Reference no: EM132571430

Question 1: BADM Variety Inc. runs a small convenience store. It has one refrigerator in which it stocks 355 ml cans of soft drinks and 500 ml cartons of orange juice. The beverages are kept on separate shelves. There are five shelves in the refrigerator. The owner only has time to stock the refrigerator once a day. The following is the additional information BADM Variety Inc. has provided:

                                                   Soft Drinks                        Orange Juice

Selling price per unit                    $1.75                               $3.99

Cost to BADM Variety Inc. per unit      0.50                               1.99

Units per shelf                                 130                                 90

Daily demand in units                          600                              500

How many shelves should be allocated for each product? How much operating income would the company lose if it must stock at least two shelves of each beverage?

Question 2: UOG Company makes 20,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct Materials                          $24.70

Direct Labour                           $16.30

Variable Manufacturing Overhead    $ 2.30

Fixed Manufacturing Overhead       $13.40

Unit Product Cost                           $56.70

• An outside supplier has offered to sell the company all the parts that UOG needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year.
• If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

Required:

a) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?

b) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year?