QUESTION 5 Speedy Gonzales Ltd manufactures bath towels and other bathroom textiles. The factory can manufacture a maximum of 600,000 bath towels. The company, however, is company currently operating at 90% capacity. The bath towels normally sell for $50 per piece. The variable cost to produce one bath towel is $35. The fixed costs per year consist of the following: Fixed overhead $3,200,000 Administration $1,900,000 $5,100,000 Consider the following independent scenarios: Scenario A Elmer Fudd Ltd has approached Speedy Gonzales Ltd to purchase 100,000 pieces of bath towels. As this is an unusually large order, Elmer Fudd Ltd is only willing to pay a discounted total price of $4,500,000. They have also requested for all bath towels to be modified to include the initials of their company. This will incur an additional $2 variable cost per bath towel. The cheapest engraving machine that Speedy Gonzales Ltd is able to purchase in order to print the initials of Elmer Fudd Ltd on the bath towels costs $240,000. Speedy Gonzales Ltd does not foresee any further use of this machine, and it is to be disposed of for 25% of its purchase price. Scenario B Yosemite Sam Ltd has approached Speedy Gonzales Ltd to produce all bath towels currently produced for the entire year for $37 per piece. As the buy option includes all necessary manufacturing, packaging and transportation costs, Speedy Gonzales Ltd can reduce its fixed overhead costs to $2,400,000. In addition, administration costs will decrease by $200,000. However, delivery costs of $0.10 per bath towel will need to be incurred, and a despatch employee at $1,000 per month will be required a) For Scenario A: (i) Calculate the incremental benefit (or cost) of the special order. (3% marks) (ii) Should Speedy Gonzales Ltd accept the special order? Discuss quantitative and qualitative factors. (1% marks) b) For Scenario B: (i) Prepare a table to compare the costs of the make and buy options. (3% marks) (ii) Should Speedy Gonzales Ltd continue manufacturing the bath towels or buy it from Yosemite Sam Ltd? Discuss quantitative and qualitative factors. (1% marks) [Total: 10 marks]