American Coat Company estimates that 60,000 special zippers will be used in the manufacture of men's jackets during the next year. Reese Zipper Company has quoted a price of $.60 per zipper. American would prefer to purchase 5,000 units per month, but Reese is unable to guarantee this delivery schedule. To ensure availability of these zippers, American is considering the purchase of all 60,000 units at the beginning of the year. Assuming American can invest cash at 8%1 the company's opportunity cost of purchasing the 60,000 units at the beginning of the year is
Answer(s): A
The cost of 60,000 zippers is $36,000 (60,000 x $.60). The monthly cost is $3,000 (5,000 x $60). The company would like to purchase the items monthly, so it will invest at least $3,000 in January. Accordingly, the zippers to be used in January will be purchased at the first of the year even if no special purchase is made. Thus, the incremental advance purchase is only $33,000. Because the alternative arrangement involves a constant monthly expenditure of $3,000, the incremental investment declines by that amount each month. The result is that the average incremental investment for the year is $16,500 ($33,000 ÷ 2), and the opportunity cost of purchasing 60,000 units at the beginning of the year is $1,320 ($16,500 x 8%).
A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600,000 boxes annually, but forecasts that it will produce and sell only 500,000 boxes in the coming year. The costs to manufacture and distribute the candy are detailed below. The organization has invested capital of $6,750,000.The confectioner has been asked by a retailer to submit a bid for a special order of 40,000 one-pound boxes of candy; this is a one-time order that will not be repeated. While the candy would be almost identical, the candy ingredients would be $0.45 less. The total distribution costs for the entire order would be $32,000. Special setup costs required by this order would amount to $60,000. There would be no other changes in costs, rates, or amounts. The minimum selling price per one-pound box that the confectioner would bid on this special order would be
The minimum selling price equals the incremental costs of the special order (variable manufacturing costs, variable packaging costs, distribution costs, and setup costs) divided by the units ordered. The fixed costs do not change because the manufacturer has excess capacity. Total variable manufacturing costs are $190,000 [40,000 x ($4.85 - $.45+ $.35)], distribution costs are $32,000, and setup costs are $60,000. Thus, the minimum unit price is $7.05 [$190,000 + $32,000 + $60,000) / $40,000].
A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600000 boxes annually, but forecasts that it will produce and sell only 500,000 boxes in the coming year. The costs to manufacture and distribute the candy are detailed below. The organization has invested capital of $6,750,000.The selling price per pound that the confectioner should charge for a one-pound box of candy to obtain a 20% rate of return on invested capital is
Answer(s): D
The company expects to incur variable costs of $3,500,000 (500000 lbs. x $7) and fixed costs of $1,080,000 ($810,000 + $270,000). To earn a 20% return on invested capital ($6,750,000 x 20% = $1,350,000), the company must charge a price of $11.86 [($3,500,000 + $1 ,080,000 + $1 ,350 000) ÷ 500,000].
Randall Corporation is a table manufacturing company that has the following cost structure for producing table tops.Recently, Randall Corporation received an offer from Blurr Corporation to supply the table tops to Randall). Randall is considering buying the table tops from Blurr instead of manufacturing them internally. Which one of the following statements is correct?
Answer(s): C
The total unit cost includes $20 of fixed costs ($17 + $3) that is not avoidable if the units are purchased. Moreover, the company has excess capacity. The opportunity cost of making the table tops is zero because no production will be displaced. Consequently, the relevant unit cost of making the table tops is the $47 unit variable cost, and the supplier's price must be less to justify the buy decision.
Stewart Industries has been producing two bearings, components B12 and B18, for use in production.Stewart's annual requirement for these components is 8,000 units of B12 and 11000 units of B18. Recently, Stewart's management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 411000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits). Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours. Note 2: Fixed manufacturing overhead is applied on the basis of machine hours. The net benefit (loss) per machine hour that would result if Stewart accept the supplier's offer of $13.50 per unit for Component B18 is
Answer(s): B
The variable costs of producing B18 total $ 10.50 ($3.75 + $4.50 + $2.25). Thus, purchasing at $ 13.50 would result in a loss of $3 per bearing. Given that each bearing requires 3 hours of machine time, the loss is $1 per machine hour.
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