Vernon Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The companys chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segments operating activities. The relevant range for the production and sale of the calculators is between 33,000 and 71,000 units per year.

Required

a. A large discount store has approached the owner of Vernon about buying 7,000 calculators. It would replace The Math Machines label with its own logo to avoid affecting Vernons existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $4.20 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Vernon accept the special order?

b-1. Vernon has an opportunity to buy the 47,000 calculators it currently makes from a reliable competing manufacturer for $4.60 each. The product meets Vernons quality standards. Vernon could continue to use its own logo, advertising program, and sales force to distribute the products. Should Vernon buy the calculators or continue to make them?

b-2. Calculate the total cost for Vernon to make and buy the 47,000 calculators.

b-3. Should Vernon buy the calculators or continue to make them, if the volume of sales were increased to 71,000 units?

c. Because the calculator division is currently operating at a loss, should it be eliminated from the companys operations? Support your answer with appropriate computations. Specifically, by what amount would the segments elimination increase or decrease profitability?

Revenue (47,000 units x $9) Unit-level variable costs $423,000 Materials cost (47,000 $2) Labor cost (47,000 x $1) Manufacturing overhead (47,000 x $0.20) Shipping and handling (47,000 x $0.24) Sales commissions (47,000 x $2) (94,000) (47,000) (9,400) (11,280) 94,000 167,320 Contribution marqin Fixed expenses Advertising costs Salary of production supervisor Allocated company wide facility-level expenses (30,000) (66,000) (82,000 $ (10,680) Net loss