11-32 Opportunity costs. The Wild Boar Corporation is working at full production capacity producing 13,000 units of a unique product, Rosebo. Manufacturing cost per unit for Rosebo is as follows:
Direct manufacturing labor
Total manufacturing cost
Manufacturing overhead cost per unit is based on variable cost per unit of $4 and fixed costs of $39,000 (at full capacity of 13,000 units). Marketing cost per unit, all variable, is $2, and the selling price is $26.
A customer, the Miami Company, has asked Wild Boar to produce 3,500 units of Orangebo, a modification of Rosebo. Orangebo would require the same manufacturing processes as Rosebo. Miami has offered to pay Wild Boar $20 for a unit of Orangebo and share half of the marketing cost per unit.
1. What is the opportunity cost to Wild Boar of producing the 3,500 units of Orangebo? (Assume that no overtime is worked.)
2. The Buckeye Corporation has offered to produce 3,500 units of Rosebo for Wolverine so that Wild Boar may accept the Miami offer. That is, if Wild Boar accepts the Buckeye offer, Wild Boar would manufacture 9,500 units of Rosebo and 3,500 units of Orangebo and purchase 3,500 units of Rosebo from Buckeye. Buckeye would charge Wild Boar $18 per unit to manufacture Rosebo. On the basis of financial considerations alone, should Wild Boar accept the Buckeye offer? Show your calculations.
3. Suppose Wild Boar had been working at less than full capacity, producing 9,500 units of Rosebo at the time the Miami offer was made. Calculate the minimum price Wild Boar should accept for Orangebo under these conditions. (Ignore the previous $20 selling price.)
This question was asked on Sep 21, 2012 and answered on Sep 22, 2012.
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