Bain Corporation makes and sells state-of-the-art electronics products. One of i
ID: 2341583 • Letter: B
Question
Bain Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company’s chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment’s operating activities. The relevant range for the production and sale of the calculators is between 30,000 and 60,000 units per year.
Required
a. A large discount store has approached the owner of Bain about buying 5,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Bain’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $6.60 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Bain accept the special order?
b-1. Bain has an opportunity to buy the 40,000 calculators it currently makes from a reliable competing manufacturer for $6.72 each. The product meets Bain’s quality standards. Bain could continue to use its own logo, advertising program, and sales force to distribute the products. Should Bain buy the calculators or continue to make them?
b-2. Calculate the total cost for Bain to make and buy the 40,000 calculators.
b-3. Should Bain buy the calculators or continue to make them, if the volume of sales were increased to 60,000 units?
c. Because the calculator division is currently operating at a loss, should it be eliminated from the company’s operations? Support your answer with appropriate computations. Specifically, by what amount would the segment’s elimination increase or decrease profitability?
Revenue (40,000 units × $10.80) $ 432,000 Unit-level variable costs Materials cost (40,000 × $2.70) (108,000 ) Labor cost (40,000 × $1.20) (48,000 ) Manufacturing overhead (40,000 × $1.20) (48,000 ) Shipping and handling (40,000 × $0.30) (12,000 ) Sales commissions (40,000 × $1.20) (48,000 ) Contribution margin 168,000 Fixed expenses Advertising costs (24,000 ) Salary of production supervisor (72,000 ) Allocated company wide facility-level expenses (96,000 ) Net loss $ (24,000 )Explanation / Answer
Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Part a: $ Revenue 5000*6.6 33000 Unit Level Variable Cost: Material Cost 5000*2.7 -13500 Labor Cost 5000*1.2 -6000 Manufacturing Cost 5000*1.2 -6000 Shipping and Handling 5000*0.3 -1500 Sales Commission 0 Contribution Margin 6000 Should be accepted as it will increase profitability by $6000 $ $ Part b1&b2: Cost to Make Cost to Buy Material Cost 40000*2.7 108000 Labor Cost 40000*1.2 48000 Manufacturing Cost 40000*1.2 48000 Prod Supervisor Salary 72000 Purchase Cost 40000*6.72 0 268800 Total Cost 276000 268800 Should purchase from outside as cost is lower than making it Part b3: $ $ Cost to Make Cost to Buy Material Cost 60000*2.7 162000 Labor Cost 60000*1.2 72000 Manufacturing Cost 60000*1.2 72000 Prod Supervisor Salary 72000 72000 Purchase Cost 60000*6.72 0 403200 Total Cost 378000 475200 Should make in house as cost is lower Part c: It should not be eliminated. Elimination will decrease profitability by $72000 which is being allocated company wide facility exp. Before Allocation, actual profit is (168000-24000-72000)=$72000 Loss is because of allocation of facility expenese, which will be allocated on other segment.
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