Reference no: EM132507568

Chewie Corporation manufactures a single product, R2D2, in its Duluth plant. R2D2 sells for $280. Current production is 10,000 units per year, and demand is expected to be relatively stable. Income statement for the product for the most recent year (in $000):

Sales 2,800

Expenses:

Variable production costs 1,420

Fixed overhead: occupancy 400

Fixed overhead: other 480

General overhead 560 2,860

Net loss (60)

1. Occupancy cost includes items such as utilities, taxes, insurance, and depreciation. General overhead is corporate level costs allocated at 20% of sales.
2. Because R2D2 is running a loss, a vice president has developed a plan to drop this product, and replace it with a new product, C3PO. Existing capacity in Duluth is sufficient to meet expected demand for this product, which is 8,000 units/year.
3. C3PO would sell for $400/unit and have variable costs of $215/unit. Overhead costs would remain the same, except that an additional supervisor would need to be hired for $50,000/year. Product C3PO would not have any effect on sales of other Chewie products. However, R2D2 has synergies with product S0L0, produced in the Oshkosh plant. If R2D2 is eliminated, sales of 300 units/year of S0L0 would be lost. S0L0 sells for $500/unit and has a cost of $340 unit (60% variable.
4. The CFO has discovered that the Duluth facility could be rented to another firm (not a competitor). Under this lease, occupancy cost would decrease by 20% and overhead: other would be eliminated, except for $25,000 per year paid to a security firm.

Required:

Question a. Is R2D2 really losing money? Explain briefly.

Question b. Should Chewie produce C3PO instead of R2D2? Explain.

Question c. How much rent would have to be charged on the facility to make that alternative superior to producing either of the two products?