Problem 9-15 Determining Whether to Accept a Special Order and Whether to Make o
ID: 2547793 • Letter: P
Question
Problem 9-15 Determining Whether to Accept a Special Order and Whether to Make or Buy (LO1 - CC4, 5) The Engine Guys produces specialized engines for "snow climber buses. The company's normal monthly production volume is 8,000 engines, whereas its monthly production capacity is 16,000 engines. The current selling price per engine is $1,200. The cost per unit of manufacturing and marketing the engines at the normal volume is as follows: Costs per Unit for Engines Manufacturing costs 104 Direct materials Direct labour Variable overhead Fixed overhead 192 192 520 32 Subtotal Marketing costs Variable Fixed S 60 132 Subtotal 192 Total unit cost 712 Required Answer the following independent questions 1-a. The Provincial Bus Company wishes to purchase 720 engines in October. The bus company is willing to pay a fixed fee of $960,000 and reimburse The Engine Guys for all manufacturing costs incurred to manufacture 720 motors. October is a busy month for The Engine Guys, and there are sufficient orders to operate at 100% capacity utilization. There will be no variable marketing costs on this government contract. Compute the incremental benefit of the contract ntal benefit of the contractExplanation / Answer
1-a) Since the company operates at 100% capacity in the month of October, the Company will have to sacrifice normal sales to fulfil the special order. Therefore the opportunity cost of lost sales margin should be included in the decision to accept or reject the order:
Variable cost for manufacturing and marketing of normal orders = 104+192+32+60 = 388
Contribution margin on normal sales = 1200-388 = 812
Opportunity cost due to lost sales = 812*750 = 609,000
Variable cost of manufacturing and marketing special order = 104+192+32+0 = 328
Incremental benefit of the special order = 960000-(328*750)-609000 = 105,000
1-b) Yes, Since the company earns a positive contribution from the sepecial order.
2-a)
2-b) No. Since the cost of manufacturing 8000 units is lower than purchasing 4000 units and manufaturing rest 4000 units.
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Buy 4000 units and make 4000 units Make 4000 units Formula Amount Formula Amount Purchase Cost =4000*576 2,304,000 0 0 Variable Manufacturing =4000*(104+192+32) 1,312,000 =8000*(104+192+32) 2,624,000 Fixed Manufacturing =(8000*192)*(1-0.2) 1,228,800 =(8000*192) 1,536,000 Variable Marketing =(60*4000)+(60*(1-0.4)*4000) 384,000 =(60*8000) 480,000 Fixed Marketing =132*8000 1,056,000 =132*8000 1,056,000 Cost of option 6,284,800 5,696,000 Difference in favour of make option 588,800