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BARKIN' MAD INC. RELEVENT COST ANALYSIS SHORT-TERM DECISIONS Barkin' Mad manufactures high-quality dog beds. The company normally manufactures and sells 80,000 dog beds each year, selling them for an average price of $40 apiece. The company's cost data at the 80,000 bed activity level is shown below. Cost Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total average cost per unit Per unit Total $ 9.50 10.00 2.80 5.00 $400,000 1.70 4.50 360,000 $33.50 The questions below all relate to the production and sale of dog beds. Please consider each question independently; that is, do not incorporate any information you calculated in a previous question unless you are specifically told to do so. 1. Inventory valuation. Barkin' has 5,000 dog beds in inventory at the beginning of the year. For the purpose of reporting the value of the inventory on the Balance Sheet to shareholders, what cost per dog bed would they use? Assume that their volume last year was also 80,000. 2. Promotion campaign. Barkin' has sufficient capacity to produce 100,000 dog beds each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 25% above the present 80,000 dog beds per year if it were willing to increase the fixed selling expenses by $150,000. Would the increased fixed expenses be worthwhile? 3. Special order. Assume again that Barkin' has sufficient capacity to manufacture 100,000 dog beds each year. The company has an opportunity to sell 20,000 dog beds in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total $14,000. The only incremental selling costs associated with the order would be $1.50 shipping per unit. You have been asked by the President to compute the per unit break even price for this order. AC222 1 pd rev 3/23/16 4. Keep or drop. One of the materials used in the production of dog beds, a very special type of cedar chips, is obtained from a supplier in another country. A general labor strike in the supplier's country has caused a cutoff in material shipments to Barkin' that is expected to last for three months. Barkin' has enough cedar chips on hand to continue to operate at 25% of normal levels for the three-month period. However, they are considering an alternative to this. They could close the plant down entirely for the three months. Closing the plant would reduce fixed overhead costs by 40% during the three-month period. The fixed selling costs would continue at just two-thirds of their normal level while the plant is closed. What would be the dollar advantage, or disadvantage, of closing the plant for this three-month period? 5. Sunk costs. The company has 500 dog beds in inventory that were manufactured last month. Unfortunately, they are imperfect - the fabric used had some unfortunate streaking in the colors. The beds would be impossible to sell at the normal price, since they are not up to the standard that Barkin's customers expect. If the company will use it's regular distributor to sell these beds, what unit cost figure is relevant for setting a minimum sales price for the beds? Explain your answer. 6. Outsourcing. A manufacturer who has a plant in the same office park as Barkin' has excess machine capacity, and has offered to produce dog beds for Barkin' and ship them to Barkin's customers directly. If Barkin' accepts this offer, the facilities that it uses to manufacture dog beds would be idle. However, fixed overhead costs would continue at 30% of their present level. Since the outside manufacturer would pay for all shipping costs, the variable selling costs would be reduced by 60%. Compute the unit cost figure that is relevant for Barkin' to use to compare with whatever price the outside manufacturer quotes to Barkin' for producing the beds. 7. Sell or process further. Barkin' has 500 dog beds in inventory that were made too small so that they cannot be sold at their regular price. The company could rework the beds by adding sides and selling them as cat beds. This will cost $6 for direct materials, $6 for direct labor, and $1.70 for variable overhead. In addition, fixed overhead would be redistributed, so that fixed overhead applied to the cat beds would be 50% of direct labor cost. After rework, the beds could be sold at the usual market price of $40. Alternatively, the company could sell the defective beds \"as is\" to an online discounter for $25. What should Barkin' do if they wish to maximize profits? 8. Constraint. At another facility, Barkin' also makes dog toys. The same workers make two of the toys, the Chunky Chomper and the Retriever Roller. The Chomper sells for $80 a box, and the Roller for $70 a box 1. The variable costs of the Chomper are $20 a box, and the variable costs of the Roller are $40 a box. The Chomper requires 5 labor hours per box, and the Roller 2 labor hours per box. The company has only 320 labor hours available per week in this facility, and temporarily cannot add workers because of a labor shortage in the area. Current demand is for 50 boxes of Chompers and 60 boxes of Rollers per week. Which product(s) should the company produce, and in what quantity? What would be the incremental income from an additional 10 hours of labor per week? 1 The toys are each packed and sold 20 toys to a box. AC222 2 pd rev 3/23/16