Exercise 5A: Produce or buy an item.

The company BB Inc. manufactures a part X for its annual production. The following table presents information on production costs at a given level.

Production Level	30,000 units
Direct Materials	$7.20
Direct Labor	$10.50
Variable Manufacturing Overhead	$4.80
Fixed manufacturing Overhead	$15.00
Total Cost Per Unit	$37.50

BB Inc. received an offer to purchase 30,000 units of the already manufactured part for $35.25 per unit. There are fixed overheads of $9 per unit that would be maintained even if the same units were purchased. However, buying the part would allow BB Inc. to lease the production area for $200,000 per year.

Required:

Prepare a report comparing both alternatives and reflecting how much the profit would increase or decrease if you decide to buy the part. It must include all the computations made.

Exercise 5B: Consider accepting a special order to produce. The ROAR company manufactures a single product that sells for $17.00 each. The cost of each unit produced at a monthly production level of 10,000 units is:

Direct Materials	$2.75
Direct Labor	$3.25
Variable Manufacturing Overhead	$.75
Fixed manufacturing overhead cost	$4.50
Fixed administrative expenses	$2.25

The total monthly production capacity is 12,000 units. A special order for 2,000 units was received at a purchase price of $14.00 per unit. Regular sales will not be affected by this order.Required:

1. How much will the monthly profit increase or decrease if ROAR accepts the special order? Please note that accepting the order will not affect the fixed costs.

2. Suppose the company has 600 units of an earlier model of this item that were unsold last year. To dispose of the units, the company has to sell them at a reduced price through normal sales channels. Identifies the unit cost that is relevant to determining the minimum price at which these units can be disposed of. Explain why you consider this to be the relevant cost.

Exercise 5C: Utility of a restricted resource The School Pack company manufactures bags for school with a very resistant plastic bottom. It has three models that are the best sellers. The following table gives you information about these models.

	Mod A	Mod B	Mod C
Price Per Unit	$110	$150	$87.50
Variable Cost Per Unit	$30	$60	$27.50
Processing time in the plastic machine for each unit	3 mins	4 mins	1 min
Quantity of Plastic per unit ( in pounds)	4 lbs	5 lbs	3 lbs

The constrained resource is the processing time on the machine.

1. Determine the model with the highest and the lowest performance in the use of processing time as a constrained resource.

2. Determine the highest and lowest performing pattern in the use of plastic if this is the constrained resource.

3. Determine the model that has the highest contribution margin. Did this model turn out to be the top performer in the answers above? If it wasn't, explain why.

Exercise 5D: Recovery period (Payback period)A company that sells solid lumber for the manufacture of wood cabinets and furniture is considering investing in a wood-forming machine that will produce the following cash flows in the next few years. The investment will be made in two years as indicated below.

Year	Investent	Cash Flow
1	$28,500	$1,500
2	$6,000	$3,000
3		$6,000
4		$6,750
5		$9,000
6		$7,500
7		$6,000
8		$4,500
9		$3,750
10		$3,750

1. Determine the payback period of the investment.

2. Indicates if this method is an adequate tool to determine if the company should make the investment or not and why.