Qucstion 2 Nicholas See, a celebrity chef with an engineering background, founded Magic Corporation three years ago to produce and market his patented invention, the Magic Pot. The Magic Pot combines the benefits of multiple kitchen appliances such as pressure cooker, air fryer and other cooking functions into one programmable pot. It is able to cook a multitude of dishes in shorter times than traditional kitchen appliances. Shortly after its launch, the Magic Pot becomes the top-selling kitchen appliance on Amazon and it is now an indispensable kitchen gadget well-loved by busy working adults. Production and sales information relating to the Magic Pot is listed below. 60,000 units $90.00 Annual production and sales volume Selling price per unit Manufacturing cost per unit: Direct materials Direct labour Variable overhead Fixed overhead* Selling and administrative expenses per unit: Variable selling and admin Fixed selling and admin $28.00 $12.00 $11,00 $8.00 $12.00 $6.00 *Details of annual fixed overhead costs: Factory rent Equipment lease Other inanufacturing costs $220,000 $60,000 $200,000 Nicholas is very happy with the runaway success of the Magic Pot but feels it is time to introduce a smaller version of the Magic Pot to cater to those who require less cooking functions or those with smaller family size. Nicholas is convinced that there is a large, untapped market of potential customers such as young couples, singles or students living in dorms or shared accommodations. The smaller sized appliance may even attract the attention of frequent travelers who would like to cook some simple meals while travelling. Nicholas is very excited about the new product which he has named the Mini Pot. However, there is a roadblock in Nicholas's quest to add the new product. The rented factory is not large enough to produce both the Magic Pot and the Mini Pot. Nicholas is not willing to relocate to a new factory as moving costs are substantial and there would be disruptions to the production schedule. Nicholas is exploring the option of outsourcing the production of the Magic Pot to an external sub-contractor and use the existing production facility for the production of the Mini Pot. That way, he can better monitor the teething production issues that are inevitable with the new product. Nicholas has identified Potcon Inc. as the outsourcing partner due to Potcon's experience and good reputation as a kitchen appliance sub-contractor, On top of manufacturing the Magic Pot, Nicholas would like Potcon Inc. to handle deliveries to customers as well, Magic Corporation will continue to handle the marketing and customer service aspects of the Magic Pot. Customer sales orders for the Magic Pot will be consolidated and forwarded to Potcon Inc. for direct delivery to customers. With this new arrangement. Nicholas expects the current variable selling and administrative expenses for the Magic Pot to fall by 40%. Forecasted production and sales information relating to the Mini Pot is listed below. 50,000 units $60.00 Annual production and sales volume Selling price per unit Manufacturing cost per unit: Direct materials Direct labour Variable overhead Selling and administrative cxpenses per unit: Variable selling and adinin $15.00 $12.00 $10.00 15% of selling price Production and sales of the Mini Pot will bring about some changes to the company's annual fixed costs as listed below. Other than the following items, all other fixed costs would remain unchanged i) Production workers would need some training in the slightly modified production process. Additional training costs is forecasted to be $13,000. ii) An additional equipment would need to be leased. The annual equipment lease cost is forecasted to increase to $86,000. ii) Marketing and promotion activities are forecasted to cost an additional $34,000. With the introduction of the Mini Pot, Nicholas believes that it will cannibalized the sales of the Magic Pot by a small margin. Nicholas forecasts that the sales volume of the Magic Pot would be reduced by 5% with no impact on the selling price. Required (Each of the following is an independent question, always refer to the original data unless otherwise instructed. Round your intermediate calculations and final answers to TWO (2) decimal places wherever applicable. All workings should be detailed and clearly presented.) (a) Nicholas is contemplating to outsource the entire production of Magic Pot to Potcon Inc. and produce Mini Pot in-house. He would like to maintain the current annual net income (before the outsourcing) in the coming year. Compute the maximum price per unit that Nicholas is willing to pay to Potcon Inc. (14 marks) Other than the price charged by the sub-contractor, discuss three factors that Magic Corporation should consider before deciding to outsource the production of the Magic Pot to Potcon Inc. Illustrate each factor with an example. (9 marks) (C) Assume that Magic Corporation has outsourced the entire production of Magic Pot to Potcon Inc. at a purchase price of $50 per unit and the company's corporate income tax rate is 20%. Instead of leasing, Nicholas is contemplating to buy a brand new equipment. The equipment under consideration has a purchase cost of $450,000 and a residual value of $50,000 at the end of an estimated useful life of ten ycars. The company adopts a straight-line depreciation method. How many units of the Magic Pot and the Mini Pot must the company sell in order to earn an annual net income of $625,000? (9 marks) (d) Assume that factory space is no longer a constraint and Nicholas has decided to purchase a new equipment. Nicholas would like to produce both the Magic Pot and the Mini Pot in-house if possible. However, the new equipment has a limited annual capacity of 50,000 machine hours. If each unit of Magic Pot requires 0.5 machine hours and each unit of Mini Pot requires 0.4 machine hours to produce, how many units of each product should be produced by Magic Corporation to maximize the company's profit? (8 marks) Qucstion 2 Nicholas See, a celebrity chef with an engineering background, founded Magic Corporation three years ago to produce and market his patented invention, the Magic Pot. The Magic Pot combines the benefits of multiple kitchen appliances such as pressure cooker, air fryer and other cooking functions into one programmable pot. It is able to cook a multitude of dishes in shorter times than traditional kitchen appliances. Shortly after its launch, the Magic Pot becomes the top-selling kitchen appliance on Amazon and it is now an indispensable kitchen gadget well-loved by busy working adults. Production and sales information relating to the Magic Pot is listed below. 