Question
Part B: The Modern Electronics Company sells electronic devices. Currently the company sells a single model, Device 1. The selling price is $100 each. Managers
Part B: The Modern Electronics Company sells electronic devices. Currently the company sells a single model, Device 1. The selling price is $100 each. Managers estimate that the market demand for Device 1 is 5,000 units each year, but production is constrained by the capacity of a special machine. A total of 2,000 hours is available annually on the machine. The production of each unit of Device 1 requires 0.5 hours of machine time. Managers are considering the following options. First, the company can purchase additional units of Device 1 from an outside supplier. The supplier can provide up to 5,000 units of Device 1 per year at a price of $85 per unit. The company can resell the units to customers after proper relabelling. Second, the company can use the special machine to manufacture another model, Device 2, which would require 1 hour of machine time per unit. Managers forecast that they can sell 10,000 units of Device 2 each year at a price of $200 per unit. Data on variable costs of the two devices are as follows: Variable costs per unit Direct materials Direct labor Manufacturing overhead Selling and administrative expense Device 1 Device 2 $50 $150 20 30 10 5 10 5 In addition to the variable costs above, the annual fixed manufacturing overhead is $20,000 and the annual fixed selling and administrative expense is $5,000. Required: What would you recommend to managers as to how many units of Device 1 (if any) should the company purchase from the outside supplier and how many units of Device 1 and Device 2 (if any) should the company manufacture? What is the income that would result from this plan? Show computations and explain your answers. (6 points)
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