Quesion 2
Quesion 2
Quesion 2
Sal Crew
Promo
Depr
Fuel
Insur.
Sal Asst
Baggage
Night
Total
Op Loss
Part 1 Recommend to close or keep plant open?
1. Company should not close the plant; continue to operate at reduced level of 11,000 litres produced and sold each month.
2. Closing will result in $140,000 greater loss over 2-month period than if company continues to operate
3. Potential loss of goodwill among customers who need the 11,000 litres of MJ-7 each month
4. Adverse effect on employee morale.
5. Customer needs will not be met (no inventories are on hand); may permanently lose their business to competitor
a. Will volume in future years be increasing, or will it remain constant at 40,000 units per year? (If
volume increases, then renting new equipment becomes more desirable (based on numbers above.)
b. Can quality control be maintained if the carburetors are purchased from the outside supplier?
c. Does the company have some other profitable use for the space now being used to produce the
carburetors? Does production of the carburetors require use of a constrained resource?
e. Can the company begin making the carburetors again if the supplier proves to be undependable, or
are there alternative suppliers?
f. If the outside supplier’s offer is accepted and the need for carburetors increases in future years, will
the supplier have the capacity to provide more than 40,000 carburetors per year?
$8.00 DL
$1.20 Var OH
$7.30 Fix OH
$1.50 Supervision
$1.80 Depr
$4.00 Gen OH
$22.00 Total Cost/Unit
25% New eq reduce DL Var OH
$60,000 Supervision Cost/yr
60,000 New capacity
50,000 Part 2a Volume
Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing
overhead and the cost of the special tool are relevant overhead costs in this situation. The other
manufacturing overhead costs are fixed and are not affected by the decision.
Part 1
Ski Golf Fishing Ski
Selling price/unit Sell 200
Variable cost/unit Var 60
CM per unit Time 2
Time (min) Kgs 7
CM/unit
Part 2
Ski Golf Fishing
Selling price/unit
Variable cost/unit
CM per unit
KG
CM/kg
Part 3
Golf Fishing
300 255
140 55
5 4
4 8
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