CURRENT DESIGNS Current Designs faces a number of important decisions that require incremental analysis. Consider each of the following situations independently. Situation 1 Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president of a brewing company. He was calling to inquire about the possibility of Current Designs producing "floating coolers" for a promotion his company was planning. These coolers resemble a kayak but are about one-third the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip The company would be interested in purchasing 150 coolers for the upcoming summer. It is willing to pay $375 per cooler. The brewing company would pick up the coolers upon completion of the order. Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce the coolers. After careful analysis, the following costs were identified. Direct materials Direct labor $120/unit $90/unit Variable overhead Fixed overhead $30/unit $1,500 Current Designs would be able to modify an existing mold to produce the coolers. The cost of these modifications would be approximately $3,000. Instructions (a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to produce the coolers. Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at full capacity (b) Situation2 Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current rotomold oven as a way to realize savings from reduced energy consumption. The oven operates on natural gas, using 25,500 therms of natural gas for an entire year. A new energy-efficient rotomold oven would operate on 22,500 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $375,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $15,000 Instructions (a) Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the average price for natural gas over the next 10 years will be $0.65 per therm Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in (a) (b) Situation3 One of Current Designs' competitive advantages is found in the ingenuity of its owners and CEO, Mike Cichanowski. His involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the most important component of a kayak, the seat. The "Revolution Seating System" is one-of-a-kind, rotating axis seat that gives unmatched, full contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a customizable seat position that maximizes comfort for the rider Having just designed the "Revolution Seating System", Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows Direct materials Variable overhead $30/unit $22.5/unit Direct labor Fixed overhead $18/unit 30,000 Current Designs will need to produce 4,500 seats this year, 25% of the fixed overhead will be avoided if the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will cost $75 to purchase a seat from an outside vendor. Instructions (a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating (b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". System produce income of $30,000? Situation 1 (a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to produce the coolers Net Income Reject Order Accept Order Increase (Decrease) Revenues Costs Direct materials Direct labor Variable overhead Fixed overhead Cost to modify existing mold Total costs Net income Based solely on financial considerations, Current Designs should (indicate by placing an "X" in the appropriate cell below) RejectAccept Response (b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at full capacity. Response: Situation 2 (a) Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the average price for natural gas over the next 10 years will be $0.65 per therm. Net Income Retain Oven Replace Oven Increase (Decrease) Variable mfg. costs New oven costs Proceed from scrapping old overn Total Based solely on financial considerations, Current Designs should (indicate by placing an "X" in the appropriate cell below) RetainReplace Response (b) Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in (a). Net Income Retain Oven Replace Oven Increase (Decrease) Variable mfg. costs New oven costs Proceed from scrapping old oven Total Based solely on financial considerations, Current Designs should (indicate by placing an "X" in the appropriate cell below) Retain Replace Response Situation 3 (a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating System. Net Income Make Buy Increase (Decrease) Direct materials Direct labor Variable mfg. costs Fixed mfg. costs Purchase price Total annual cost Based solely on financial considerations, Current Designs should (indicate by placing an "X" in the appropriate cell below) Make Buy Response: (b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $30,000? Net Income Make Buy Increase (Decrease) Total annual cost Opportunity cost Total cost Based solely on financial considerations, Current Designs should (indicate by placing an "X" in the appropriate cell below) Make Buy Response