1. Polar Tech, Inc. makes battery heated insulated gloves that sell for $35 a pair. It costs Polar Tech $14 in variable costs and $6 in fixed to produce each pair of their Polar Bear Paw gloves. Unfortunately, the last couple of years have seen milder than normal temperatures across the country, so demand has dropped for its Polar Bear Paw glove and the company has been operating at less than its full capacity.
A foreign buyer from Greenland offers to purchase 3,000 units at $22 each. The buyer also wants to have a small paw print embroidered onto the back of the glove. Polar Tech will have to purchase a small embroidery attachment for their sewing machine at a cost of $550.00. This attachment will have no further use to Polar Tech after the special order has been completed. In addition, the embroidery thread will add $1.50 to the cost of producing each pair of gloves. Polar Tech, Inc. will incur special shipping costs of $5 per pair.
a. If the special offer is accepted and produced with the unused capacity, and none of the fixed costs are affected, then by how much will net income increase or decrease?
b. In addition to the special order's effect on profits, what are some of the other longer-term quantitative and qualitative factors that the company's managers should consider before deciding whether to accept the offer? must list at least three factors
2. Apple, Inc. is considering outsourcing the production of its earbuds which are included in sales of iPads to Skullcandy, a company that specializes in making earbuds. The accounting department reports the following per unit costs for producing 500,000 earbuds each quarter:
Direct materials $4.00
Direct labor 0.50
Variable overhead 1.50
Supervisor's salary 0.50
Depreciation of special equipment 1.20
Allocated general overhead 0.30
Costs per unit $8.00
If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only 1/3 of these allocated general overhead costs would be avoided. In addition, the space used to produce the earbuds could be used to make more of one of the company's other products, generating an additional segment margin of $260,000 per year for that product.
Skullcandy is willing to provide the earbuds to Apple for $7.00 each.
a. Should Apple make the earbuds or buy them from Skullcandy?
b. In addition to the financial analysis, what else should Apple, Inc. consider when making this decision? Are there any potential drawbacks to accepting the offer? - must list at least three factors
3. ClimateMaster produces three different geothermal heat pumps. All the pumps use a furnace operation, which has a maximum number of 10,000 hours available for production of all three heat pumps. The following information is available:
Product 101 Product 102 Product 103
Unit demand monthly 1,000 1,500 1,000
Per unit information:
Sales $35.00 $33.00 $29.00
Variable Costs 15.00 15.00 15.00
Furnace hours 4 3 2
a. From a profitability perspective, what order of production and amount would maximize profit?
4. A segment of Music Hazard Inc. has the following data.
Sales $200,000
Variable expense $140,000
Fixed expenses $100,000
If this segment is eliminated, what will be the effect on the remaining company? Assume that 50% of the fixed expenses will be eliminated and the rest will be allocated to the segments of the remaining company.
a. By how much will income increase or decrease?
b. What are some considerations the companies managers may want to take into account when making the decision to discontinue a product line, department, or other segment? must list a minimum of three factors.
5. Tech Enterprises produces 1,000 units of an optical switch that it uses in its final product. The manufacturing costs associated with the optical switch are listed below:
DM $24,000
DL 16,000
Variable Overhead 4,000
Fixed Overhead 7,000
None of Tech Enterprises' fixed overhead costs can be reduced, but another product could be made that would increase contribution margin by $8,000 if the optical switches were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the optical switch, what is the maximum external price that Tech Enterprises would be willing to accept to acquire the 1,000 optical switches externally?