15. Cutting Costs at Best Boards, Inc. Refer to the dialogue at Best Boards, Inc., presented at the beginning of the chapter. How does the vice president of operations, Jim Muller, expect to reduce costs and earn his bonus? What was the flaw in his plan? 16. Make-or-Buy Decision. Coffee Mugs, Inc., currently manufactures ceramic coffee mugs. Management is interested in outsourcing production to a reputable manufacturing company that can supply the cups for $2 per unit. Coffee Mugs produces 100,000 mugs each year. Variable production costs are $0.80 and annual fixed costs are $150,000. If production is outsourced, all variable costs and 40 percent of annual fixed costs will be eliminated. Perform differential analysis using the format presented in Figure 4.2 "Make-or-Buy Differential Analysis for Best Boards, Inc." and explain which alternative is best, Alternative 1 (producing internally) or Alternative 2 (outsourcing). 17. Product Line Decision. The following segmented annual income statement is for Flash Drive, Inc.: Product Lines 1 Gig 2 Gig 4 Gig Total Sales revenue $1,000,000 $4,000,000 $5,000,000 $10,000,000 Variable costs 600,000 2,500,000 3,500,000 6,600,000 Contribution margin $ 400,000 $1,500,000 $1,500,000 $ 3,400,000 Direct fixed costs 300,000 800,000 1,000,000 2, 100,000 Allocated fixed costs (A) (B) (C) 1,100,000 Profit (loss) $ ( D ) $ (E) $ ( F ) $ 200,000 For items A, B, and C, assign allocated fixed costs to each product line based on sales revenue for each product line as a proportion of total sales revenue. For example, the 1 Gig product will be assigned 10 percent of allocated fixed costs (= $1,000,000 in 1 Gig sales revenue : $10,000,000 total sales revenue), or $110,000 (=$1,100,000 total allocated fixed costs x 10 percent). For items D, E, and F, calculate the profit or loss for each product line.18. Customer Decision. Consulting Group LLC has two customers. Customer One generates $150,000 in income after direct xed costs are deducted, and Customer Two generates $200,000 in income after direct xed costs are deducted. Allocated xed cosB total $300,000 and are assigned 30 percent to Customer One and 70 percent to Customer Two based on several different cost drivers. Total allocated xed costs remain the same regardless of how these costs are assigned to customers. Calculate the amount of allocated xed costs to be assigned to each customer, and determine the prot or loss for each customer. Should Consulting Group drop Customer Two? Explain. 19. Special Order Decision: Operating with Idle Capacity. Jerseys, Inc., currently produces 10,000 jerseys a year for its regular customers and charges $10 per jersey. Jerseys, Inc., has capacity to produce an additional 5,000 jerseys if sales grow in the future. Variable costs total $6 per jersey and annual xed costs total $15,000. The city of Rockville recently approached the company and proposed a one-time purchase of 3,000 jerseys for $3 each. Should Jerseys, Inc., accept the proposal? Explain. 20. Cost-Plus Pricing. KJ Home Builders is bidding on a custom home for a potential customer. The company typically charges 15 percent above cost and estimates the home will cost $500,000 to build. Calculate the price bid by K1 Home Builders. 21. Constrained Resourca. Deal, Inc., produces two types of computers: Vortex and Zoom. The computers are produced in separate departments and sent to the quality testing department before being packaged and shipped. A labor-hour bottleneck has been identied in the quality testing department due to the high skill requirements of the job. Deal, Inc., would like to optimize its use of labor hours by producing the most protable computer: Based on the information shown, calculate the contribution margin per quality testing labor hour for each product: Quality Testing Labor Hours Contribution Margin Vortex 0.50 $600 Zoom 0.40 500 22. Evaluating Qualitative Factors. Assume your company is considering whether to outsource production. What qualitative hctors should be considered before making this decision? Bob Lee is president of Best Boards, Inc., a manufacturer of wakeboards. In the face of stiff competition, Best Boards' profits have declined steadily over the past few years. Bob is concerned about the decline in profits and has instructed Jim Muller, the vice president of operations, to do whatever it takes to reduce costs. In fact, Bob offered to pay Jim a bonus equal to 25 percent of any production cost savings the company achieves during the coming year. Jim Muller thinks he has a way to cut costs and earn his bonus, and he approaches Bob Lee and Amy Eckstrom, the company's accountant, to discuss his plan: Jim: Bob and Amy, I hope you've had a chance to review my proposal to outsource production. I think it could save the company thousands of dollars this coming year. Bob I did review your proposal. Give me a quick summary of what you have in mind. Jim: Our staff accountants tell me that the average unit product cost for our wakeboards is about $110, and we make 10,000 wakeboards each year. Amy: Sounds about right. Jim: My thought is that we could save substantial amounts of money by having an outside supplier make our wakeboards rather than doing it ourselves. I contacted one reputable wakeboard manufacturer interested in producing the boards for us. Bob: What did you find? Jim: They told me the wakeboards could be purchased from them for $70 a board. This amounts to $40 in savings per unit, and $400,000 in total savings! Even after my 25 percent bonus of $100,000, Best Boards would save $300,000. Amy: Jim has an interesting idea, but there are some issues that should be considered. Jim, you are correct in stating the average unit product cost for our wakeboards is $110 given production of 10,000 units per year. However, it is not accurate to assume we will eliminate $1, 100,000, which is $110 per unit cost times 10,000 units, in total production costs by outsourcing production. The average unit cost includes factory equipment lease payments, along with supervisors' salaries, and factory rent. These costs don't go away quickly if we stop production. The equipment lease is for several years, we are locked into a long-term lease for the factory building, and we would have to look at our supervisors' contracts before letting them go. Bob: Can we get a better idea of which costs would be eliminated by outsourcing production, and which costs would remain? Amy: Sure. I'll get a team working on this right away. Best Boards is facing a decision common to many organizations: whether to build its own product or to have another company build the product. We will come back to this scenario after describing how com- --ies facing such decisions can use differential analysis to make wise business decisions