2. Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $30 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
| Per Unit | | 13,000 Units
Per Year | |
| Direct materials | $ | 13 | | $ | 169,000 | |
| Direct labor | | 9 | | | 117,000 | |
| Variable manufacturing overhead | | 3 | | | 39,000 | |
| Fixed manufacturing overhead, traceable | | 3 | * | | 39,000 | |
| Fixed manufacturing overhead, allocated | | 6 | | | 78,000 | |
| Total cost | $ | 34 | | $ | 442,000 | |
|
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Required:
1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier?
2. Should the outside supplierâs offer be accepted?
3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $130,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier?
4. Given the new assumption in requirement 3, should the outside supplierâs offer be accepted?
3.
Imperial Jewelers manufactures and sells a gold bracelet for $408.00. The companyâs accounting system says that the unit product cost for this bracelet is $267.00 as shown below:
| | | |
| Direct materials | $ | 142 | |
| Direct labor | | 89 | |
| Manufacturing overhead | | 36 | |
| Unit product cost | $ | 267 | |
|
The members of a wedding party have approached Imperial Jewelers about buying 28 of these gold bracelets for the discounted price of $368.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $456 and that would increase the direct materials cost per bracelet by $5. The special tool would have no other use once the special order is completed.
To analyze this special order opportunity, Imperial Jewelers 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, $6.00 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 partyâs order using its existing manufacturing capacity.
Required:
1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?
2. Should the company accept the special order?
4.
Outdoor Luggage, Inc., makes high-end hard-sided luggage for sports equipment. Data concerning three of the companyâs most popular models appear below.
| Ski
Guard | Golf
Guard | Fishing
Guard |
| Selling price per unit | $ | 210 | | $ | 310 | | $ | 265 | |
| Variable cost per unit | $ | 70 | | $ | 150 | | $ | 130 | |
Plastic injection molding machine processing
time required to produce one unit | 8 minutes | | 10 minutes | | 10 minutes | |
| Pounds of plastic pellets per unit | 7 pounds | | 16 pounds | | 6 pounds | |
|
Required:
1. If we assume that the total time available on the plastic injection molding machine is the constraint in the production process, how much contribution margin per minute of the constrained resource is earned by each product?
2. Which product offers the most profitable use of the plastic injection molding machine?
3. If we assume that a severe shortage of plastic pellets has required the company to cut back its production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product?
4. Which product offers the most profitable use of the plastic pellets?
5. Which product has the largest contribution margin per unit?
