BYP 7-1 (Continued)
Situation #2
(a) Current designs should not replace the Rotomold oven based on the
following calculations:
Retain
Oven
Replace
Oven
Net Income
Increase
(Decrease)
Variable manufacturing costs
$110,500*
$ 97,500**
$ 13,000
New oven cost
0
250,000
(250,000)
Proceeds from scrapping old oven
0
(10,000)
10,000
Total
$110,500
$337,500
($ 227,000)
*(17,000 therms/year X $0.65/therm X 10 years)
**(15,000 therms/year X $0.65/therm X 10 years)
(b) Even with the cost of natural gas increasing at a faster than expected
Retain
Oven
Replace
Oven
Net Income
Increase
(Decrease)
Variable manufacturing costs
$144,500*
$127,500**
$ 17,000
New oven cost
0
250,000
(250,000)
Proceeds from scrapping old oven
0
(10,000)
10,000
Total
$144,500
$367,500
($ 223,000)
*(17,000 therms/year X $0.85/therm X 10 years)
BYP 7-1 (Continued)
Situation #3
(a) Current Designs should make the seats based on the following calcu–
lations:
Make
Buy
Net Income
Increase
(Decrease)
Direct materials
$ 60,000
$ 0
$ 60,000
Direct labor
45,000
0
45,000
Variable manufacturing costs
36,000
0
36,000
Fixed manufacturing costs
20,000
15,000
5,000
Purchase price ($50 X 3,000)
0
150,000
(150,000)
Total annual cost
$161,000
$165,000
($ 4,000)
Make
Buy
Net Income
Increase
(Decrease)
Total annual cost
$161,000
$165,000
($ 4,000)
Opportunity cost
20,000
0
20,000
Total cost
$181,000
$165,000
$16,000
BYP 7-2 DECISION-MAKING ACROSS THE ORGANIZATION
Retain
Old Machine
Purchase
New Machine
Net Income
Increase
(Decrease)
Sales
Costs and expenses
Cost of goods sold
Selling expenses
Administrative expenses
Purchase price
Total costs and expenses
Net income
$6,000,000
4,500,000
900,000
500,000
—
5,900,000
$ 100,000
(1)
(3)
$6,600,000
4,620,000
990,000
565,000
150,000
6,325,000
$ 275,000
(2)
(4)
(5)
($ 600,000
( (120,000)
( (90,000)
( (65,000)
( (150,000)
( (425,000)
($ 175,000
(1) 12,000 X $100 X 5 years = $6,000,000.
(2) $6,000,000 X 110% = $6,600,000.
with the new machine.
BYP 7-3 MANAGERIAL ANALYSIS
(a)
Make
Buy—
Trans-
Tech
Buy—
Omega
Sales Revenue
Variable Manufacturing Cost:
Circuit Board
Plastic Case
Alarms (4 @ $.15 each)
Labor
Overhead
Purchase Cost
Fixed Manufacturing Cost:
Total Manufacturing Cost
Profit per Unit
Total Profit
$ 14.50
2.00
0.80
0.60
3.00
0.50
0
—
6.90
$ 7.60
$38,000
$ 14.50
0
0
0
0
0
10.00
1.00*
11.00
$ 3.50
$17,500
$ 14.50
0
0
0
0
0
5.00
1.00
6.00
$ 8.50
$42,500
not manufactured, divided by the 5,000 units.
The company will make the most profit if the clocks are purchased
about Omega’s ability to remain in business. However, the company
could purchase just this one order from Omega, and then continue to
search for another manufacturer, or stop manufacturing the clocks.
Trans-Tech’s stringent requirements for preferred customer status, in
BYP 7-3 (Continued)
BYP 7-4 REAL-WORLD FOCUS
(b) Incremental analysis would provide a financial comparison of income
with the special-order ceiling fans to income without the special orders.