Hours available 4000 x 20% 800 hours
January 23 2014 BU247 Problem 2 – 43 Mc Gee Corporation’s Olympia plant produces a module used in automobile manufacturing. McGee Corporation's Olympia plant produces a module used in automobile manufacturing. The company's practical capacity is 4000 modules per week. The selling price is $900 per module. Production this quarter is 3000 modules per week, and all of the modules produced are sold each week. Demand is expected to remain steady. Total costs of production this week at the level of 3000 modules were $300 000 plus $2 400 000 of variable costs. Suppose that a new customer's supplier has an emergency need for 1500 modules to be delivered next week and that the plan cannot schedule overtime production. Consequently, McGee would have to give up some of its current sales to fill the new order. Total selling and administrative would not change if McGee accepts the order Required What is the minimum (floor) price that McGee should charge for the new order?
Relevant items: Selling price Variable production costs Contribution margin Opportunity cost (1500 – 1000) x $100
$900 $2 400 000/3 000 = $800 per unit $100 $50 000 $833.33 min we would be willing to charge
Capacity: 4000 – 3000 = 1000 Floor price = $50 000/ 1500 + $800
Problem 2- 44 Shorewood Shoes Company Shorewood Shoes Company makes and sells a variety of leather shoes for children. For its current mix of different models and sizes, the average selling price and costs per pair of shoes are as follows (in blue) Proposal: A discount store wants to order 10 000 pairs of shows with a private label embossed @ $0.50 per pair. No Variable selling costs will be incurred with this order Required Determine the minimum (floor) price that Shorewood Shoes should charge for this order? What other consideration are relevant for this decision
Average Price/ Cost Structure: Item Amount Price (selling) $20 Costs: Direct materials $6 Direct labour 4 Variable manufacturing 2 OH Variable selling costs 1
Other details: Item Batch size for shoes Machine hours per batch Plant capacity: Machine hours per month Current production:
Hours available 4000 x 20%
800 hours
Fixed OH
3
500 hours
Total costs
$16
Hours needed: 10 000/ 100 x 5 hours Floor price: $16 + $1 + $0.50 - $3.00
100 pairs 5 hours 4000 hours 80%
$12.50
Proposal: A discount store wants to order 10 000 pairs of shoes with a private label embossed @ $0.50 per pair. No variable selling costs will be incurred with this order. -leather shoes are usually high end product therefore we would need to look at the market -also look at the other customers who buy your product since they may want the discount as well -making baby shoe vs making an adult shoe would be different therefore we would need to consider
Problem 2- 46 The manufacturing capacity of Ritter Rotator Company The manufacturing capacity of Ritter Rotator Company's plant facility is 60 000 rotators per quarter. Operating results for the first quarter of this year are as follows
A foreign distributor has offered to by 30 000 units at $9 per unit during the second quarter of this year. Domestic demand is expected to remain the same as in the first quarter Required a. determine the impact on operating income if Ritter accepts this order. Assume that if the company accepts the order, it forgoes sales to regular domestic customers. What other considerations are relevant to this decision? **need to consider that if you can't satisfy your current customers can damage your future profits because you may lose them in the long run. You can probably make money in the short run but may lose money in the long run b. Assume that Ritter decides to run an extra shift so that it can accept the foreign order without forgoing sales to its regular domestic customers? The proposed extra shift would increase capacity by 25% and increase fixed costs by $25 000. Determine the impact on operating income if Ritter operates the extra shift and accepts the export order. What other considerations are relevant in this decision? **need to consider the impact on the quality of your product because you are working your workers and machinery overtime. (People might get tired) **by running this order in the short time, it might be changing something in the long run that we do not know of
Sales (36 000 units x $10) Variable manufacturing and selling (198 000/ 36 000) Contribution margin
Fixed Costs Operating Income Capacity information: (unused capacity 60 000 – 36 000) Foreign distributor order Domestic sales fore gone
Total $360 000
Units $10.00
198 000
5.50
Opportunity cost (6000*$-4.50)
$(27 000) loss
$162 000
$4.50
New contribution margin: ($9 - $5.50 = $3.50) x 30 000 units Impact on income
105 000
99 000 $63 000
Part A:
+$78 000
Incremental: 24 000
New CM (Part A)
$105 000 (25 000)
6000
Additional fixed costs Impact on income
+$80 000
-May need to think about losing existing customers in a long run because you may lose current customers and upset them though your numbers may look good temporarily -May need to think about quality and also the employees hours of working Problem 2-47 Superstore is a large discount supermarket. Superstore is a large discount supermarket. Profits have declined, so the manager has collected data on revenues and costs for different food categories. The following data pertain to some of the frozen foods that Superstore sells. To facilitate comparisons, the manager has listed average price and cost information for each category in equivalent squarefoodpackages. The manager wants a maximum of 250 square feet devoted to the 4 categories in this table Required: a. Given the manager's constraints and assuming that the store can sell whatever displayed on the shelves what shelf mix (ex. what number of square feet for each category in the table) will maximize Superstore's contribution margin from these four categories? b. What other factors might the manager consider? **need to consider how quickly each of the products sell. Turnover rates for each of the products need to be considered. **need to consider what the customers may want for their family. If customers go to your store and they do not see anything that they want to buy, they will stop going to your store > need to know the purchasing patterns of your customer
