Reference no: EM132604778

Powersport is an energy drink that is well known among sport federations and athletes. Since it came on the market three years ago, sales have increased continuously. The company believes it will sell 200,000 cases next year. A case contains twelve 375-ml bottles of Powersport and is sold for $18 per case to vendors at sporting events, which sell the bottles for $3 each.

Based on the production of 200,000 cases, the production costs are:

Labour                                                      $2.75 per case

Raw Materials                                            $3.75 per case

Variable and fixed manufacturing overhead      $3.00 per case

Total fixed manufacturing overhead                      $400,000

The company received an offer last month from Lawrence Chung Ltd., a manufacturer that makes containers out of recycled materials, to make the bottles for $0.15 each. This proposition would enable Powersport to decrease its cost of labour and raw materials by 20%. The company's variable manufacturing overhead would decrease to $0.60 per case.

REQUIRED:

Question 1: Should Powersport accept the proposition? Show all calculations.

Question 2: Calculate the maximum price that Powersport should pay for a case of bottles.

Question 3: The estimated sales are now 300,000 cases instead of 200,000 cases, but Powersport cannot produce more than 250,000 cases without having to purchase a new machine to make the bottles. The new machine can be bought for $150,000 and has a useful life of 10 years. Variable overhead costs would increase by 20%. Should Powersport accept the proposition in part (a)? Show all calculations.