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Chapter 25: Q25-13RQ (page 1406)
What questions should managers answer when considering special pricing orders?
Answer
Managers must consider several factors, such as capacity required, qualitative factors, fixed costs, and more, before considering special pricing orders.
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Grimm Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes:
Direct materials \(500
Direct labor 1,000
Variable manufacturing overhead 200
Fixed manufacturing overhead 1,200
Total manufacturing cost \)2,900
Number of cakes 梅 100
Cost per cake \(29
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Grimm expects to retain the equipment. Grimm can buy the cakes for \)25.
What makes information relevant to decision making?
Priscilla Smiley manages a fleet of 250 delivery trucks for Daniels Corporation. Smiley must decide whether the company should outsource the fleet management function. If she outsources to Fleet Management Services (FMS), FMS will be responsible for maintenance and scheduling activities. This alternative would require Smiley to lay off her five employees. However, her own job would be secure; she would be Daniels鈥檚 liaison with FMS. If she continues to manage the fleet, she will need fleet management software that costs \(9,500 per year to lease. FMS offers to manage this fleet for an annual fee of \)300,000. Smiley performed the following analysis:
Retain in-house Outsource to FMS Difference
Annual leasing fee for \(9,500 \)9,500
Software
Annual maintenance of
Trucks 147,000 147,000
Total annual salaries of
Five laid-off employees 185,000 185,000
Fleet management
Service鈥檚 annual fee \(300,000 (300,000)
Total differential cost of
Outsourcing \)341,500 \(300,000 \)41,500
Requirements
1. Which alternative will maximize Daniels鈥檚 short-term operating income?
2. What qualitative factors should Daniels consider before making a final decision?
Each morning, Max Smith stocks the drink case at Max鈥檚 Beach Hut in Myrtle Beach, South Carolina. The drink case has 120 linear feet of refrigerated drink space. Each linear foot can hold either six 12-ounce cans or three 20-ounce bottles.
Max鈥檚 Beach Hut sells three types of cold drinks:
1. Licious-Ade in 12-oz. cans for \(1.40 per can
2. Licious-Ade in 20-oz. bottles for \)1.90 per bottle
3. Pep-Cola in 20-oz. bottles for \(2.20 per bottle
Max鈥檚 Beach Hut pays its suppliers:
1. \)0.20 per 12-oz. can of Licious-Ade
2. \(0.35 per 20-oz. bottle of Licious-Ade
3. \)0.55 per 20-oz. bottle of Pep-Cola
Max鈥檚 Beach Hut鈥檚 monthly fixed costs include:
Hut rental \(355
Refrigerator rental 65
Max鈥檚 salary 1,700
Total fixed costs \)2,120
Max鈥檚 Beach Hut can sell all the drinks stocked in the display case each morning.
Requirements
1. What is Max鈥檚 Beach Hut鈥檚 constraining factor? What should Max stock to maximize profits?
2. Suppose Max鈥檚 Beach Hut refuses to devote more than 80 linear feet to any individual product. Under this condition, how many linear feet of each drink should Max鈥檚 stock? How many units of each product will be available for sale each day?
What is differential analysis?
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