1. Outsourcing

Duncan Co. is currently servicing 20,000 clients at a cost of $16 per service call.

An outside supplier has offered to service all these clients for $14 per call.

Duncan's costs are shown below:

Per Call

Direct Supplies $2

Direct Labor 4

Variable overhead 5

Fixed overhead (40% avoidable) 5

$16

a. Should Duncan outsource?

b.Assume the equipment used to service the clients could be leased to another company for $40,000. What decision should be made?

2. Dropping a Product Line

Step Up, Inc. sells, through infomercials, two types of stair stepping machines, the Deluxe and the Regular models. A recent segmented income statement is shown below.

RegularDeluxeTotal__

Sales $ 160,000$ 240,000$ 400,000

Less: Cost of goods sold 120,000160,000280,000

Contribution margin 40,00080,000120,000

Less:

Direct fixed costs 10,00020,00030,000

Common fixed costs 32,00050,00082,000

Total fixed costs 42,00070,000112,000

Net income (Loss) $( 2,000 )$10,000$8,000

Direct fixed costs refer to the advertising programming costs for each model.

Common fixed costs include the shared order processing and fulfillment departments.

Determine if Step Up should drop the Regular model.

3.PRICING A SPECIAL ORDER

Scott, Inc. has a capacity of servicing 300,000 clients a year and charges them $28 per service.

At present Scott is servicing 250,000 clients.

A foreign companywants Scott to service its US customers (there are 40,000 of them) for $20 per service.

The foreign company will perform all the billing and no commissions will be paid on these calls, so variable selling costs will be reduced by 40%.

The sales manager has collected the following data on Scott's operating costs:

Per Unit

Direct Supplies $3.00

Direct labor 7.50

Variable overhead 6.00

Variable selling 3.50

Fixed overhead 4.00

Fixed administration1.50

Total $25.50

Determine if the new customer should be accepted or rejected.

4.KEEP OR REPLACE?

The company must choose between keeping the old machine - it's only one year old - and replacing it with a new one.You have the following data.

Old Machine

Original Cost$175,000

Accumulated Depreciation $35,000

Purchase Date 1 year ago

Remaining Useful Life 4 years

Disposal Value $90,000

Disposal Value in 4 years $0

Annual Variable OperatingExpenses $345,000

Annual Revenue$500,000

New Machine

Price New$200,000

Expected Useful Life 4 years

Disposal Value in 4 years $0

Annual Variable OperatingExpenses $300,000

Annual Revenue$500,000