Problem #1:
While vacationing in Thailand, Steve and Linda fell in love with Thai food. Their hometown does not have a Thai restaurant, so Steve and Linda planned to open one. Linda is a chef and Steve would quit his job to run the "business" side of the restaurant.
Steve found an empty restaurant for lease with seven tables that would seat four each. The restaurant would serve dinner only (no lunch) Tuesday - Saturday, and Linda is planning on having two seatings per evening. They will close two weeks a year for vacation.
The Thai loving couple have come up with the following estimates:
Average Revenue, including beverages and dessert $ 45 per meal
Average cost of food $ 15 per meal
Chef's (Linda) and dishwasher's salaries $ 61,200 per year
Rent for building and equipment $ 4,000 per month
Cleaning costs $ 800 per month
Replacement of dishes, glasses, etc. $ 300 per month
Utilities, advertising, telephone $ 2,300 per month
Requirements:
- Compute the annual breakeven number of meals and Sales Revenue for the restaurant:
- Compute the number of meals needed to earn operating income of $75,600 to replace Steve's salary from his
- How many meals must Steve and Linda serve each night to earn the target income of $75,600?
- Should Steve and Linda open the restaurant? Explain why or why not.
Problem #2:
Sharp Image Company makes a part used in the manufacture of video cameras. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $21.30 per part. Sharp Image needs 100,000 parts per year. The cost of manufacturing 100,000 parts is computed as follows:
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Direct materials
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$ 765,000
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Direct labor
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612,000
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Variable manufacturing overhead
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510,000
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Fixed manufacturing overhead
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663,000
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Total manufacturing costs
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$2,550,000
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If Sharp Image buys the part, it would pay $.30 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 35% of fixed manufacturing overhead costs. Sharp Image's factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $75,000.
Prepare an analysis to show which alternative makes the best use of Sharp Image's factory space:
1) make the part
2) buy the part and leave facilities idle
3) buy the part and use facilities to make another product
Answer:
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Make the Part
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Buy part and leave facilities idle
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Buy part and use facilities to make another product
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Direct materials
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Direct labor
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Variable manufacturing overhead
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Variable transportation
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Fixed manufacturing overhead
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Purchase price
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Profit contribution from another product
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Total cost
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