Case 1

Marcy has received a special order for 2,000 units of its product at a special price of $60. The product normally sells for $80 and has the following manufacturing costs:

Assume that Marcy has sufficient capacity to fill the order without harming normal production and sales and all fixed overhead is unavoidable.

Per Unit

Direct Materials $24

Direct Labor 16

Variable manufacturing overhead 12

Fixed manufacturing overhead 20

Unit Cost 72

a. If Marcy accepts the order, what effect will the order have on the company's short-term profit?

b. What minimum price should Marcy charge to achieve a $20,000 incremental profit?

c. Now assume Marcy is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Marcy accepts the order, what effect will the order have on the company's short-term profit?

Case 2

Edward currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $22. Edward currently produces 100,000 subcomponents at the following manufacturing costs:

Per Unit

Direct Materials $7.50

Direct Labor 8.00

Variable manufacturing overhead 5.00

Fixed manufacturing overhead 7.50

Unit Cost 28.00

a. If Edward has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier?

b. If Edward has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier?

c. Now assume Edward would avoid $300,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?

Case 3

Valley Inc. has three divisions, Almond, Grover and Oak. Following is the income statement for the previous year:

Almond Grover Oak Total

Sales $500,000 $275,000 $225,000 $1,000,000

Variable cost 175,000 125,000 100,000 400,000

Contribution Margin 325,000 150,000 125,000 600,000

Fixed Cost 275,000 151,250 123,750 550,000

Profit Margin 50,000 (1.250) 1.250 50,000

Of the fixed costs, $300,000 is for corporate costs and is allocated equally to the three divisions.

a. How much does Grover Division have in direct fixed costs?

b. What is Grover Division's segment margin?

c. What would Valley's profit margin be if Grover Division were dropped?

Case 4

Elmwood, Inc. currently sells 12,000 units of its product per year for $100 each. Variable costs total $75 per unit. Elmwood's manager believes that if a new machine is leased for $147,000 per year, modifications can be made to the product that will increase its retail value. These modifications will increase variable costs by $20 per unit, but Elmwood is hoping to sell the modified units for $130 each.

a. Should Elmwood modify the units or sell them as is? How much will the decision affect profit?

b. What is the least Elmwood could charge for the modified units to make it worthwhile to modify them?

c. The leasing company is willing to negotiate the price of the machine lease. What is the most Elmwood would be willing to pay to lease the machine if they plan to charge $130 for the modified units?