Selling price per unit (square foot package) Variable cost per unit (square foot package)
Ice Cream $12.00
Juice $13.00
Frozen Dinners $24.00
Frozen Vegetables $9.00
$8.00
$10.00
$20.50
$7.00
Contribution Margin Min. Square footage required Max. square footage allowed
$4.00
$3.00
$3.50
$2.00
24
24
24
24
100
100
100
100
100
26
100
24
The manager wants a maximum of 250 square feet devoted to the 4 categories in this table. Problem 2-59 Genis Battery Company Genis Battery Company is considering accepting a special order for 50 000 batteries that it received from a discount retail store. The order specified a price of $4 per unit, which reflects a discount of $0.50 per unit relative to the company's regular price of $4.50 per unit. Genis's accounting department has prepared the following analysis to show the cost savings resulting from additional sales No additional fixed costs will be incurred for this order because the company has surplus capacity. Because the average cost per unit will be reduce from $4.20 to $3.90, Genis's president believes that a reduction to the price to $4 is justified for this order. Required a. Should the order for 50 000 units at a price of $4 be accepted? What will be the impact on Genis's operating income? **the fixed costs are not actually dropping. We are just amortizing the fixed costs over a larger amount of units b. Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest? **the accounting department gives only average costs. Different types of batteries and the size of the battery will affect the cost to product them. This could cause us to lose money if the order consists of batteries that cost more to produce. c. What other considerations are important in this case? Why? **need to consider that other customers might get upset that you are charging someone else at a cheaper price. Everyone might come to you and be asking for the cheaper price as well. If you do not give them the cheaper price, they will not come back
Costs Variable Fixed
Cost/ Unit without + sales (100 000 units) $3.30 $0.90
Impact on income ($4 - $3.30) x 50 000 units
Cost/ unit with + sales (150 000 units) $3.30 $0.60 Increase + $35 000
Relevant Not relevant $.90 x 100 000 = $90 000 $.60 x 150 000 = $90 000
No additional fixed costs will be incurred for this order because the company has surplus capacity. Because the average cost per unit will be reduced from $4.20 to $3.90, Genis’s president believes that a reduction in the price to $4 is justified for this order. Answer to part a) = 35 000 *everyone would want your product to be sold $4 therefore you may need to consider
Relevant items: Selling price Variable production costs Contribution margin Opportunity cost (1500 – 1000) x $100
$900 $2 400 000/3 000 = $800 per unit $100 $50 000 $833.33 min we would be willing to charge
Capacity: 4000 – 3000 = 1000 Floor price = $50 000/ 1500 + $800
Problem 2- 44 Shorewood Shoes Company Shorewood Shoes Company makes and sells a variety of leather shoes for children. For its current mix of different models and sizes, the average selling price and costs per pair of shoes are as follows (in blue) Proposal: A discount store wants to order 10 000 pairs of shows with a private label embossed @ $0.50 per pair. No Variable selling costs will be incurred with this order Required Determine the minimum (floor) price that Shorewood Shoes should charge for this order? What other consideration are relevant for this decision
Average Price/ Cost Structure: Item Amount Price (selling) $20 Costs: Direct materials $6 Direct labour 4 Variable manufacturing 2 OH Variable selling costs 1
Other details: Item Batch size for shoes Machine hours per batch Plant capacity: Machine hours per month Current production:
Hours available 4000 x 20%
800 hours
Fixed OH
3
500 hours
Total costs
$16
Hours needed: 10 000/ 100 x 5 hours Floor price: $16 + $1 + $0.50 - $3.00
100 pairs 5 hours 4000 hours 80%
$12.50
Proposal: A discount store wants to order 10 000 pairs of shoes with a private label embossed @ $0.50 per pair. No variable selling costs will be incurred with this order. -leather shoes are usually high end product therefore we would need to look at the market -also look at the other customers who buy your product since they may want the discount as well -making baby shoe vs making an adult shoe would be different therefore we would need to consider
Problem 2- 46 The manufacturing capacity of Ritter Rotator Company The manufacturing capacity of Ritter Rotator Company's plant facility is 60 000 rotators per quarter. Operating results for the first quarter of this year are as follows
