Questions -
Q1. FP Company manufactures fine paint sprayers for commercial painting. FP has the capacity to produce 650 units per month and is currently operating at 92% of capacity. FP's Super Duty Sprayer (SDS) sells for $325 per unit. Total costs to produce a SDS unit are $275 per unit. Monthly fixed costs equal $44,850 per month.
FP Company has received an offer from Spring Inc. to buy 50 Super Duty Sprayers. The special offer is for $250 per unit.
Answer each of the following and show supporting calculations for your answers.
a. What are the relevant costs per unit to analyze this special offer?
b. For the short-run, should FP accept or reject Spring's offer?
c. For the long-run, should FP accept or reject Spring's offer?
Q2. BestCo manufactures radio components. Current production is 10,000 components per year. BestCo is considering incurring additional final inspection costs of $1 per unit before delivery to customers. The additional inspection should reduce the defective rate from 3.0% to 1.0%. If a defective unit is found, it is scrapped at no additional cost and materials cannot be reused. The manufacturing costs before the final inspection are $200 per unit.
Currently external failure costs are $40 per defective unit.
a. Prepare a cost/benefit analysis to justify if management should incur the additional final inspection costs? Show calculations to support your answer.
b. If BestCo were to measure the improvements in the number of defective units, what perspective on the Balanced Scorecard would report this measure?