Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number.

4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

Buy. $_____?______

Question 2:

Structuring a Special-Order Problem

The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $4.20 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows:

Fixed overhead will not be affected by whether or not the special order is accepted.

Required:

By how much will operating income increase or decrease if the order is accepted?What is the total contribution to income from processing the logs into lumber?

$____?____

• Should Jack's continue to sell the logs or process them further into lumber?
• Should continue to sell logs
• Should process to lumber

Question 4:

Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint

Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 30 minutes of machine time.

Assume that a maximum of 51,160 units of each sweatshirt can be sold.

Required:

If required, round your answers to the nearest whole number.

1. What is the contribution margin per hour of machine time for each type of sweatshirt?

Contribution Margin
Swoop $___?___
Rufus $___?___

• What is the optimal mix of sweatshirt?

	Optimal Mix
Swoop ___?___units
Rufus ___?___units What is the total contribution margin earned for the optimal mix? $___?___

Question 5:

Special Order

Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $10.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 92,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $14 per unit. Unit cost information is as follows:

Direct materials	$3.10
Direct labor	2.50
Variable overhead	1.15
Fixed overhead	1.80
Total	$8.55

Suppose a customer wants to have its company logo affixed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20.

Required:

By how much will profit increase or decrease if the order is accepted? If your answer is decrease, enter negative value.

Increase?/decrease? by $______?____

Question 6:

Keep or Buy, Sunk Costs

Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor:

Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following:

In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am.

Required:

1. Conceptual Connection: In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern?

_____________?