Reference no: EM132507829
1. Outsourcing
Duncan Co. is currently servicing 20,000 clients at a cost of $16 per service call. An outside supplier has offered to service all these clients for $14 per call. Duncan's costs are shown below:
Per Call
Direct Supplies $2
Direct Labor 4
Variable overhead 5
Fixed overhead (40% avoidable) 5
$16
Question a. Should Duncan outsource?
Question b. Assume the equipment used to service the clients could be leased to another company for $40,000. What decision should be made?
2. Dropping a Product Line
Step Up, Inc. sells, through infomercials, two types of stair stepping machines, the Deluxe and the Regular models. A recent segmented income statement is shown below.
Regular Deluxe Total__
Sales $ 160,000 $ 240,000 $ 400,000
Less: Cost of goods sold 120,000 160,000 280,000
Contribution margin 40,000 80,000 120,000
Less:
Direct fixed costs 10,000 20,000 30,000
Common fixed costs 32,000 50,000 82,000
Total fixed costs 42,000 70,000 112,000
Net income (Loss) $ ( 2,000 ) $ 10,000 $8,000
Direct fixed costs refer to the advertising programming costs for each model.
Common fixed costs include the shared order processing and fulfillment departments.
Question c: Determine if Step Up should drop the Regular model.
3. PRICING A SPECIAL ORDER
Scott, Inc. has a capacity of servicing 300,000 clients a year and charges them $28 per service. At present Scott is servicing 250,000 clients. A foreign company wants Scott to service its US customers (there are 40,000 of them) for $20 per service. The foreign company will perform all the billing and no commissions will be paid on these calls, so variable selling costs will be reduced by 40%.
The sales manager has collected the following data on Scott's operating costs:
Per Unit
Direct Supplies $3.00
Direct labor 7.50
Variable overhead 6.00
Variable selling 3.50
Fixed overhead 4.00
Fixed administration 1.50
Total $25.50
Question d: Determine if the new customer should be accepted or rejected.
4. KEEP OR REPLACE?
The company must choose between keeping the old machine - it's only one year old - and replacing it with a new one. You have the following data.
Old Machine
Original Cost $175,000
Accumulated Depreciation $35,000
Purchase Date 1 year ago
Remaining Useful Life 4 years
Disposal Value $90,000
Disposal Value in 4 years $0
Annual Variable Operating Expenses $345,000
Annual Revenue $500,000
New Machine
Price New $200,000
Expected Useful Life 4 years
Disposal Value in 4 years $0
Annual Variable Operating Expenses $300,000
Annual Revenue $500,000