Situation 1: Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president of a brewing company. He was calling to inquire about the possibility of Current Designs producing "floating coolers" for a promotion his company was planning. These coolers resemble a kayak but are about one-third the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip. The company would be interest in purchasing 100 coolers for the upcoming summer. It is willing to pay $250 per cooler. The brewing company would pick up the coolers upon completion of the order. Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce the coolers. After careful analysis, the following costs were identified.
Direct materials $80/unit Variable overhead $20/unit
Direct labor $60/unit Fixed overhead $1,000
Current Designs would be able to modify an existing mold to produce the coolers. The cost of these modifications would be approximately $2,000.
Instructions
(a) Create a Incremental analysis to determine whether Current Designs should accept this special order to produce the coolers.
(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at full capacity.
Situation 2: Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current rotomold oven as a way to realize savings from reduced energy consumption. The oven operates on natural gas, using 17,000 therms of natural gas for an entire year. A new, energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $10,000
Instructions
(a) Create a incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.
(b) Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in (a).
Situation 3: One of Current Designs' competitive advantages is found in the ingenuity of its owners and CEO, Mike Cichanowski. His involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the most important component of a kayak, the seat. The "Revolution Seating System" is one-of-a-kind, rotating axis seat that gives unmatched, full contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a customizable seat position that maximizes comfort for the rider.
Having just designed the "Revolution Seating System", Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows.
Direct materials $20/unit Direct labor $15/unit
Variable overhead $12/unit Fixed overhead $20,000
Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will cost $50 to purchase a seat from an outside vendor.
Instructions
(a) Create a incremental analysis showing whether Current Designs should make or buy the "Revolution Seating System."
(b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $20,000?
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?".
After you have completed CD7, consider the following additional questions.
1. Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or reject the special order.
2. Assume in situation 2, the purchase price of the new oven changed to $100,000. Would this change the decision to retain or replace the oven?
3. Assume in situation 3, that the estimated number of seats to be produced changed to 3,500 and the cost to purchase one seat from an outside supplier changed to $55. Should Current Designs make or buy the seats?