Reference no: EM133041831
Question 1 - Western Company must decide whether to make or buy some of its components. The cost of producing 60,000 switches for its generators is as follows:
Direct materials $30,000
Direct labour 42,000
Variable overhead 45,000
Fixed overhead 60,000
Instead of making the switches for an average cost of $2.95 ($177,000 / 60,000 units), the company has an opportunity to purchase the switches for $2.70 per unit. If the company purchases the switches, all of the variable costs and ¼ of the fixed costs will be eliminated.
a) Should Western Company continue to make the switches or purchase them?
b) Identify other considerations related to the outsourcing decision.
Question 2 - Tomorrow's Tech has been in business for five years and manufactures tech products. While demand is high, the company has an annual production capacity of 23,000 units.
A summary of operating results for last year is as follows:
Sales (16,000 units @ $1,000) $16,000,000
Variable costs 7,680,000
Contribution margin 8,320,000
Fixed costs 2,450,000
Net operating profit $5,870,000
Tomorrow's Tech expects its regular sales to be 18,000 units next year.
The company must now decide which course of action to take.
Option 1 - Over the next year, Tomorrow's Tech can use the extra capacity not needed for its expected regular sales to produce 5,000 camera drones which can be sold for $1,350 each, with a variable cost of $460 per drone. This option would result in additional fixed costs of $180,000.
Option 2 - A foreign distributor has made a one-time offer to buy a guaranteed 8,000 drones at $1,025 per unit next year.
Tomorrow's Tech expects its regular sales to be 18,000 units over the next year. Accepting this offer would result in an additional fixed cost of $190,000 for the year.
a) Assuming Tomorrow's Tech chooses Option 1 calculate the total operating profit for the next year.
b) Assuming Tomorrow's Tech chooses Option 2, calculate the total operating profit for the next year.
c) If tomorrow's Tech decides to forego both options and just produce the regular 18,000 units, calculate the total operating profit for the next year.
d) From your calculations above, should Tomorrow's Tech select (a), (b) or (c)?