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Chapter 25: Q19E (page 1414)

Refer to Exercise E25-18. Cool Systems needs 79,000 optical switches. By outsourcing them, Cool Systems can use its idle facilities to manufacture another product that will contribute $225,000 to operating income.

Requirements

1. Identify the expected net costs that Cool Systems will incur to acquire 79,000 switches under three alternative plans: make the switches, buy the switches and leave facilities idle, buy the switches and use the idle facilities to make another product.

2. Which plan makes the best use of Cool System’s facilities? Support your answer.

Short Answer

Expert verified

It is advisable for the company topurchase the switches from outside.

Step by step solution

01

Meaning of Outsourcing

In business terms, outsourcing refers to a practice in which an outsider is hired or allowed by a business entity to performplanned or existing business tasks. Outsourcing helps business entities fulfill their needs from the outside rather than making/producing products/services in-house.

02

Computation of total expected net cost


MakeFacilities Idle
Make New Product

No. of units required

79,000

79,000

79,000

Variable costs:

Direct material @ $5

395,000

Direct labor @ $3

237,000

Variable overhead @ 6

474,000

Purchase cost @ 15

1,185,000

1,185,000

Expected profit contribution from other products

(225,000)

Total expected net cost

1,106,000

1,185,000

960,000

03

Decision

Based on the analysis presented above, the company should purchase the switches from an outsider and devote its idle facility to making another product.

Making another product will add $225,000 to the company’soperating income and decrease theexpected cost of switches.

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Most popular questions from this chapter

What is outsourcing?

Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Light could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows:

Per Unit

Deluxe Regular

Sales price \(1,030 \)610

Costs:

Direct materials 320 130

Direct labor 88 180

Variable manufacturing overhead 270 90

Fixed manufacturing overhead* 102 34

Variable operating expenses 121 63

Total costs 901 497

Operating income \(129 \)113

*allocated on the basis of machine hours

Requirements

1. What is the constraint?

2. Which model should Tread Light produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)

3. If Tread Light should produce both models, compute the mix that will maximize operating income.

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz’s total production cost is \(0.58 per pack, as follows:

Variable costs:

Direct materials \)0.11

Direct labor 0.09

Variable overhead 0.08

Fixed overhead 0.30

Total cost \(0.58

Collector-Cardz has enough excess capacity to handle the special order.

Requirements

1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.

2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?

NaturalMaid processes organic milk into plain yogurt. NaturalMaid sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of \(840, yields 300 gallons of plain yogurt. NaturalMaid sells the one-gallon tubs for \)5 each and spends \(0.14 for each plastic tub. NaturalMaid has recently begun to reconsider its strategy. NaturalMaid wonders if it would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores. NaturalMaid could further process each batch of plain yogurt into 6,400 individual portions (3/4 cup each) of fruited yogurt. A recent market analysis indicates that demand for the product exists. NaturalMaid would sell each individual portion for \)0.58. Packaging would cost \(0.10 per portion, and fruit would cost \)0.11 per portion. Fixed costs would not change.

Should NaturalMaid continue to sell only the gallon-size plain yogurt (sell as is) or convert the plain yogurt into individual-size portions of fruited yogurt (process further)? Why?

Skiable Acres operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 10% return on investment on the company’s \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)31,000,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about \(8 per guest. Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.

Requirements

1. Would Skiable Acres emphasize target pricing or cost-plus pricing? Why?

2. If other resorts in the area charge \)85 per day, what price should Skiable Acres charge?
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