60,000 units $90.00 Annual production and sales volume Selling price per unit Manufacturing cost per unit: Direct materials Direct labour Variable overhead Fixed overhead* Selling and administrative expenses per unit: Variable selling and admin Fixed selling and admin $28.00 $12.00 $11,00 $8.00 $12.00 $6.00 *Details of annual fixed overhead costs: Factory rent Equipment lease Other inanufacturing costs $220,000 $60,000 $200,000 Nicholas is very happy with the runaway success of the Magic Pot but feels it is time to introduce a smaller version of the Magic Pot to cater to those who require less cooking functions or those with smaller family size. Nicholas is convinced that there is a large, untapped market of potential customers such as young couples, singles or students living in dorms or shared accommodations. The smaller sized appliance may even attract the attention of frequent travelers who would like to cook some simple meals while travelling. Nicholas is very excited about the new product which he has named the Mini Pot. However, there is a roadblock in Nicholas's quest to add the new product. The rented factory is not large enough to produce both the Magic Pot and the Mini Pot. Nicholas is not willing to relocate to a new factory as moving costs are substantial and there would be disruptions to the production schedule. Nicholas is exploring the option of outsourcing the production of the Magic Pot to an external sub-contractor and use the existing production facility for the production of the Mini Pot. That way, he can better monitor the teething production issues that are inevitable with the new product. Nicholas has identified Potcon Inc. as the outsourcing partner due to Potcon's experience and good reputation as a kitchen appliance sub-contractor, On top of manufacturing the Magic Pot, Nicholas would like Potcon Inc. to handle deliveries to customers as well, Magic Corporation will continue to handle the marketing and customer service aspects of the Magic Pot. Customer sales orders for the Magic Pot will be consolidated and forwarded to Potcon Inc. for direct delivery to customers. With this new arrangement. Nicholas expects the current variable selling and administrative expenses for the Magic Pot to fall by 40%. Forecasted production and sales information relating to the Mini Pot is listed below. 50,000 units $60.00 Annual production and sales volume Selling price per unit Manufacturing cost per unit: Direct materials Direct labour Variable overhead Selling and administrative cxpenses per unit: Variable selling and adinin $15.00 $12.00 $10.00 15% of selling price Production and sales of the Mini Pot will bring about some changes to the company's annual fixed costs as listed below. Other than the following items, all other fixed costs would remain unchanged i) Production workers would need some training in the slightly modified production process. Additional training costs is forecasted to be $13,000. ii) An additional equipment would need to be leased. The annual equipment lease cost is forecasted to increase to $86,000. ii) Marketing and promotion activities are forecasted to cost an additional $34,000. With the introduction of the Mini Pot, Nicholas believes that it will cannibalized the sales of the Magic Pot by a small margin. Nicholas forecasts that the sales volume of the Magic Pot would be reduced by 5% with no impact on the selling price. Required (Each of the following is an independent question, always refer to the original data unless otherwise instructed. Round your intermediate calculations and final answers to TWO (2) decimal places wherever applicable. All workings should be detailed and clearly presented.) (a) Nicholas is contemplating to outsource the entire production of Magic Pot to Potcon Inc. and produce Mini Pot in-house. He would like to maintain the current annual net income (before the outsourcing) in the coming year. Compute the maximum price per unit that Nicholas is willing to pay to Potcon Inc. (14 marks) Other than the price charged by the sub-contractor, discuss three factors that Magic Corporation should consider before deciding to outsource the production of the Magic Pot to Potcon Inc. Illustrate each factor with an example. (9 marks) (C) Assume that Magic Corporation has outsourced the entire production of Magic Pot to Potcon Inc. at a purchase price of $50 per unit and the company's corporate income tax rate is 20%. Instead of leasing, Nicholas is contemplating to buy a brand new equipment. The equipment under consideration has a purchase cost of $450,000 and a residual value of $50,000 at the end of an estimated useful life of ten ycars. The company adopts a straight-line depreciation method. How many units of the Magic Pot and the Mini Pot must the company sell in order to earn an annual net income of $625,000? (9 marks) (d) Assume that factory space is no longer a constraint and Nicholas has decided to purchase a new equipment. Nicholas would like to produce both the Magic Pot and the Mini Pot in-house if possible. However, the new equipment has a limited annual capacity of 50,000 machine hours. If each unit of Magic Pot requires 0.5 machine hours and each unit of Mini Pot requires 0.4 machine hours to produce, how many units of each product should be produced by Magic Corporation to maximize the company's profit? (8 marks)