8. (6 points) Pfizer Company produced and sold 50,000 units of product and is op

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8. (6 points) Pfizer Company produced and sold 50,000 units of product and is operating at 75% of plant capacity. Unit information about its product is as follows: Sales Price $70 Variable manufacturing cost $45 Fixed manufacturing cost ($500,000 ÷ 50,000) 10 55 Profit per unit $15 The company received a proposal from a foreign company to buy 15,000 units of Pfizer Company's product for $50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of Pfizer Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. Instructions a) Prepare a schedule reflecting an incremental analysis of this special order. b) Should Pfizer accept/reject this order and why?

9. (8 points) General Electric Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs: Direct materials $35,000 Direct labor 15,000 Variable manufacturing overhead 10,000 Fixed manufacturing overhead 20,000 $80,000 Another company has offered to sell the same component part to the company for $12 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, General Electric Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $14,000. Instructions Prepare an incremental analysis report for this make or buy decision. Should General Electric make or buy this component part and why?

Explanation / Answer

All Amounts in $ 8. Pfizer Limited a) Incremental Analysis of Special Order Sale from Special Order 750000 Less : Variable Costs 675000 Less : Fixed Costs 150000 825000 Net Loss due to special order -75000 b) Since the acceptance of the special order results in a loss of $ 75,000 for Pfizer Limited, hence the same should not be accepted. 9. General Electric Company a) Incremental Analysis of Make or Buy Decision In case of make Total Variable Costs 60000 (Direct Material + Direct Labor + Variable Overheads) Cost per unit produced 10 If purchased from outside Cost per unit purchased 12.00 Less : Contribution Margin from use of factory equipment per unit      2.33 Net Cost per unit      9.67 Since the net cost per unit on purchase is lower than the in-house manufacturing variable cost per unit (Fixed Costs are constant in both cases), hence General Electric Company should consider buying the product from outside rather than manufacturing the same within its factory premises.

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