Scribd
Upload
30 views

Module 6 - Home Work Solution

The document discusses two questions regarding business decisions. Question 1 asks whether a company should outsource the production of light switches based on financial and qualitative factors. Question 2 asks about calculating contribution margins, determining the minimum price, and deciding whether to accept a special order for beaters.

Uploaded by

ntkt0408
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
30 views

Module 6 - Home Work Solution

The document discusses two questions regarding business decisions. Question 1 asks whether a company should outsource the production of light switches based on financial and qualitative factors. Question 2 asks about calculating contribution margins, determining the minimum price, and deciding whether to accept a special order for beaters.

Uploaded by

ntkt0408
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Module 6 – Homework Questions and Answers

Q1 Outsource computations, qualitative factors

Diamond Light Company incurred the following costs to produce 50 000 light switches for floor
lamps in 2016.

Direct materials $ 100 000

Direct labour 150 000

Variable manufacturing overhead 80 000

Fixed manufacturing overhead 120 000

Total manufacturing costs $450 000

The Ignition Company has offered to supply the switches for $16 per unit. An analysis of the
overhead costs has identified that if the switches are outsourced, Diamond Light Company
would eliminate $20 000 of fixed costs, and could use the released production capacity to
generate additional income of $56 000 from producing a different product.

Required:
a. From a financial perspective, should the light switches be outsourced? Show calculations.
b. What qualitative factors need to be considered in the outsourcing decision?

a.
Financial analysis of decision to outsource light switches.

Relevant Costs Make Buy


Direct materials $100 000
Direct labour $150 000
Variable manufacturing $80 000
overhead
Purchase Price $800 000
Fixed Costs ($20 000)
Additional income if outsourced ($56 000)
Costs $330 000 $724 000
Additional costs if switches purchased from Ignition Company $394 000
b.
Qualitative issues:
 Reliability of supply
 Quality of switch
 Potential for price increases in the future

Q2 Special Order

Cisco Pty Ltd manufactures handheld beaters. For the first eight months of 2015, the company
reported the following operating results while operating at 80 per cent capacity.

Sales (400 000 units) $4 000 000


Cost of sales 2 400 000
Gross profit 1 600 000
Operating expenses 900 000
Profit $ 700 000

Cost of sales was 65 per cent variable and 35 per cent fixed. Operating expenses were 60 per
cent variable and 40 per cent fixed. In October, Cisco Pty Ltd receives a special order for 20
000 beaters at $6 each from Angel Cakes located in New Zealand. Acceptance of the order
would result in $5000 of shipping costs but no increase in fixed operating costs.

Required:

a. Calculate the contribution margin per beater for normal sales.


b. Calculate the contribution margin per beater for the special order.
c. What is the minimum selling price for the special order?
d. Should Cisco Pty Ltd accept the special order? Explain your answer and show any
calculations.

a.
Before we can determine the contribution margin per beater it is necessary to break the costs
into fixed and variable costs:

Cost of sales = $2 400 000

65% variable = $1 560 000

35% fixed = $840 000

Operating Expenses = $900 000

60% variable = $540 000

40% fixed = $360 000

 Total variable = $1 560 000 + $540 000 = $2 100 000


 Total fixed = $840 000 + $360 000 = $1 200 000
Contribution margin per beater =

Sales Price ($4 000 000 / 400 000 units) =$10.00


Variable Costs ($2 100 000 / 400 000 units) =$5.25
Contribution margin =$4.75

b.
Contribution margin for the special order

Sales Price =$6.00


Variable cost =$5.25**
Contribution margin =$0.75

**additional shipping costs of $5000 treated as an incremental fixed cost

c.

The minimum selling price for the special order should cover all incremental costs which are
equal to:

(i) Variable costs (20 000 beaters x $5.25) $105 000

(ii) Fixed Costs $5 000

$110 000 / 20 000 beaters = $5.50 per beater

d.
Refer (c) above – the minimum selling price (or breakeven price) is $5.50 – Angel Cakes have
requested to purchase the beaters at $6 per beater. Therefore, if the order is accepted there
will be an increase in profits for Cisco of $10 000 (20000 beaters x $0.50).

Whether the order should be accepted depends upon


(i) If Cisco wants to improve its cash flow then the order should be accepted.

(ii) If Cisco wants to have Angel Cakes as a regular customer, then for strategic reasons the
answer would be yes. However, Cisco may need to assess its selling price of $6 if Angel Cakes
became a regular customer as this price may not allow it to provide an appropriate level of
contribution to fixed costs.

You might also like