1).
 Midwest8s diret labor ontrat alls for a ( !erent wage inrease in -)1).
 The failities used to manufature MTRB-))) are rented under a monthBtoBmonth rental agreement.
Midwest would ha5e no need for this s!ae if it does not manufature MTRB-))). Thus
Midwest an withdraw from the rental agreement without an" !enalt".
ohn $orter Midwest di5isional manager sto!!ed b" L"nn8s offie to 5oie his o!inion regarding the
outsouring of MTRB-))). e ommented PI am reall" onerned about outsouring 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!!reiate 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 inreases 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
!urhase it from Marle" Com!an" for -)1).

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