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QuesdnilJnad Quantum Manufacturing produces measuring instrument of 8 units using component J7 each month. The total manufacturing cost of one unit of J? is $2,220
QuesdnilJnad Quantum Manufacturing produces measuring instrument of 8 units using component J7 each month. The total manufacturing cost of one unit of J? is $2,220 which include the following costs - Direct material: $200; Material handling (10% of direct material cost): $20; Direct labour: $800 and Manufacturing overhead (150% of direct labour): $1,200. Material handling represents the direct variable costs charged by the Receiving Department. It has been agreed that they are applied to direct material and any purchased component at 10 per cent of the cost of the direct material or component delivered. This is a separate charge in addition to manufacturing overhead. Quantum's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Hardware Supply, one of Quantum's reliable vendors, has offered to supply component J? at a unit price of $1 ,800. Required: a) Calculate the incremental cost of purchasing one unit of component J? from Hardware Supply and the incremental unit cost of manufacturing inhouse. Illustrate by what amount would the unit cost of J? change between the two choices? (10 marks) b) Assume if Quantum purchases J? from Hardware Supply, the capacity that Quantum used to manufacture these components would be able to rent out for $12,000 per month. Assess by how much would Quantum's monthly cost for J? increase or decrease if Quantum decides to purchase the 8 units from Hardware SUDMy? (3 marks) c) Assume that Quantum does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $17,000 per month. Assess Quantum's opportunity cost from using the space to manufacture J? if Quantum elects to manufacture J? in order to maintain quality control? (2 marks) We.) Pacific Limited is a retailer of commercial gadgets. At the end of each year, the divisional managers are evaluated for the performances of their divisions and bonuses are awarded according to their achievement based on the ROI. Last year, thecompany as a whole produced an ROI of 14 per cent. During the past week, the management of the company's Deluxe Division was contacted about the possibility of buying the operations of a competitor, SuperPart, which wished to cease its retail operations. The following data relate to recent performance of both the Deluxe Division and SuperPart. DI n... E El Sales $840,000 $520,000 Variable costs 70% of sales 65% of sales Fixed costs $215,000 $16?,000 Invested capital $185,000 $62,500 If the acquisition occurs, the operations of SuperPart will be absorbed into the Deluxe Division. The operations of Superpart will need to be upgraded to meet the high standards of Pacific Limited which would require an additional $3?,500 of invested capital. Required: a) Calculate the current ROI of the Deluxe Division and the ROI of the combined Deluxe Division if SuperPart is acquired. (6 marks) b) Discuss the likely reaction of divisional management towards the acquisition. (2 marks) c) Predict and explain the likely reaction of Pacific Limited's corporate management to the acquisition. (2 marks) d) Assume that Pacific Limited uses residual income to evaluate performance and desires a 12 per cent minimum return on invested capital. Calculate the current residual income of the Deluxe Division and the combined Division's residual income if Superpart is acquired. Evaluate the divisional management reaction towards the acquisition
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