Toys for fun Co. is working at full production capacity producing 20,000 units o
ID: 2555375 • Letter: T
Question
Toys for fun Co. is working at full production capacity producing 20,000 units of a unique product, OB1. Sale price and costs per unit for OB1 are as follows $ 40 Sale price Direct materials Direct manufacturing labour Manufacturing overhead Selling costs (all variable) $8 14 The unit manufacturing overhead cost is based on a variable cost per unit of $10 and fixed costs of 80,000 (at full capacity of 20,000 units). A Chinese customer, Zhao Co., has asked Toys for fun Co. to produce 4,000 units of Jedi1, a modification of OB1. Jedi1 would require the same manufacturing processes as OB1. Zhao Co. has offered to pay Toys for fun Co. $33 for a unit of Jedi1 and half the selling costs per unit. REQUIRED: Compute the contribution margin per unit for OB1 and Jedi1 What is the opportunity cost to Toys for fun Co. of producing the 4,000 units of Jedi1? (Assume that no overtime is worked) Should Toys for fun Co. accept the special order from Zhao Co.? Justify your recommandation Ottawa Co. has offered to produce 4,000 units of OB1 for Toys for fun Co. so that Toys for fun Co. may accept the Zhao Co. offer. That is, if Toys for fun Co. accepts the Ottawa Co. offer, Toys for fun Co. would manufacture 16,000 units of OB1 and 4,000 units of Jedi1 and purchase 4,000 units of OB1 from Ottawa Co. Ottawa Co. would charge Toys for fun Co. $30 per unit to manufacture OB1. Should Toys for fun Co. accept the Ottawa Co. offer? (Support your analysis with detailed analysis) Suppose Toys for fun Co. had been working at less than full capacity, producing 16,000 units of OB1 at the time the Zhao Co. offer was made. What is the minimum price Toys for fun Co. should accept for Jedi1 under these conditions (ignore the previous $33 selling price). Are there any qualitative factors that Toys for fun Co. should consider before making any decision on the special order from Zhao Co.? Discuss at least three factors. 1. 2. 3. 4. 5. 6.Explanation / Answer
1.Contribution margin per unit
OB1= Selling price per unit-Variable cost per unit
= $40-$31
=$9 per unit
Jedi1= $33-$31
=$2 per unit
2.The opportunity cost of producing 4000 units of Jedi1 is $7 per unit as it can use same resources and produce 4000 unis of OB1 .
3.No,they should not accept the offer as they would be getting only half the costing whereas they can use the same resources and get better price for OB1.
4.No,Toys for fun Co, should nit accept the offer from Ottawa Co.as still they are not going to get that selling price of 40$ per unit.
5.Minimum price that they shoould charge must be the one that recovers their cost atleast and give them some margin i.e.35/unit.
6.Qualitative factors:-
External Reputation
Small business owners should be aware how managerial-accounting-based decisions affect the external reputation of the firm. Often, quantitative analysis suggests a clear choice between two decision alternatives.
Labor Relations
Nearly any quantitative analysis will demonstrate that spending less money on employees increases profits. However, this may be shortsighted. Quantitative analysis usually does not take into account the importance of healthy relations with your labor force.
Quality
In most cases, quantitative information neglects to provide information on quality. Businesses, smartly looking to reduce costs, must be cautious to avoid sacrificing the long-term benefit of being associated with quality products and services for the short-term quantitative benefit of cutting costs.
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