Problem 8-57. Make or Buy, Qualitative Considerations Oblecuve1 2 Hetrick Dentistry Services operates in a large metropolitan area. Currently, Hetrick has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows: Porcelain Gold Raw materials 5 7 $130 Direct labor 27 27 Variable overhead 8 8 Fixed overhead i E Total g g Fixed overhead is detailed as follows: Salary (supervisor) $26,000 Depreciation 5,000 Rent (lab facility) 32,000 Overhead is applied on the basis of di- rect labor hours. These rates were com- puted by using 5,500 direct labor hours. A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is $125 for porcelain crowns and $150 for gold crowns; however, the offer is conditional on supplying both types of crownsit will not supply just one type for the price indicated. If the offer is ac- cepted, the equipment used by Hetrick's laboratory would be scrapped (it is old and has no market value), and the lab fa- cility would be closed. Hetrick uses 2,000 porcelain crowns and 600 gold crowns per year. Required: 1. Conceptual Connection Should Hetrick continue to make its own crowns, or should they be pur- chased from the external supplier? What is the dollar effect of purchasing? Answer i Check Figure: Cost to make = $367,000 2. Conceptual Connection What qualitative factors should Hetrick consider in making this decision? 3. Conceptual Connection Suppose that the lab facility is owned rather than rented and that the $32,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1? 4. Conceptual Connection Refer to the original data. Assume that the volume of crowns used is 4,200 porcelain and 600 gold. Should Hetrick make or buy the crowns? Explain the outcome. Answer i Check Figure: Cost to make = $598,000 Brief Exercise 8-27. Structuring a Special-Order Problem Objective 2 . Example 8.2 Rabbit Foot Motors has been ap- proached by a new customer with an of- fer to purchase 5,000 units of its hands- free, Wi-Fi-enabled automotive model- the SMAK-at a price of $18,000 per auto- mobile. Rabbit Foot's other sales would not be affected by this new customer of- fer. Rabbit Foot normally produces 100,000 units of its SMAK model per year but only plans to produce and sell 90,000 in the coming year. The normal sales price is $35,000 per SMAK. Unit cost in- formation for the normal level of activity is as follows: Direct materials $10,000 Direct labor 2,000 Variable overhead 4,000 Fixed overhead 8,000 Total $24,000Fixed overhead will not be affected by whether or not the special order is accepted. Required: 1. What are the relevant costs and benefits of the two alternatives (ac- cept or reject the special order)? 2. By how much will operating in- come increase or decrease if the or- der is accepted? Problem 8-54. Special-Order Decision Objective 1, 2 Rianne Company produces a light fix- ture with the following unit cost: Direct materials Direct labor Variable overhead Fixed overhead Unit cost The production capacity is 300,000 units per year. Because of a depressed housing market, the company expects to produce only 180,000 fixtures for the coming year. The company also has fixed selling costs totaling $500,000 per year and variable selling costs of $1 per unit sold. The fixtures normally sell for $12 each.At the beginning of the year, a cus- tomer from a geographic region outside the area normally served by the com- pany offered to buy 100,000 fixtures for $7 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any variable selling costs. Required: 1. Conceptual Connection Based on a quantitative (numerical) analysis, should the company accept the order? Answer l Check Figure: Variable overhead = $300,000 2. Conceptual Connection What qualitative factors might impact the decision? Assume that no other or- ders are eXpected beyond the regu- lar business and the special order