Problem:
The exhibit on shows income data for the BNO Company for the year just ended, fiscal year 2009. The company makes industrial power drills at its Alabama plant. The exhibit contains separate columns for the costs of electrical and mechanical components (part A) and the costs of the plastic housing (part B). The direct fixed costs of the two parts are those that were traced to the separate facilities within the plant that manufacture the parts. Indirect (common) fixed costs, such as building depreciation, were allocated to the two parts on the basis of their direct labor costs. BNO's managers have budgeted identical results in the company's 2010 master budget.
How many units in excess of the breakeven point do BNO's managers expect to sell in 2010?
A prospective customer in an unrelated market has just approached BNO's senior salesperson, offering $82,000 for 1,000 drills. These drills could be made and sold in addition to the 100,000 expected to be sold in BNO's current market. The regular sales commission will be paid if the order is accepted. BNO's president is reluctant to accept the order because "the price is below our cost of $96 per unit." What will be BNO's 2010 operating income if the order is accepted? Discuss one important factor other than income that the president should consider in making her decision. Should the order be accepted?
A supplier has offered to manufacture the year's supply of 100,000 plastic housings for $13.50 each. What would be the effect on operating income if BNO Company buys, rather than makes, the housings? Assume that $310,000 of the direct fixed costs assigned to housings will be avoided if the housings are bought. Should the company make or buy the housings?
Suppose that if the company buys the plastic housings for $13.50 each it can use the vacated space to manufacture a deluxe version of its drill. Assume that 20,000 deluxe units could be made and sold in addition to the 100,000 regular units. The unit variable cost of the deluxe drills would be $90, exclusive of housings and of the 10% sales commission. The 20,000 housings needed for the deluxe drills also could be purchased for $13.50. Deluxe drills would sell for $132. All the direct fixed costs pertaining to the plastic housings would continue, because these costs relate primarily to the manufacturing facilities that have been used to make the housings but would be used to make the electrical and mechanical components for the deluxe drills.
a. What will be BNO's operating income if the company buys the plastic housings and manufactures and sells 20,000 deluxe drills and 100,000 regular drills?
b. What should BNO Company do? Briefly, why?
Exhibit
BNO Company
Results of Operations, 2009
A B A + B
Electrical and Plastic Industrial
Mechanical Components* Housing Drills
Sales: 100,000 units @ $100 $10,000,000
Variable expenses:
Direct materials $4,400,000 $ 500,000 4,900,000
Direct labor 400,000 300,000 700,000
Variable factory overhead 100,000 200,000 300,000
Sales commissions @ 10% of sales 1,000,000
Total variable expenses 6,900,000
Contribution margin 3,100,000
Direct fixed expenses 900,000 400,000 1,300,000
Indirect fixed expenses 800,000 600,000 1,400,000
Total fixed expenses 2,700,000
Operating income $ 400,000