The Soho company manufactures a three$-$in$-$one stereo consisting of CD player, a

cassette deck, and a digital radio.

Direct Material $ $9$

Direct Manufacturing Labor $2,4$

Variable manufacturing Overhead $1,6$

Fixed manufacturing Overhead $$3,000,000$

Currently, material handling and setup activities occur each time a batch of CD

Players is made. Soho produces $1,000,000$ CD players with $400$ units per batch. Total

material$-$handling cost and setup cost equal fixed cost of $$500,000$ plus variable cost of $$500$

per batch.

Soho considers producing CD players in smaller batch sizes. Soho anticipates

producing the same $1,000,000$ units next year at $200$ units per batch. Through continuous

improvement, the company expects to reduce the variable cost of material handling setup to

$$300$ per batch. Another manufacturer offers to sell Soho $1,000,000$ unit CD players next

year for $$16$ per unit on whatever delivery schedule Soho wants. Fixed manufacturing

overhead costs will continue to be incurred regardless of the decision made.

Required:

$1.$ Should Soho accept the offer from another manufacturer? Show your calculation.

$2.$ Assume Soho decides to buy CD players for its stereo from an outside supplier. The

idle facilities can produce $500,000$ Discman, a portable, stand$-$alone CD Player. With

the help of operating manager, John Marquez, below are estimates of the total

operating income.

Revenues $$8,000,000$

Cost:

Direct Material $$3,400,000$

Direct Manufacturing Labor $1,000,000$

Variable Overhead $600,000$

Material$-$handling and setup

overhead

$500,000$

Total Manufacturing Cost $$5,500,000$

Operating Income $$2,500,000$

Because of the capacity constraints, Soho can make either CD players for its stereo

unit or Discman, but not both. Which of the following three alternatives should Soho

choose? Show your calculation.

a$.$ Make stereo CD players only

b$.$ Buy stereo CD players only

c$.$ Buy stereo CD players and make Discmans

$3.$ Explain the relevant qualitative factors Soho should consider in deciding whether to

bid in the special order. $($at least two factors$)$