3. Owly Corporation's agriculture division currently produces their own soil mix to grow the

plants they sell in. Owly currently makes 200,000 cubic meters of soil mix a year. Each cubic

meter of soil mix has direct labour costs of $1.50, direct material costs of $3.15, variable

overhead costs of $0.75, and fixed overhead costs of $0.70 for a total cost of $6.10 per cubic

meter. An outside supplier has offered to sell Owly soil mix for $5.75 per cubic meter. If Owly

purchases the soil mix, 25% of the fixed manufacturing overhead will be eliminated, the

remaining 75% will still exist.

A. What is the net dollar advantage (disadvantage) of purchasing the soil mix rather than making

it?

B. What is the maximum amount Owly is willing to pay an outside supplier per cubic meter (to

the cent) for the soil mix if the supplier commits to supplying all 200,000 cubic meters?

C. After one month of greenhouse growing time Owly can produce 100,000 four inch pot basil

plants that can be sold for $2.20 each. Another month in the greenhouse results in 80,000 ten

inch pot basil plants that can be sold for $4.80 each. A month of greenhouse growing time costs

Owly $135,000. What is the dollar advantage (disadvantage) of growing the plants for another

month?

4. Owly Corporation's beverage division produces and sells a hard seltzer, Starwings. The

current wholesale price of Starwings in $21 per 12-pack. Owly currently sells 40,000 12-packs a

quarter. Variable manufacturing costs per 12-pack are 38% of the current selling price. Owly

pays the Starwings sales people a 3% commission on every sales dollar of Starwings they

generate. Current fixed costs per quarter for Starwings are $315,000.

To increase sales and profitability of Starwings, Owly is considering lowering the wholesale

price from $21 to $18. Along with this reduction in selling price, Owly would also change the

way the Starwings sales people are compensated. Owly will up the sales commission on every

sales dollar to 7% and reduce the sales peoples' base salary resulting in a reduction of quarterly

fixed costs by $25,000. The dollar amount of variable manufacturing costs will not change. Owly

believes the lowering of the selling price and the change in sales peoples' compensation mix will

result in a 25% increase in sales per quarter.

A. What is the net operating income under the current selling price and sales people

compensation system?

B. What is the net operating income for the proposed reduction in selling price and change to the

sales people compensation system?

C. What is the dollar advantage (disadvantage) of adopting the lower sales price and change to

sales people compensation system compared to the current selling price and sales people

compensation?