UCF-ACG2071 Ch. 8 Special Decisions

UCF-ACG2071 Ch. 8 Special Decisions - Example#1SpecialOffer...

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IN CLASS EXAMPLES – CHAPTER 8 SPECIAL DECISIONS - SOLUTIONS Example#1 – Special Offer Special orders are one time sales usually for a special price.  These sales are in addition to current production.  The relevant  costs pertaining to the decision to accept or reject are the variable costs.  Fixed costs will not change in the short run. Example: The Lambert Corporation sells its main product, scooters at a price of $52 per unit.  The cost per unit for the scooters is as  follows: Assume the company has excess capacity.  Excess capacity means that the company can increase production by only adding  variable costs.  Fixed costs do not increase until the company uses up all excess capacity. Direct materials 13 Direct labor 15 Factory overhead (2/3 fixed) 12  Total cost 40 The company has received an order for 20,000 units for $36 each.  The buyer will require special handling and shipping  which will amount to $2 per unit. Should the company accept the offer? Solution: The variable costs to produce are: Direct materials   13 Direct labor   15 Variable factory overhead     4 Handling     2 Total cost   34 Sale price $36 Variable cost to produce    34 Profit per unit     2 === Number of units sold    20,000 profit per unit x      $ 2 Net benefit to the company $40,000 ====== Conclusion:  accept the offer Page 1 of 11
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Example#2 – Special Offer The Dubin Company sells its main product, chairs at a price of $38 per unit.  The cost per unit for the chairs is as follows: Direct materials   8 Direct labor 10 Variable factory overhead   4 Fixed factory overhead    7  Total cost 29 Assume the company has excess capacity. The company has received an order for 9,000 units for $21 each.  A special paint will be used which will cost  $1.25 per unit. Should the company accept the offer? Solution: The costs to produce are: Direct materials $  8.00 Direct labor   10.00 Variable factory overhead     4.00 Special. paint     1.25 Total cost  23.25 Sale price $21.00 Cost to produce (variable)   23.25 profit (loss) per unit ($2.25) Number of units sold     9,000 loss per unit x $ 2.25 net loss for  the company   20,250 ====== Conclusion:  reject the offer Page 2 of 11
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Example #3 – Make Versus Buy Often a company must decide whether to make an item or purchase it from an outside source.  The relevant costs with  respect to this decision are variable costs to produce and fixed costs that will differ among alternatives.
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