The Consumer Products division of Elite Appliances has been struggling lately. M

Question

The Consumer Products division of Elite Appliances has been struggling lately. Management has noticed a steady level of losses being reported, and is concerned about how to turn the division around. The division manager reports that the production of Toasters is causing the issue. As part of an in-depth analysis, management wants you to evaluate the following possible solution Although a last resort, management is open to the possibility of stopping production of toasters You are asked to consider all the information provided below as a whole. If the smart financial decision were made with regards to all options considered (Purchase vs Produce, Sell vs Process further, Accept or Decline a special order), what would be your recommendations for each option considered? (Note that some options may affect the information available in other options) Purchase or Produce Costs to produce the coils Cost to purchase the coils $1/coil $2/coil $7/coil $2/coil $4/coil (Ordering costs included) Direct materials Direct labor Variable overhead Fixed overhead Sell or Process Further Costs for unfinished toasters Additional marginal costs for finished toasters Direct materials Direct labor Variable overhead Fixed overhead Selling price $25/unit $15/unit $10/unit $8/unit $45/unit Direct materials Direct labor Variable overhead Fixed overhead Selling price $10/unit S30/unit $15/unit $5/unit $115/unit Accept or Decline Special Order Current production Potential special order Current production capacity Current production/Sales levels 20,000 units/month 15,000 units/month Special order Special price 3,000 units $100/unit Elite allocates $200,000 of total fixed overhead to the production of toasters per month Would you recommend that management discontinue producing toasters or not? What is the overall Gross Profit or Loss that justifies your decision?

Explanation / Answer

a) As the variable cost of producing the coils = $10 per coil , and the acquisition cost of the coils are = $4 per coil, so it is better to purchase. b) As the variable cost of unfinished toasters is $50 and selling price is $45, so not advisable to sell. After further processing and finishing toasters, the variable cost = $50 + $55 = $105, Selling price =$115 per unit So, it is advisable to sell the toaster after finishing the same. c) The company can accept Special Order as having spare capacity of 5000 units per month. but not advisable to accept the order as the special price is $100 per unit and finished toaster variable cost is $105. d) Overall, the contribution towards fixed cost is $10 where as the fixed cost is $5+8 = $13. A loss of $3 per toaster. So, it is not advisable to continue production of toaster in long run.

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