BUAD 2050: Spring 2018: Due on 3/19/2018 at the beginning of class 11. Chappy ma
ID: 2544401 • Letter: B
Question
BUAD 2050: Spring 2018: Due on 3/19/2018 at the beginning of class 11. Chappy manufactures two lines of pants: Stripe and Plaid. Last year, the Stripe line sold 25,000 and the Plaid sold 32,000. Chappy is considering to eliminate the Stripe line based on the financial statement listed below Plain $400,000 Upscale $900,000 Sales Less: COGS Unit level _Deprecationproductionequipment Gross Margin Less: operating expenses: 320,000 120,000 460,000 80000 100,000 Unit level SG&A; Corporate(facility levelfixed cost) Net income (loss) 130,000 60,000 $270,000 80,000 60,000 40 Should Chappy eliminate the Stripe slacks line? Explain your answer: 12. Tommy has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $50.000 and a market value of $10,000. They are expected to have an eight-year remaining life and $1,000 salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have an eight-year useful life and $5,000 salvage value. The operating expenses associated with the old machines are S15,000 a year. Should Tommy keep or replace the machine, and how would that decision impact profitability?Explanation / Answer
11. Chappy shouldnot eliminate Stripe as there's a consilidated profit of $ 230000 (270000-40000) of Stripe. However on analysis of Stripe we observe that there's a loss of $ 40000 in plain and a gain of $ 270000 in upscale. The loss is owing to excess fixed cost compared to gross profit. If the following cannot be achieved then CHappy should consider closing Plain and not scrapping the whole product Stripe:
a) Reduction in fixed cost to ensure Net Profit
b) Increase the Selling Price of the product to cover for the loss
12. Tommy should replace the machine as by keeping the machine we are incurring a cost of $ 22615 per year.
By replacing the machine we are saving:
Savings in expense (7990 x 8) A 63920
Salvage Value B 5000
Total Savings (A+B) 68920
Total Outlay on day 1 (90000)
Total loss 21800
Loss per year (21800/8) $(2365)
Hence we should replace the machine as loss is less.
14. WHen the company is selling 2500 units the net profit amount to $ 50000. If the company accepts the Special order the Net Profit with the special order will amount to $ 52500, thus the company should accept the special order of 500 units at $160 each.
Income Statement:
Without Special Order
Sale (No of units x S.P) 500000
less. Direct Material 220000
DIrect Labour 100000
Variable Cost 60000
Fixed Overhead Cost 70000
$50000
With Special Order:
Sale (No of units x S.P) 580000
less. Direct Material 264000
DIrect Labour 120000
Variable Cost 72000
Fixed Overhead Cost 71500
$52500
Hence the Montoya Enterprise's income will increase if the order is accepted.
15. When Rocky manufactures the product the total cost to Rocky amounts to $ 80 (12+15+13+30).
If Rocky sources the product the total cost to Rocky amounts to $ 72 (60+(40% of 30))
Hence Rocky should the buy the product from the supplier as he will save $8 per unit
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