Question

Christine Pte Ltd ("CPL") produces a single product called T01. The product uses material sourced from Europe. The company has sufficient capacity to produce 80,000 units of T01 each month, without the need to increase fixed manufacturing overhead costs. It normally produces and sells 70,000 T01 each month at a selling price of $199 per unit. The company's unit costs at this level of activity are given below. Fixed manufacturing costs are allocated on the basis of production volume.

Required:

Part A

(a) CPL is considering expansion. The company's marketing director estimates that sales can be increased by 25% above the current monthly production level. The corresponding increase in fixed expenses is expected to be $803,000 per month. Based on these estimations, should CPL invest in the monthly increase in fixed expenses? Justify your answer by showing the net impact on profit. State any necessary assumption(s) you have to make.

(b) This month, CPL received a request from an overseas customer for a one-time order of 25,000 units of T01. The import duties incurred by CPL to sell these units overseas will be $2.70 per unit. Another $19,000 is expected to be incurred for permits and licenses to make this overseas sale. The only selling cost for this one-time order will be shipping cost of $2.20 per unit of T01. Calculate the minimum price per unit that CPL should charge for this order. Round your answer to the nearest cent. State any necessary assumption(s) you have to make. Ignore the marketing director's expansion plan from part (a) for this section.

(c) Suggest two (2) ways that CPL can increase its factory capacity without outsourcing.

Part B

This part of the question should be answered independently of Part A.

CPL was just informed that due to a strike in its supplier's plant, the company is unable to purchase more direct material for the production of T01. The strike is expected to persist for 1 month. CPL currently has enough material on hand to operate at 20% of its normal production level for the coming month.

Alternatively, CPL can close its own manufacturing plant for the month. If CPL's plant is closed, fixed manufacturing overhead costs would continue at 50%, and fixed selling expenses would be reduced by 30% for the duration of closure.

(d) Would you recommend that CPL close its plant for the month? Show the net impact on CPL's profit, using incremental analysis, to support your recommendation.

(e) An outside, competitor manufacturer heard about the strike and has offered to produce and ship directly to CPL's customers the shortfall in T01 for the coming month. The outside manufacturer will pay for shipping to CPL's customers, and hence, variable selling expenses incurred by CPL will be reduced to $0.20 per unit for the shortfall units. Based only on the financial information available, compute and explain the maximum unit price CPL should be willing to pay the outside manufacturer. Round your answer to the nearest cent.

(f) Provide two (2) qualitative factors that CPL should consider when deciding whether to outsource in part (e) above.