Reference no: EM132753869
Questions -
Q1. Company purchases the 65,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.10 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is $11.60 as shown below:
Per Unit
Total Direct materials $6.00
Direct labor 2.20
Supervision 1.40 $91,000
Depreciation 1.00 $65,000
Variable manufacturing overhead 0.40
Rent 0.60 $39,000
Total production cost $11.60
If Company decides to make the starters, a supervisor would have to be hired (at a salary of $91,000) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $85,000 per period. Depreciation is due to obsolescence rather than wear and tear.
What is the financial advantage (disadvantage) of making the 65,000 starters instead of buying them from an outside supplier?
Q2. Manufactures and sells a gold bracelet for $403.00. The company's accounting system says that the unit product cost for this bracelet is $266.00 as shown below:
Direct materials $150
Direct labor 81
Manufacturing overhead 35
Unit product cost $266
The members of a wedding party have approached the manufactures about buying 19 of these gold bracelets for the discounted price of $363.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require the manufactures to buy a special tool for $454 and that would increase the direct materials cost per bracelet by $12. The special tool would have no other use once the special order is completed.
To analyze this special order opportunity, manufactures has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $13.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party's order using its existing manufacturing capacity.
1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?
2. Should the company accept the special order?