Comprehensive problem including special order, outsourcing, and segment elimination decisions Heth Company’s electronics division produces a radio/cassette 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 radio/cassette player is between 50,000 and 150,000 units per year.

Required (Consider each of the requirements independently.)

a. An international trading firm has approached top management about buying 30,000 radio/cassette players for $26.50 each. It would sell the product in a foreign country, so that Heth’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 Heth 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. Heth has an opportunity to buy the 60,000 radio/cassette players it currently makes from a foreign manufacturer for $26 each. The manufacturer has a good reputation for reliability and quality, and Heth could continue to use its own logo, advertising program, and sales force to distribute the products. Should Heth buy the radio/cassette players or continue to make them? Support your answer with appropriate computations. Specifically, how much more or less would it cost to buy the radio/cassette 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?
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