• Calculate and document answers to questions related to the Minnetonka Corporation in Problem 6-65

H.111\" DHULIIU HUI. DU UUPJ UUldLUU. HEIIUIL UWUB' LIIU lilllu, Wlllll Wilt PHI Ullw IUI tDUU'U',UUU many yUlb ago. A recent appraisal placed the value of the land at $18 million because it is a prime site for an industrial park and shopping center. Agribiz could purchase all the tomatoes it needs on the market for $.25 per pound delivered to its factory. If it did this. it would sell the farmland and shut down the operations in Sharpestown. If the farm were sold, $300,000 of the annual xed costs would be saved. Agribiz can invest excess cash and earn an annual rate of l0%. 1. How much does it cost Agribiz annually for the land used by the tomato farm? 2. How much would Agribiz save annually if it closed the tomato farm? Is this more or less titan would be paid to purchase the tomatoes on the market? 3. What ethical issues are involved with the decision to shut down the tomato farm? 6-64 lrrelevance of Past Costs at Starbucks Starbucks purchases and masts high-quality, whole-bean coffees, its hallmark, and sells them along with other coffee-related products primarily through its company-operated retail stores. Suppose that the qualitycontrol manager at Starbucks discovered a LEGOpound batch of roasted beans that did not meet the company's quality standards. Company policy would not allow such beans to be sold with the Starbucks name on them. However, they could be reprocessed, at which time they could be sold by Starbucks' retail stores, or they could be sold as is on the wholesale coffee bean market. Assume that the beans were initially purchased for $800, and the total cost of roasting the batch was $2,520, including $420 of variable costs and $2,100 of xed costs (primarily depreciation on the equipment). The wholesale price at which Starbucks could sell the beans was $3.80 per pound. Purchasers would pay the shipping costs from the Starbucks plant to their individual warehouses. If the beans were reprocessed, the processing cost would be $900 because the beans would not require as much processing as new beans. All $900 would be additional costs, that is, costs that would not be incurred without the reprocessing. The beans would be sold to the retail stores for $4.90 per pound, and Starbucks would have to pay an average of $.45 per pound to ship the beans to the stores. 1. Should Starbucks so]! the beans on the market as is for $3.80 per pound, or should the company reprocess the beans and sell them through its own retail stores? Why? 2. Compute the amount of extra prot Starbucks earns from the alternative you selected in number 1 compared to what it would earn from the other alternative. 3. What cost numbers in the problem were irrelevant to your analysis? Explain why they were irrelevant. CASES 6-65 Make or Buy The Minnetonka Corporation, which produces and sells to wholesalers a highly succeszul line of water skis, has decided to diversify to stabilize sales throughout the year. The company is considering the production of crossacountry skis. After considerable research, a crosscountry ski line has been developed. Because of the con servative nature of the company management, however, Minnetonka's president has decided to introduce only one type of the new skis for this coming winter. If the product is a success, further expansion in future years will be initiated. The ski selected is a mass-market ski with a special binding. It will be sold to wholesalers for $80 per pair. Because of available capacity. no additional xed charges will be incurred to produce the skis. A $125,000 xed charge will be absorbed by the skis, however. to allocate a fair share of the company's present xed costs to the new product. Using the estimated sales and production of 10,000 pair of skis as the expected volume, the accounting department has developed the following costs per pair of skis and bindings: Direct labor $35 Direct materials 30 Total overhead E Total cost Minnetonka has approached a subcontractor to discuss the possibility of purchasing the bindings. The purchase price of the bindings from the subcontractor would be $5.25 per binding, or $10.50 per CHAPTER 6 0 RELEVANT INFORMATION FOR DECISION MAKING WITH A FOCUS ON GPEI pair. If the Minnetonlca Corporation accepts the purchase proposal. it is predicted that direct-labor and variable-overhead costs would be reduced by 10% and direct-materials costs would be reduced by 20%. 1. Should the Minnetonka Corporation make or buy the bindings? Show calculations to support your answer. 2. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the bindings? Support your master with an appropriate explanation. 3. Instead of sales of 10,000 pairs of skis. revised estimates show sales volume at 12,500 pairs. At this new volume. additional equipment. at an annual rental of $0.000, must be acquired to manu- facture the bindings. This incremental cost would be the only additional xed cost required, even if sales increased to 30.000 pairs. {The 30,000 level is the goal for the third year of production.) Under diese circumstances, should the Mirmetonlra Corporation make or buy the bindings? Show calculations to support your answer. 4. The company has the option of making and buying at the same time. What would be your answer to number 3 if this altemalive were considered? Show calculations to support your answer. 5. What nonquantiable factors should the Minnetonka Corporation consider in determining whether it should make or buy the bindings? 6-66 Make or Buy The Robr Company's old equipment for making snbassemblies is worn out. The company is con- sidering two courses of action: (a) completely replacing the old equipment with new equipment or (b) buying subassemblies from a reliable outside supplier, who has quoted a unit price of $1 on a 7-year contract for a minimum of 50,000 units per year. Production was 60,000 units in each of the past 2 years. Future needs for the next 7 years are not expected to uctuate beyond 50.000 to 70,000 units per year. Cost records for the past 2 years reveal the following unit costs of manufacturing the subassembly: Direct materials 3 .30 Direct lab-or .35 Variable overhead .10 Fixed overhead (including $.10 depreciation and $.10 for direct departmental xed overhead) i $1 00 The new equipment will cost $188,000 cash, will last 7 years, and will have a disposal value of $20,000. The current disposal value of the old equipment is $10,000. The sales representative for the new equipment has summarized her position as follows: The increase in machine speeds will reduce direct labor and variable overhead by $.35 per unit. Consider last year's experience of one of your major competitors with identical equipment. It pro- duced 100,000 units under operating conditions veryr comparable to yours and showed the following unit costs. Direct materials $.30 Direct labor .05 Variable overhead .05 Fixed overhead. including depreciation of $.24 __40 Total E For purposes of this case. assume that anyr idle facilities cannot be put to alternative use. Also assume that $.05 of the old Rohr unit cost is allocated fixed overhead that will be unaffected by the decision. 1. The president asks you to compare the alternatives on a total-annual-cost basis and on a per-unit basis for annual needs of 60,000 units. Which alternative seems more attractive? 2. Would your answer to number 1 change if the needs were 50,000 units? T0000 units? At what volume level would Ruhr be indifferent between making and buying subassemblies? Show your computations. 3. What factors. other than the preceding ones. should the accountant bring to the attention of management to assist it in making its decision? Include the considerations that might be applied to the outside supplier