A foreign distributor has offered to by 30 000 units at $9 per unit during the second quarter of this year. Domestic demand is expected to remain the same as in the first quarter Required a. determine the impact on operating income if Ritter accepts this order. Assume that if the company accepts the order, it forgoes sales to regular domestic customers. What other considerations are relevant to this decision? **need to consider that if you can't satisfy your current customers can damage your future profits because you may lose them in the long run. You can probably make money in the short run but may lose money in the long run b. Assume that Ritter decides to run an extra shift so that it can accept the foreign order without forgoing sales to its regular domestic customers? The proposed extra shift would increase capacity by 25% and increase fixed costs by $25 000. Determine the impact on operating income if Ritter operates the extra shift and accepts the export order. What other considerations are relevant in this decision? **need to consider the impact on the quality of your product because you are working your workers and machinery overtime. (People might get tired) **by running this order in the short time, it might be changing something in the long run that we do not know of
Sales (36 000 units x $10) Variable manufacturing and selling (198 000/ 36 000) Contribution margin
Fixed Costs Operating Income Capacity information: (unused capacity 60 000 – 36 000) Foreign distributor order Domestic sales fore gone
Total $360 000
Units $10.00
198 000
5.50
Opportunity cost (6000*$-4.50)
$(27 000) loss
$162 000
$4.50
New contribution margin: ($9 - $5.50 = $3.50) x 30 000 units Impact on income
105 000
99 000 $63 000
Part A:
+$78 000
Incremental: 24 000
New CM (Part A)
$105 000 (25 000)
6000
Additional fixed costs Impact on income
+$80 000
-May need to think about losing existing customers in a long run because you may lose current customers and upset them though your numbers may look good temporarily -May need to think about quality and also the employees hours of working Problem 2-47 Superstore is a large discount supermarket. Superstore is a large discount supermarket. Profits have declined, so the manager has collected data on revenues and costs for different food categories. The following data pertain to some of the frozen foods that Superstore sells. To facilitate comparisons, the manager has listed average price and cost information for each category in equivalent squarefoodpackages. The manager wants a maximum of 250 square feet devoted to the 4 categories in this table Required: a. Given the manager's constraints and assuming that the store can sell whatever displayed on the shelves what shelf mix (ex. what number of square feet for each category in the table) will maximize Superstore's contribution margin from these four categories? b. What other factors might the manager consider? **need to consider how quickly each of the products sell. Turnover rates for each of the products need to be considered. **need to consider what the customers may want for their family. If customers go to your store and they do not see anything that they want to buy, they will stop going to your store > need to know the purchasing patterns of your customer
Selling price per unit (square foot package) Variable cost per unit (square foot package)
Ice Cream $12.00
Juice $13.00
Frozen Dinners $24.00
Frozen Vegetables $9.00
$8.00
$10.00
$20.50
$7.00
Contribution Margin Min. Square footage required Max. square footage allowed
$4.00
$3.00
$3.50
$2.00
24
24
24
24
100
100
100
100
100
26
100
24
The manager wants a maximum of 250 square feet devoted to the 4 categories in this table. Problem 2-59 Genis Battery Company Genis Battery Company is considering accepting a special order for 50 000 batteries that it received from a discount retail store. The order specified a price of $4 per unit, which reflects a discount of $0.50 per unit relative to the company's regular price of $4.50 per unit. Genis's accounting department has prepared the following analysis to show the cost savings resulting from additional sales No additional fixed costs will be incurred for this order because the company has surplus capacity. Because the average cost per unit will be reduce from $4.20 to $3.90, Genis's president believes that a reduction to the price to $4 is justified for this order. Required a. Should the order for 50 000 units at a price of $4 be accepted? What will be the impact on Genis's operating income? **the fixed costs are not actually dropping. We are just amortizing the fixed costs over a larger amount of units b. Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest? **the accounting department gives only average costs. Different types of batteries and the size of the battery will affect the cost to product them. This could cause us to lose money if the order consists of batteries that cost more to produce. c. What other considerations are important in this case? Why? **need to consider that other customers might get upset that you are charging someone else at a cheaper price. Everyone might come to you and be asking for the cheaper price as well. If you do not give them the cheaper price, they will not come back
Costs Variable Fixed
Cost/ Unit without + sales (100 000 units) $3.30 $0.90
Impact on income ($4 - $3.30) x 50 000 units
Cost/ unit with + sales (150 000 units) $3.30 $0.60 Increase + $35 000
Relevant Not relevant $.90 x 100 000 = $90 000 $.60 x 150 000 = $90 000
No additional fixed costs will be incurred for this order because the company has surplus capacity. Because the average cost per unit will be reduced from $4.20 to $3.90, Genis’s president believes that a reduction in the price to $4 is justified for this order. Answer to part a) = 35 000 *everyone would want your product to be sold $4 therefore you may need to consider
