Make or Buy Bobs Auto manufactures cars and currently uses only 50 of its manufacturing facility to make 30,000 cars per year Bob could rent the unused portion of its plant and receive $3,000 a month Alternatively, the company could utilize more of its facility by producing its own tires It currently purchases tires at $30 per set of four If Bob produces the tires, it would incur $12 per set for direct materials, $10 for direct labor, and $24 for overhead (30 is avoidable) Should the company make or buy the tires Division A of Gwinnett Company, produces wedges Division Zs manager has discretion in pricing and other decisions Division Z is expected to generate a minimum required rate of return of at least 18 on its operating assets The division has average operating assets of $900,000 The wedges are sold for $8 each Variable costs are $3 per wedges, and fixed costs total $390,000 per year The division has a capacity of 120,000 wedges each year How many wedges must Division Z sell each year to generate the desired rate of return on its assets Number of wedges Assume that Division Zs current ROI equals the minimum required rate of 18 The divisional manager wants to increase the selling price per wedge by 5 Market studies indicate that an increase in the selling price would cause sales to drop by 15,000 units each year However, operating assets could be reduced by $65,000 due to decreased needs for accounts receivable and inventory Compute the new ROI if these changes are made ROI Refer to the original data (i e used for question A ) Assume again that the Divisions current ROI equals the required rate of 18 Rather than increase the selling price, the sales manager want to reduce the selling price by 10 Market studies indicate that this would fill the plant to capacity In order to carry the greater level of sales, however, operating assets would increase by $28,000 Compute ROI if these changes are made

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Make or Buy Bobs Auto manufactures cars and currently uses only 50% of its manufacturing facility to make 30,000 cars per year. Bob could rent

Make or Buy

Bobs Auto manufactures cars and currently uses only 50% of its manufacturing facility to make 30,000 cars per year. Bob could rent the unused portion of its plant and receive $3,000 a month. Alternatively, the company could utilize more of its facility by producing its own tires. It currently purchases tires at $30 per set of four. If Bob produces the tires, it would incur $12 per set for direct materials, $10 for direct labor, and $24 for overhead (30% is avoidable).

Should the company make or buy the tires?

Division A of Gwinnett Company, produces wedges. Division Zs manager has discretion in pricing and other decisions. Division Z is expected to generate a minimum required rate of return of at least 18% on its operating assets. The division has average operating assets of $900,000. The wedges are sold for $8 each. Variable costs are $3 per wedges, and fixed costs total $390,000 per year. The division has a capacity of 120,000 wedges each year.

How many wedges must Division Z sell each year to generate the desired rate of return on its assets? Number of wedges: ___________
Assume that Division Zs current ROI equals the minimum required rate of 18%. The divisional manager wants to increase the selling price per wedge by 5%. Market studies indicate that an increase in the selling price would cause sales to drop by 15,000 units each year. However, operating assets could be reduced by $65,000 due to decreased needs for accounts receivable and inventory. Compute the new ROI if these changes are made. ROI: __________
Refer to the original data (i.e. used for question A.). Assume again that the Divisions current ROI equals the required rate of 18%. Rather than increase the selling price, the sales manager want to reduce the selling price by 10%. Market studies indicate that this would fill the plant to capacity. In order to carry the greater level of sales, however, operating assets would increase by $28,000. Compute ROI if these changes are made.