(LO4-4) 4-41. Make-or-Buy Decisions Mobility Partners makes wheelchairs and other assistive devices. For years it has made the rear wheel assembly for its wheelchairs. A local bicycle manufacturing firm, Trailblazers, Inc., offered to sell these rear wheel assemblies to Mobility. If Mobility makes the assembly, its cost per rear wheel assembly is as follows (based on annual production of 2,000 units): Direct materials Direct labor. Variable overhead Fixed overhead $ 50 106 32 94 Total $282 Trailblazers has offered to sell the assembly to Mobility for $220 each. The total order would amount to 2,000 rear wheel assemblies per year, which Mobility's management will buy instead of make if Mobility can save at least $20,000 per year. Accepting Trailblazers is offer would eliminate annual fixed overhead of $80,000. Required Should Mobility make rear wheel assemblies or buy them from Trailblazers? Prepare a sched- ule that shows the differential costs per rear wheel assembly. 4-45. Dropping Product Lines Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight's routes between Europe and the United States. If these routes are dropped, the revenue associated with the routes would be lost and the related vari- able costs saved. In addition, the company's total fixed costs would be reduced by 20 percent. Segmented income statements for a typical month appear as follows (all amounts in mil- lions of dollars): (LO 4-4) S Routes Sales Variable costs... Fixed costs allocated to routes. Operating profit (loss).. Within U.S. Within Europe $3.4 $2.6 1.4 1.0 17 1.3 $0.3 $0.3 Between U.S. and Europe $ 2.8 1.5 1.4 $(0.1) Required Prepare a differential cost schedule like the one in Exhibit 4.8 to indicate whether Freeflight should drop the routes between the United States and Europe. that would make it profitable, assuming capacity is available? 4-37. Special Order Mission Electronics manufactures and sells basic DVD players under various generic store brand names. The cost of one of their models follows: (10 41,2) Materials Labor Variable overhead Fixed overhead ($2,700,000 per year, 450,000 units per year) Total $18.00 12.00 5.00 6.00 $4100 Pacific Cash & Carry, a chain of low-price electronic sales and rental outlets, has asked Mis- sion to supply them with 30,000 players for a special promotion Pacific is planning Pacific has offered to pay Mission a unit price of $42 per DVD player. The regular selling price is $60. The special order would require some modification to the basic model. These modifications would add $4.00 per unit in material cost, S1.50 per unit in labor cost, and 50 50 in variable overhead cost. Although Mission has the capacity to produce the 30,000 units without affect- ing its regular production of 450.000 units, a one-time rental of special testing equipment to meet Pacific's requirements would be needed. The equipment rental would be $45.000 and would allow Mission to test up to 50,000 units. Required a Prepare a schedule to show the impact of filling the Pacific order on Mission's profits for the year. b Would you recommend that Mission accept the order? c Considering only profit. what is the minimum quantity of DVD players in the special order that would make it profitable? (LO 4-1.2) 4-34. Pricing Decisions Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follow Materials $1.80 Labor. 0.60 Variable overhead 0.30 Fixed overhead ($24,000 per month, 20,000 gallons per month)... 1.20 Total costs per gallon .... $3.90 One of Cold Rock's regular customers asked the company to fill a special order of 400 gallons at a selling price of $3.60 per gallon for a fund-raising picnic for a local charity. Cold Rock has capacity to fill it without affecting total fixed costs for the month. Cold Rock's general manager was concerned about selling the ice cream below the cost of $3.90 per gallon and has asked for your advice. Required Prepare a schedule to show the impact on Cold Rock's profits of providing 400 gallons of ice cream in addition to the regular production and sales of 20.000 gallons per month. b. Based solely on the data given, what is the lowest price per gallon at which the ice cream in the special order could be sold without reducing Cold Rock's profits? What other factors might the general manager want to consider in setting a price for the special order? a c