Budgeting and Decision Making Exercises IV

SkousenBudgeting and Decision Making Exercises IV Download free books at... Download free eBooks at bookboon.com3 Budgeting and Decision Making Exercises IV All material in this publicat

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Larry M Walther; Christopher J Skousen

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Larry M Walther & Christopher J Skousen

Budgeting and Decision Making

Exercises IV

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Budgeting and Decision Making Exercises IV

All material in this publication is copyrighted, and the exclusive property of

ISBN 978-87-7681-907-1

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Budgeting and Decision Making Exercises IV

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Contents

Contents

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Contents

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Problem 1

Problem 1

Canadian Autoparts manufactures and sells alternators Canadian has been producing and selling approximately 1,500,000 units per year Each units sells for $350, and there are no variable selling, general, or administrative costs he company has been approached by a foreign supplier who wishes

to provide an alternator component for $45 per unit Total annual manufacturing costs, including the alternator component, is as follows:

Direct materials $120,000,000

Direct labor 192,000,000

Variable factory overhead 38,400,000

Fixed factory overhead 84,000,000

If Canadian Autoparts outsources the alternator component, it is expected that direct materials will be reduced by 15%, direct labor by 20%, and variable factory overhead by 25% here will be no reduction

in ixed factory overhead

a) Should Canadian Autoparts outsource the alternator component?

b) If outsourcing the alternator component will free up capacity, and enable Canadian

Autoparts to increase production and sales to 1,750,000 units per year, would it make sense

to outsource?

Worksheet 1

a)

Internal Outsource

-It appears that it will cost more to outsource Based on this quantitative analysis the

company would not outsource the compressors

b)

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Problem 1

Solution 1

a)

Internal Outsource

Variable factory overhead 38,400,000 28,800,000

Fixed factory overhead 84,000,000 84,000,000

Outsourced compressors (1,500,000 X $45) – 67,500,000

Total cost of each option $ 434,400,000 $ 435,900,000

It appears that it will cost more to outsource Based on this quantitative analysis the

company would not outsource the compressors

b)

Outsource @ 1,750,000 units Direct materials (1,750,000/1,500,000 X $102,000,000) $ 119,000,000

Direct labor (1,750,000/1,500,000 X $153,600,000) 179,200,000

Variable factory overhead (1,750,000/1,500,000 X $28,800,000) 33,600,000

Outsourced compressors (1,750,000 X $45) 78,750,000

Total cost if 1,750,000 units are built $ 494,550,000

Although costs increase by $60,150,000 ($494,550,000 – $434,400,000), revenues

would increase far more (250,000 additional units X $350 each = $87,500,000) It

seems that the company will be better of by outsourcing The company would also

want to consider nonquantitative factors such as quality of product and reliability of

the supply chain.

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Problem 2

Problem 2

Industrial Bearings manufactures high quality ball bearings he cost of producing a box of 100 bearings

is as follows:

Direct materials $2.50

Direct labor 3.25

Variable factory overhead 8.75

Fixed factory overhead 12.00

Variable selling, general, and administrative costs 8.75

Fixed selling, general, and administrative costs 2.00

he ixed factory overhead and ixed SG&A cost is allocated based on an assumption that the business will produce 200,000 boxes of paintballs per year he company has capacity to produce 300,000 boxes without impacting either category of ixed cost

a) he market for bearings has become very competitive and management has requested to know the break-even price that can be charged for a box of bearings, assuming production and sale of 200,000 boxes

b) Management has received a special order request for 100,000 boxes of “private label”

bearings he order speciies a per box price of $35 How will proitability be impacted if the order is accepted?

Worksheet 2

a)

b)

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