1. Amber Grease Manufacturing produces a single product. The cost of producing a
ID: 2593298 • Letter: 1
Question
1. Amber Grease Manufacturing produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: Direct materials $38.80 Direct labor (variable cost) $9.70 Variable manufacturing overhead $2.30 Fixed manufacturing overhead $18.10 Variable selling & administrative expense $1.70 Fixed selling & administrative expense $8.80 Normal selling price per unit $85.10 An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.20 less per unit on this order than on normal sales. Required: (a) Suppose the company has ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $75.30 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? (3 points) (b) Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the minimum acceptable price per unit for the special order? (3 points) (c) Suppose the company does not have enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order? (3 points) (d) What are some of the issues other than capacity that Amber Grease should consider in determining the price per unit for the special order? Discuss at least 2 issues in detail. (3 points) 2. Jena Fando owns a fitness center and is thinking of replacing the old treadmill machine with a brand new elliptical 5000. The old treadmill has a historical cost of $30,000 and accumulated depreciation of $27,000, and has a trade-in value of $4,200. It currently costs $600 per month in utilities and another $5,000 a year in maintenance to run the treadmill. Jena feels that the treadmill can be used for another 15 years, after which it would have no salvage value. The elliptical 5000 would reduce the utilities costs by 30% and cut the maintenance cost in half. The elliptical 5000 costs $49,000, has a 15-year life, and an expected disposal value of $4,000 at the end of its useful life. Jena charges customers $5 per hour to use the fitness center. Replacing the fitness machine will not affect the price of service or the number of customers she can serve. Required: (a) Jena wants to evaluate the elliptical 5000 project using capital budgeting techniques, but does not know how to begin. To help her, read through the problem and separate the cash flows into four groups: (1) net initial investment cash flows, (2) cash flow savings from operations, (3) cash flows from terminal disposal of investment, and (4) cash flows not relevant to the capital budgeting problem. (8 points) (b) Assuming a required rate of return of 7%, and straight-line depreciation over remaining useful life of machines, should Jena buy the Elliptical 5000? (5 points)
Explanation / Answer
Answer to Part D
Issues to be considered can be regularity of such one time special orders and the sudden change in cost structure along with availability of experts to carry out that order.
1 Net initial investment cashflows Cost of elliptocal 500 $ 49,000.00 LESS : Sale of treadmill $ -4,200.00 Net initial investment cashflows $ 44,800.00 2 Cashflow savings from operations Saving of utilities cost $ 2,160.00 Maintainance cost $ 2,500.00 Total Savings $ 4,660.00 PV Factor 15 years @ 7% 9.11 Cashflow savings from operations $ 42,452.60 3 Cashflows from terminal disposal Disposal value $ 4,000.00 PV Factor at 15th year 0.36 $ 1,440.00Related Questions
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