Differential Question 5 Analysis (TOTAL: 20 marks) Part A A customer has asked Nike Inc. to supply 6,000 units of its new Marathon Shoe, with some modifications, for $31.30 each. The normal selling price of this product is $46.50 each. The normal unit product cost is computed as follows: Direct materials $16.40 Direct labour 8.30 Variable manufacturing overhead 4.40 Fixed manufacturing overhead 1.90 Unit product cost $31.00 Direct labour is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to the product that would increase the variable costs by $8.90 per unit, and that would require a one-time investment of $20,000 in special moulds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. Determine the effect on the company's total net operating income of accepting the special order. Also, explain whether the company should accept or reject the special order. Show calculations. (8 marks) Part B Dell Inc. makes 1,000 units per year of a part called Optical Drives for use in one of its products. Data concerning the unit production costs of the optical drives follow: Direct materials 5342 Direct labour Variable manufacturing over 40 Fired manufacturing everte 20 Total manufacturing cowperunt An outside supplier has offered to sell Dell Inc. all of the optical drives it requires. If Dell decided to discontinue making the optical drives, 10% of the above fixed manufacturing overhead costs could be avoided. Required (show your calculations): 1. Assume Dell has no alternative use for the facilities presently devoted to the production of the optical drives. If the outside supplier offers to sell the optical drives for $850 each should Dell accept the offer? Fully support your answer with appropriate calculations. (4 marks) Type in answers here expand the space as needed ii. Assume that Dell could use the facilities presently devoted to production of the optical drives to expand production of another product that would yield an additional contribution margin of $50.000 annually. What is the maximum price Dell should be willing to pay the outside supplier for each unit optical drives? Show your calculations. (4 marks) Type in answers here expand the space as needed iii. With reference to (i) and (m) discuss four other factors that managers need to consider in order to make a more informed decision about whether to buy the part from the outside suppliers or not. Maximum word limit: 120 words (4 marks)
