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Chapter 25: Q19E (page 1414)

Refer to Exercise E25-18. Cool Systems needs 79,000 optical switches. By outsourcing them, Cool Systems can use its idle facilities to manufacture another product that will contribute $225,000 to operating income.

Requirements

1. Identify the expected net costs that Cool Systems will incur to acquire 79,000 switches under three alternative plans: make the switches, buy the switches and leave facilities idle, buy the switches and use the idle facilities to make another product.

2. Which plan makes the best use of Cool System鈥檚 facilities? Support your answer.

Short Answer

Expert verified

It is advisable for the company topurchase the switches from outside.

Step by step solution

01

Meaning of Outsourcing

In business terms, outsourcing refers to a practice in which an outsider is hired or allowed by a business entity to performplanned or existing business tasks. Outsourcing helps business entities fulfill their needs from the outside rather than making/producing products/services in-house.

02

Computation of total expected net cost


MakeFacilities Idle
Make New Product

No. of units required

79,000

79,000

79,000

Variable costs:

Direct material @ $5

395,000

Direct labor @ $3

237,000

Variable overhead @ 6

474,000

Purchase cost @ 15

1,185,000

1,185,000

Expected profit contribution from other products

(225,000)

Total expected net cost

1,106,000

1,185,000

960,000

03

Decision

Based on the analysis presented above, the company should purchase the switches from an outsider and devote its idle facility to making another product.

Making another product will add $225,000 to the company鈥檚operating income and decrease theexpected cost of switches.

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Most popular questions from this chapter

This problem continues the Piedmont Computer Company situation from Chapter 24. Piedmont Computer Company鈥檚 payroll accountant has submitted her resignation and will be leaving the company in two weeks. The company must decide if it will hire a replacement or outsource the payroll position. The current employee earns a salary of \(40,000. Medical insurance, employer payroll taxes, and contributions to the pension plan for this position cost \)7,600. The company has already invested \(22,000 in payroll software. Required annual updates to remain in compliance with all state and federal laws are \)495. The company also spends \(1,750 per year in professional development for this position to ensure the employee stays up-to-date with payroll changes. Piedmont Computer Company pays its employees weekly. Payroll Professionals will processthe company鈥檚 weekly payroll for \)1,000 per week. This fee also includes preparing all necessary payroll tax returns, reports, and W-2s.

Requirements

1. Prepare a differential analysis to determine if Piedmont Computer Company should replace the employee or outsource the payroll function.

2. What other factors should Piedmont Computer Company consider in making this decision?

What questions should managers answer when setting regular prices?

Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acres鈥檚 reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.

Requirements

1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?

Doherty Company is considering replacing the individual printers each employee in the corporate office currently uses with a network printer located in a central area. The network printer is more efficient and would, therefore, cost less to operate than the individual printers. However, most of the office staff think having to use a centralized printer would be inconvenient. They prefer to have individual printers located at each desk. Identify the following information as financial or nonfinancial and relevant or irrelevant. The first item has been completed as an example.

Financial

Nonfinancial

Relevant

Irrelevant

  1. Amount paid for current printers
  1. Resale value of current printers
  1. Cost of new printer
  1. Operating costs of current printers
  1. Operating costs of new printer
  1. Employee morale

StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to \(115,000 per period. Sales prices and variable costs are as follows:

Regular Large

Sales price per unit \)8.00 $10.40

Variable cost per unit 3.50 4.40

Requirements

1. Which product should StoreAll emphasize? Why?

2. To maximize profits, how many of each size bin should StoreAll produce?

3. Given this product mix, what will the company鈥檚 operating income be?
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