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jan 23 bu247

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Esther Maier

January 23 2014 BU247 Problem 2 – 43 Mc Gee Corporation’s Olympia plant produces a module used in automobile manufacturing. McGee Corporation's Olympia plant produces a module used in automobile manufacturing. The company's practical capacity is 4000 modules per week. The selling price is  $900 per module. Production this quarter is 3000 modules per week, and all of the modules produced are sold each week. Demand is expected to remain steady. Total costs of  production this week at the level of 3000 modules were $300 000 plus $2 400 000 of variable costs. Suppose that a new customer's supplier has an emergency need for 1500  modules to be delivered next week and that the plan cannot schedule overtime production. Consequently, McGee would have to give up some of its current sales to fill the new  order. Total selling and administrative would not change if McGee accepts the order  Required What is the minimum (floor) price that McGee should charge for the new order? Relevant items: Selling price $900 Variable production costs $2 400 000/3 000 = $800 per unit Contribution margin $100 Opportunity cost (1500 – 1000) x $50 000 Capacity: 4000 – 3000 = 1000 $100 $833.33 min we would be willing to Floor price = $50 000/ 1500 + $800 charge Problem 2- 44 Shorewood Shoes Company Shorewood Shoes Company makes and sells a variety of leather shoes for children. For its current mix of different models and sizes, the average selling price and costs per  pair of shoes are as follows (in blue) Proposal: A discount store wants to order 10 000 pairs of shows with a private label embossed @ $0.50 per pair. No Variable selling costs will be incurred with this order Required Determine the minimum (floor) price that Shorewood Shoes should charge for this order? What other consideration are relevant for this decision Average Price/ Cost Structure: Other details: Item Amount Item Price (selling) $20 Batch size for shoes 100 pairs Costs: Machine hours per batch 5 hours Direct materials $6 Plant capacity: Direct labour 4 Machine hours per month 4000 hours Variable manufacturing 2 Current production: 80% OH Variable selling costs 1 Hours available 4000 x 800 hours 20% Fixed OH 3 Hours needed: 10 000/ 500 hours 100 x 5 hours Total costs $16 Floor price: $16 + $1 + $12.50 $0.50 - $3.00 Proposal: A discount store wants to order 10 000 pairs of shoes with a private label embossed @ $0.50 per pair. No variable selling costs will be incurred with this order. -leather shoes are usually high end product therefore we would need to look at the market -also look at the other customers who buy your product since they may want the discount as well -making baby shoe vs making an adult shoe would be different therefore we would need to consider Problem 2- 46 The manufacturing capacity of Ritter Rotator Company  The manufacturing capacity of Ritter Rotator Company's plant facility is 60 000 rotators per quarter. Operating results for the first quarter of this year are as follows A foreign distributor has offered to by 30 000 units at $9 per unit during the second quarter of this year. Domestic demand is expected to remain the same as in the first quarter Required a. determine the impact on operating income if Ritter accepts this order. Assume that if the company accepts the order, it forgoes sales to regular domestic  customers. What other considerations are relevant to this decision? **need to consider that if you can't satisfy your current customers can damage your future profits because  you may lose them in the long run. You can probably make money in the short run but may lose money in the long run  b. Assume that Ritter decides to run an extra shift so that it can accept the foreign order without forgoing sales to its regular domestic customers? The proposed extra shift  would increase capacity by 25% and increase fixed costs by $25 000. Determine the impact on operating income if Ritter operates the extra shift and accepts the export order.  What other considerations are relevant in this decision? **need to consider the impact on the quality of your product because you are working your workers and machinery  overtime. (People might get tired) **by running this order in the short time, it might be changing something in the long run that we do not know of Total Units Sales (36 000 units $360 000 $10.00 Part A: x $10) Variable 198 000 5.50 Opportunity cost $(27 000) loss manufacturing and (6000*$-4.50) selling (198 000/ 36 000) Contribution margin $162 000 $4.50 New contribution 105 000 margin: ($9 - $5.50
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