1 - Mighty Safe Fire Alarm is currently buying 60,436 motherboards from MotherBo

Question

1 -

Mighty Safe Fire Alarm is currently buying 60,436 motherboards from MotherBoard's Inc. at a price of $66.00 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: Direct Materials $28.00 per unit, Direct labor $8.00 per unit, Variable Factory Overhead $14.00, Fixed Costs for the plant would increase by $78,381.00. As the financial advisor, offer your recomendations.

2 -

Win Co. Produces a single product. Its normal selling price is $27.00 per unit. The variable costs are $15.00 per unit. Fixed costs are $20,545.00 for a normal production run of 5,000 units per month. Win received a request for a special order that would not interfere with normal sales. The order was for 1,541 units and a special price of $19.00 per unit. Win Co. has the capacity to handle the special order and, for this order, a variable selling cost of $2 per unit would be eliminated.

Assuming the order is accepted, determine the impact on net income.

3 -

Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The total net differential increase or decrease in cost for the new equipment for the entire five years is:

4 - Assume that Win Co. is considering disposing of equipment that cost $51,091.00 and has $35,763.70 of accumulated depreciation to date. Win Co. can sell the equipment through a broker for $34,170.00 less 7% commission. Alternatively, But Co. has offered to lease the equipment for five years for a total of $46,281.00. Win will incur repair, insurance, and property tax expenses estimated at $9,861.00. At lease-end, the equipment is expected to have no residual value. Determine the net differential income from the lease alternative.

Explanation / Answer

1)

Current price paid = $66 per unit.

Additional fixed costs of $78,381.00 will be considered in decision making as they are incurrent if decision of making own product is taken. If they were already incurred and the organization had no control over whether to incur the fixed cost or not then they would have been excluded.

Fixed cost per unit = $78,381.00 / 60,436 = $1.30 per unit.

Variable costs of production = Direct material + Direct labor + Variable overhead = $28 + $8 + $14 = $50

So, total cost per unit = $50 + $1.30 = $51.30

So, savings = ($66 - $51.30) x 60,436 = $888,409.20

So, the organization should make its own boards.

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