Problems on Relevant Costs for Decision Making

Problem no: 1: Accepting a Special Order Sutherland manufactures and sells 110,000 laser printers each month. A principal component part in each printer is its paper feed drive. Sutherlands plant currently has the monthly capacity to produce 150,000 drives. The unit costs of manufacturing these drives (up to 150,000 per month) are as follo s! "aria#le costs per unit! $irect materials %%%%.. & '5 $irect la#or %%%%%%. (5 "aria#le ).*.+ %%%%. 5 ,i-ed costs per month! ,i-ed ).*.+ %%%%%.. &1,'.0,000

$es/0)ate 1rinters has offered to #uy (0,000 paper feed drives from Sutherland to #e used in its o n printers. 2ompute the follo ing! a. The average unit cost of manufacturing each paper feed drive assuming that Sutherland manufactures only enough drives for its o n laser printers #. The incremental unit cost of producing an additional paper feed drive. c. The per0unit sales price that Sutherland should charge $es/0 )ate to earn &500,000 in monthly preta- profit on the sale of drives to $es/0mate

Problem no: 2: Accepting a Special Order $over 3u##er 2ompany has #een offered a contract to supply 500,000 premium automo#ile tires to a large automo#ile manufacturer at a price of &'1.45 per tire. $overs full cost of producing the tire is &51.50. The normal sales price for the tire is &6..50 to #oth distri#utors and some selected retailers. "aria#le costs per tire amount to &.'..07 ho ever, in order to meet the needs of the auto manufacturer, $over ill have to cut its sales to regular customers #y 100,000 tires annually. The automa/er has clearly indicated that it ill enter into the agreement only if $over ill agree to supply all 500,000 of the tires re8uested. Should $over accept the offer9

Problem no : 3 : Dropping t e prod!ct line" "ulcan S imsuit 2ompany is considering dropping its line of omens #each ro#es. A recent product income statement for the ro#e line follo s! 1articulars 3evenue 2ost of goods sold ;ross margin Selling and administrative e-penses <et loss Amount &:50,640 541,5'0 55,:(0 1.4,500 ('6,550)

,actory overhead accounts for .5= of the cost of the goods sold and is one third fi-ed. These data are #elieved to reflect conditions in the immediate future.

Should the line #e dropped9

Problem no: #: Scarce Reso!rces$Constraint %actor Te-teriles 2ompany creates different types of #olts of cloth. These #olts of cloth are made on the same machinery. The te-tile machines have the capacity of .,400 hours per month. Te-teriles is considering producing three different types of cloth! denim, chenille, and gau>e ith contri#ution margins per #olt of &1', &((, and &: respectively. Te-teriles /no s they can sell only a total of 4,000 #olts of denim, (,000 #olts of chenille, and?or 1,(00 #olts of gau>e. A #olt of each type of cloth re8uires a different amount of machine time as follo s! denim ta/es 0.5 machine hours, chenille ta/es 1 machine0 hour, and gau>e ta/es 0.. machine0hours. @hat com#ination of products ill ma-imi>e the profits of Te-teriles9

Problem no: &: Make or '!( Decision Aarometer, Bnc., ma/es part no. 544 on one of its production lines. Cach month Aacrometer ma/es 40,000 of part no. 544 at a varia#le cost of &(.50 per part. The fi-ed costs for the production line are &150,000 or &..00 per part. Aacrometer has #een provided a #id for part no. 544 from another manufacturer ho ill ma/e the part for &(.45 per part. Aacrometer /no s the production line could #e rented to another manufacturer for &5,000 per month. Should Aacrometer continue to ma/e part no. 544 or should they #uy the part and rent the production line9

Problem no: ): *oint Prod!cts Tread ell 1harmaceuticals produces t o medications in a Doint process! Amo-iphore and Aenidrate. @ith each production run, Tread ell incurs &',000 in common costs up to the split0off point. Amo-iphore can #e sold for &(,600 at the split0off point or #e processed further at a cost of &1,400 at hich time it can #e sold for &',(00. +o ever, if Amo-iphore is sold at the split0off point, its side effects include nausea and headaches. Bf it is processed further, these side effects are diminished. $emand for Amo-iphore far e-ceeds Tread ells production capacity.Aenidrate can #e sold for &(,'00 at the split0off point or #e processed further at a cost of &.,600 at hich time it can #e sold for &4,000. a. $etermine hich product is more profita#le to process #eyond the split0off point9 #. @hat nonfinancial issues should the company consider regarding its processing decisions9