Question 1 Western Inc. manufactures gizmos. It has a manufacturing capacity of 20,000 gizmos per month. Current production is 16,000 gizmos per month. Western normally sells the gizmo for $300.00 per unit. lCost information for the gizmo is as follows: Direct materials $1,440,000 Direct labour 640,000 Other variable manufacturing costs 960,000 Fixed manufacturing costs 700,000 Fixed marketing costs 500,000 Other variable manufacturing costs refer to the variable costs of producing the gizmo. Gizmos are produced in batches of 500 per production run. The batch cost is $30,000 per batch. Required: 1. Western has received a special onetime order for 3,000 for $200.00 per gizmo. Accepting the order would not affect the company's regular business. In order to reduce production cost, the order will be produced in batches of 1,000 units. Should Western accept the order? 2. Suppose, instead, that Western is producing at full capacity for its regular customers. Should the order be accepted? 3. Suppose, now that Western is producing 18,000 gizmos for its regular customers. Should Western accept the special order? The order must be taken in full or be rejected completely. 4. Assume the original information. A company in a different marketing channel is interested in purchasing 5,000 units [order must be accepted in full or rejected]. For quality control purposes, the special order will be produced in batches of 500. Additionally, Western will have to lease a special machine to engrave the customer's brand on the Gizmo. The cost of the machine is $15,000. There is no guarantee that this order will lead to future business. Western wants to ensure that the net operating income for the company as a whole will increase by 10% ifthe order is taken. What price per unit must the Western charge the customer to achieve this result? Question 2 Eastern Inc. produces the Betatron. lOne component of the Betatron is the SCPl. Eastern currently manufactures the SCPl Recently a supplier, Arctic Industries, has offered to produce the SCPl for Eastern for $150.00 per unit. The following information relates to the production of 25,000 units per month: Total direct material costs $85.00 Direct labour costs $25.00 Variable manufacturing overhead {per batch} $750 per batch Fixed manufacturing costs $560,000 Eastern produces the SCPl in batches of 1,000 units. Eastern estimates that fixed manufacturing costs would drop to $300,000 if the III100 is outsourced. Required: 1. Should Eastern continue to make the X100 or should they Outsource production to Arctic Industries? 2. What is the point of indifference [in volume} for Eastern in determining whether to outsource or continue production? 3. Assume that it takes 0.5 machine hours to produce a unit of the SCPl. If Eastern outsouroes production of the SCPl, it can produce a new product, NPB. The NPB has the following projected cost information: Unit selling price $ 55.00 Unit variable costs $27.00 Incremental fixed manufacturing costs $20,000 Demand 15,000 Machine time per unit 1 hour per unit The only hours available for production of the NPSI are the hours available by outsourcing the SCPl. Should Eastern Inc. outsource production of the SCPl
