Problem 1 Managing Constraints:

Scrub-a-dub-dub Company produces soaps a variety of soaps for personal care. All the soaps are known for their great quality. Because of the generous amount of shea butter in the 3 bestselling soaps, they are very hydrating and one of them even has wound healing properties. They all smell delicious are sought by people of all ages. To produce a batch of 100 soaps, the company incurs the following costs:

	Exfoliating Soap	Medicated Soap	Transparent Soap
Sales Price	$130	$110	$130
Variable Cost	$81	$62	$88
Fixed Cost	18	15	20
Total Cost	99	77	108
Gross Profit	$31	$33	$22
Pounds of Shea Butter	2	2	1.5

Required:

1. Assuming no raw material constraints and unlimited demand for soaps, what type of soap would maximize the companys contribution margin? Why?
2. Assume that based on typical customer demand, Scrub-a-dub-dub will sell 12,000 batches of exfoliating soaps, 8,000 batches of medicated soaps, and 10,000 batched of transparent soaps. What will the firms contribution margin be?
3. The companys supplier of shea butter and coconut oil has announced a shortage of shea butter. Due to this inconvenience, Scrub-a-dub-dub will only be able to purchase 50,000 lbs of shea butter. How many batches of each soap should the company produce? What will the firms contribution margin be?
4. If the company uses shea butter in other products, will the allocation you recommend in part (c) change? Why or why not?

Problem 2 Make versus Buy (Outsource):

RealEstate Nerds Co. needs a new designing software for providing potential client with a clear 5D design of their home if they choose to remodel it using the companys designs. Currently they design for 1,000 clients annually. Software engineering resources (personnel and lab) to complete the development of the software will cost $3,000 per week. If the engineers dont work on this project, they will be assigned to another. The approximate cost per usage of their own software is estimated to be $50/design usage which includes labor costs for an individual to input the customer data and overhead costs.

Software Solutions, Inc., already has a 6D model software that is already developed and is very similar to the one that RealEstate Nerds needs. If the Nerds choose to outsource this software usage, Software Solution can make the necessary changes to suit what the Nerds need in just 4 weeks, at a price of $60/design usage. With Software Solutions version of the software, customers can put in their own data and no additional overhead would be incurred.

Required:

1. Should RealEstate Nerds go forward with their own software, or should it accept Software Solutions offer?
2. If RealEstate Nerds decided to outsource the new module to Software Solution, how much would the other projects that RealEstate Nerds engineers work on have to return/save to make outsourcing financially beneficial?

Problem 3 Discontinuing a Segment or Product:

La Georges Donuts Store Co., operates two stores. One on Haggerty Rd. in Livonia, and the other on Ford Rd. in Canton. Results for the month of May, which is representative of all months, are as follows:

	Livonia store	Canton store	Total
Sales revenue	$80,000	$120,000	$200,000
Variable expenses	32,000	84,000	116,000
Contribution margin	48,000	36,000	84,000
Direct fixed expenses	20,000	40,000	60,000
Common fixed expenses	4,000	6,000	10,000
Total fixed expenses	24,000	46,000	70,000
Operating Income	$24,000	($10,000)	$14,000

The following information pertains to La Georges Donuts Store Co.:

• One-fourth of each stores direct fixed expense would continue if either store was closed.
• La Georges Donuts Store Co. allocates common fixed expenses to each location on the basis of sales dollars.
• Management estimates that closing the store in Canton would result in a 10% decrease in the Livonia stores sales, while closing the Livonia store would have no effect on the Canton stores sales.

Required:

1. Management believes that the Canton store should be closed since it is operating at a loss. Do you support managements belief? Why or why not?
2. Should management consider closing the Livonia store rather than the Canton store? Why or why not?
3. La Georges Donuts Store Co. is considering a special promotional campaign at the Canton store. They expect a $6,000 monthly increase in advertising expenses to generate a 10% increase in the stores sales volume. The campaign would not affect the Livonia store in any way. What effect would the promotion have on La Georges Donuts Store Co.s monthly income? Should the campaign be implemented? Why or why not? Ignore the answers from (a) and (b) when answering this question.
4. Half of the Canton stores dollar sales come from items that are sold at variable cost to attract customers to the store. Managers are considering deleting those items from the product mix. Doing so would reduce the Canton stores direct fixed expense by 15% but would also reduce the remaining sales volume result by an additional 20%. There would be no effect on the Livonia store. Should management implement this change in the product mix? Why or why not?