Mohave Corp. is considering outsourcing production of the
umbrella tote bag included with some of its products. The company
has received a bid from a supplier in Vietnam to produce 8,000
units per year for $7.50 each. Mohave has the following information
about the cost of producing tote bags:
Direct materials | $ | 3 | |
Direct labor | 2 | ||
Variable manufacturing overhead | 1 | ||
Fixed manufacturing overhead | 2 | ||
Total cost per unit | $ | 8 | |
Mohave has determined that all variable costs could be eliminated
by outsourcing the tote bags, while 60 percent of the fixed
overhead cost is unavoidable. At this time, Mohave has no specific
use in mind for the space currently dedicated to producing the tote
bags.
Required:
1. Compute the difference in cost between making
and buying the umbrella tote bag.
2. Based strictly on the incremental analysis,
should Mohave buy the tote bags or continue to make them?
3-a. Suppose that the space Mohave currently uses
to make the bags could be utilized by a new product line that would
generate $10,000 in annual profits. Recompute the difference in
cost between making and buying the umbrella tote bag.
3-b. Does this change your recommendation to
Mohave?
Camino Company manufactures designer to-go coffee cups. Each
line of coffee cups is endorsed by a high-profile celebrity and
designed with special elements selected by the celebrity. During
the most recent year, Camino Company had the following operating
results while operating at 85 percent (85,000 units) of its
capacity:
Sales revenue | $ | 1,360,000 | |
Cost of goods sold | 637,500 | ||
Gross profit | $ | 722,500 | |
Operating expenses | 53,125 | ||
Net operating income | $ | 669,375 | |
Camino’s cost of goods sold and operating expenses are 80 percent
variable and 20 percent fixed. Camino has received an offer from a
professional wrestling association to design a coffee cup endorsed
by its biggest star and produce 13,000 cups for $10 each (total
$130,000). These cups would be sold at wrestling matches throughout
the United States. Acceptance of the order would require a $26,000
endorsement fee to the wrestling star, but no other increases in
fixed operating expenses.
Required:
1. Complete the incremental analysis of the
special order in the table provided below.
2. Should Camino accept this special order?
3. If Camino were operating at full capacity, what
price would Camino require for the special order?
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