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Chapter 25: 25PGA (page 1418)

Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:

Direct materials \(17,590

Direct labor 3,200

Variable overhead 2,080

Fixed overhead 6,300

Total manufacturing costs for 1,900 bindings \)29,170

Suppose Livingston will sell bindings to Snow Ride for \(13 each. Snow Ride would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.

Requirements

1. Snow Ride鈥檚 accountants predict that purchasing the bindings from Livingston will enable the company to avoid \)2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings.

2. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Ride鈥檚 facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

Short Answer

Expert verified

The company should focus on making the bindings.

Step by step solution

01

Meaning of Accountant

An accountant refers to an individual appointed by an entity to maintain and record its financial transactions in the company's books. An accountant must be aware ofaccounting principles, concepts, and standards.

02

Preparation of analysis

Analysis

Particulars

Make ($)

Buy ($)

Difference ($)

Variable cost (Working notes)

22,870

31,350

(8,480)

Add: Fixed cost (Working notes)

6,300

4,200

2,100

Total cost of 1900 bindings

$29,170

$35,550

$(6,380)

Working Notes:

Computation of variable and fixed costs:

Particulars

Make ($)

Buy ($)

Variable cost

17590+3200+2080=22,870

1900*(13+3+0.5)=31,350

Fixed cost

6300

6300-2100=4200

Comment:

Based on the analysis above, it is advisable thatthe company should make the bindings.

03

Identification of best alternative

Particulars

Make

Leave facility idle

Make another product

Variable cost

22,870

31,350

31,350

Add: Fixed cost

6,300

4,200

4,200

Less: Profit from another product

(3,100)

Total cost of 1900 bindings

$29,170

$35,550

$32,450

Comment:

Based on the analysis above, the company should focus on making bindings because it costs less than other alternatives.

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Most popular questions from this chapter

Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:

Direct materials \(5.00

Direct labor 3.00

Variable overhead 6.00

Fixed overhead 7.00

Manufacturing product cost \)21.00

Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.

Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.

Dan Jacobs, production manager for GreenLife, invested in computer-controlled production machinery last year. He purchased the machinery from Superior Design at a cost of \(3,000,000. A representative from Superior Design has recently contacted Dan because the company has designed an even more efficient piece of machinery. The new design would double the production output of the year-old machinery but would cost GreenLife another \)4,500,000. Jacobs is afraid to bring this new equipment to the company president鈥檚 attention because he convinced the president to invest $3,000,000 in the machinery last year.

Explain what is relevant and irrelevant to Jacobs鈥檚 dilemma. What should he do?

Johnson Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Atlanta. Land and labor are cheap, and competition among developers is fierce. The homes are a standard model, with any upgrades added by the buyer after the sale. Johnson Builders鈥檚 costs per developed sublot are as follows:

Land \(50,000

Construction 123,000

Landscaping 9,000

Variable selling costs 8,000

Johnson Builders would like to earn a profit of 14% of the variable cost of each home sold. Similar homes offered by competing builders sell for \)207,000 each. Assume the company has no fixed costs.

Requirements

1. Which approach to pricing should Johnson Builders emphasize? Why?

2. Will Johnson Builders be able to achieve its target profit levels?

3. Bathrooms and kitchens are typically the most important selling features of a home. Johnson Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost \(16,000 per home but would enable Johnson Builders to increase the sales prices by \)28,000 per home.

(Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Johnson Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?

Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of \(9,700 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue:

Cocoa powder \)14,500

Chocolate syrup 103,000

Boxed assorted chocolates 204,000

The cost of transforming the cocoa powder into chocolate syrup would be \(72,000. Likewise, the company would incur a cost of \)183,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make assorted boxed chocolates due to their high sales value and to the fact that the cocoa bean processing cost of $9,700 eats up most of the cocoa powder profits. Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response.

Question: Explain the difference between price-takers and price-setters.
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