Joe Smith has owned and operated Smith's Tool and Die for 40 years.Currently, he is only making one part, RL-5 which is a small electricial relay.He has a 2-year contract to provide 30,000 parts per month to Ford Motor. Unfortunately, Joe got quite sick and his son, Mike, has had to come in and run the business.Mike is disappointed when he finds the following monthly information about the RL-5 part:

Per unit 30,000 units

Sales Price: $ 22.00 660,000

Variable manufacturing costs $14.00 420,000

Variable selling costs $ 2.00 60,000

Fixed manufacturing overhead 150,000

Fixed administrative/selling costs 60,000

Operating income (30,000)

Smith's Tool and Die has the capacity to produce 100,000 units of the RL-5 part per month.

Mike comes to you to see what can be done about the current losses Smith's Tool and Die is experiencing.You and Mike determine that there are three alternatives to consider:

1.Mike mentions that his friend's dad, Sam, also owns a tool and shop and also supplies the RL-5 part to other automotive businesses.Sam's business is doing very well and can't keep up with current production.Sam offers to purchase 50,000 units of RL-5 from Mike for $15.00 per unit. Since this is Mike's deal, no additional selling costs will be incurred.

2.Mike is also thinking about shutting down the business.Since he needs to the honor his contract with Ford, he has looked into outsourcing the part to Fred's Tool and Die.Fred offers to make the 30,000 parts per month for a price of $20 per unit. Outsourcing the part will reduce fixed manufacturing overhead by $80,000 and fixed administrative and selling costs by $30,000.

3.Mike can pay Ford a non-performance fee and sell the assets of the business.The fee is 10% of the sales revenue for one year.Mike has received an offer from Tony who will pay $1,200,000 for the assets.Tony plans to sell what assets he can, demolish the building and build condos on the land.The current net book value of the assets is $200,000. Assume that Smith's tax rate on the gain is 21%.

Required:

1.How much profit/loss will Mike realize if he accepts Sam's special order for 50,000 units?

Incremental revenue:

Incremental costs

2.List 3 qualitative issues that you think Mike should consider before accepting the special order:

A.

B.

C.

3.How much profit/loss will Mike realize if he decides to outsource the part to Fred's Tool and Die?

inhouse Outsource Difference

4.List 3 qualitative issues that you think Mike should consider before outsourcing the part:

A.

B.

C.

5. How much profit/loss will Mike realize if he sells the assets of the business to Tony?

6.List 3 qualitative issues that you think Mike should consider before selling off the business:

A.

B.

C.

7. Assess all of the three alternatives.Which do you recommend Mike choose?Why?