Smith Consultancy provides outstanding strategic and tactical financial as well as non$-$financial

business advisory services to a diverse clientele, aiding them in attaining their business goals and

objectives. In your role as a trainee at the company, your manager has tasked you with preparing a

business report to assist the management of Comfy Toy Company in addressing the current issues

outlined in the case.

Case: Comfy Toy Company

Comfy Toy Company manufactures large and small stuffed animal toys. It has a long$-$term contract with

a large chain of discount stores to sell $3,000$ large and $6,000$ small stuffed animal toys each month. The

following cost information is available for large and small stuffed animal toys:

ITEM LARGE SMALL

Price per unit $$32$ $$21$

Variable costs per unit:

Direct material $$12$ $$10$

Direct labour $62$

Variable support $21$

Fixed costs per unit $33$

Total costs per unit $$23$ $$16$

Estimated demand $($inclusive

of long$-$term contracts$)15,000$ units $25,000$ units

Production occurs in batches of $100$ large or $200$ small stuffed animal toys. Each batch, regardless of

the toy$$s size, takes a total of $10$ machine hours to manufacture. The total machine hour capacity of

$3,000$ machine hours cannot be increased for at least a year.

REQUIRED:

Write a business report for Comfy Toy Company, fulfilling the Comfy Toy Company manufactures large and small stuffed animal toys. It has a long$-$term contract with a large chain of discount stores to sell $3,000$ large and $6,000$ small stuffed animal toys each month. The following cost information is available for large and small stuffed animal toys:

$\backslash$table$[[$ITEM$,$LARGE,SMALL$],[$Price per unit,$$32,$$$21],[$Variable costs per unit:,,$],[$Direct material,$$12,$$$10],[$Direct labour,$6,2],[$Variable support,$2,1],[$Fixed costs per unit,$3\_,3\_],[$Total costs per unit,$$23\_\_,$$$16\_\_],[\backslash$table$[[$Estimated demand $($inclusive$],[$of long$-$term contracts$)]],,25,000$ units$]]$

Production occurs in batches of $100$ large or $200$ small stuffed animal toys. Each batch, regardless of the toy's size, takes a total of $10$ machine hours to manufacture. The total machine hour capacity of $3,000$ machine hours cannot be increased for at least a year. i$.$ Determine the contribution margin per unit and the contribution margin per machine hour

for each of the two sizes of stuffed animal toys.

ii$.$ Determine which size of stuffed animal toys is more profitable to produce under constrained

capacity. How many units of each size should Comfy Toy Company produce under the

current capacity $($i$.$e$.,3,000$ machine hours$)?$ Justify your answers with supporting

calculations.

iii. Due to an unexpected high demand for stuffed dinosaur toys, the discount store chain has

requested an additional order of $5,000$ large stuffed dinosaur toys and is willing to pay $$37$

per dinosaur toy for this special order. Determine the opportunity cost associated with this

special order.

iv$.$ Should Comfy Toy Company accept the special order described in $($iii$)?$ Explain your

answer with supportive calculations.

v$.$ Suppose the company has the option to subcontract the production of up to $10,000$ small

stuffed animal toys to an external supplier at a cost of $$22$ per animal toy. Determine the

optimal distribution of units for each size of toys $($including special$-$order units, small, and

large toy

i$.$ Determine the contribution margin per unit and the contribution margin per machine hour

for each of the two sizes of stuffed animal toys.

ii$.$ Determine which size of stuffed animal toys is more profitable to produce under constrained

capacity. How many units of each size should Comfy Toy Company produce under the

current capacity $($i$.$e$.,3,000$ machine hours$)?$ Justify your answers with supporting

calculations.

$4$

iii. Due to an unexpected high demand for stuffed dinosaur toys, the discount store chain has

requested an additional order of $5,000$ large stuffed dinosaur toys and is willing to pay $$37$

per dinosaur toy for this special order. Determine the opportunity cost associated with this

special order.

iv$.$ Should Comfy Toy Company accept the special order described in $($iii$)?$ Explain your

answer with supportive calculations.

v$.$ Suppose the company has the option to subcontract the production of up to $10,000$ small

stuffed animal toys to an external supplier at a cost of $$22$ per animal toy. Determine the

optimal distribution of units for each size of toys $($including special$-$order units, small, and

large toy units$)$ that should be produced in$-$house and subcontracted.

vi$.$ Evaluate the viability of subcontracting the production for the company based on the

calculations provided in $($v$).$ Provide an explanation supported by relevant calculations.

vii. Recommend a suitable price for the subcontracted production, justifying your choice with

calculations.

viii. Provide three qualitative factors you would advise the company to take into consideration

for the subcontracted production.