Rooney Company's electronics division produces a DVD player. The vice president in charge of the division is evaluating the income statement showing annual revenues and expenses associated with the division's operating activities. The relevant range for the production and sale of the DVD player is between 50,000 and 150,000 units per year.
Income Statement
Revenue (60,000 units × $70)..............................$4,200,000
Unit-level variable costs
Materials cost (60,000 × $40) .............................(2,400,000)
Labor cost (60,000 × $16) .............................. ....(960,000)
Manufacturing overhead (60,000 × $3) ...................(180,000)
Shipping and handling (60,000 × $1) .......................(60,000)
Sales commissions (60,000 × $4) ..........................(240,000)
Contribution margin............................................360,000
Fixed expenses
Advertising costs related to the division...................(60,000)
Salary of production supervisor...........................(252,000)
Allocated companywide facility-level expenses.........(240,000)
Net loss......................................................$ (192,000)
Required (Consider each of the requirements independently.)
a. An international trading firm has approached top management about buying 30,000 DVD players for $63 each. It would sell the product in a foreign country, so that Rooney's existing customers would not be affected. Because the offer was made directly to top management, no sales commissions on the transaction would be involved. Based on quantitative features alone, should Rooney accept the special order? Support your answer with appropriate computations. Specifically, by what amount would profitability increase or decrease if the special order is accepted?
b. Rooney has an opportunity to buy the 60,000 DVD players it currently makes from a foreign manufacturer for $62 each. The manufacturer has a good reputation for reliability and quality, and Rooney could continue to use its own logo, advertising program, and sales force to distribute the products. Should Rooney buy the DVD players or continue to make them? Support your answer with appropriate computations. Specifically, how much more or less would it cost to buy the DVD players than to make them? Would your answer change if the volume of sales were increased to 140,000 units?
c. Because the electronics division is currently operating at a loss, should it be eliminated from the company's operations? Support your answer with appropriate computations. Specifically, by what amount would the segment's elimination increase or decrease profitability?