Question

Greenview Corp. (see PB7-1) is considering the possibility of outsourcing the production of the upholstered chair pads included with some of its wooden chairs. The company has received a bid from a company in China to produce 1,000 units per year for $9 each. Greenview has the following information about its own production of the chair pads: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit Greenview has determined that all variable costs could be eliminated by dropping production of the chair pads, and that 30 percent of the fixed manufacturing overhead is avoidable. At this time, Greenview has no specific use in mind for the space currently dedicated to producing the chair pads. Required: 1. Compute the difference in cost between making and buying the chair pads. 2. Should Greenview buy the chair pads or continue to make them? 3. Suppose that a new product line that Greenview wants to develop could utilize the space currently used for the chair pads. How much profit must the new product line generate for Greenview to be indifferent between making or buying the chair pads?

Answer 1

1. Compute the difference in cost between making and buying the chair pads. Particulars Calculation Make Calculation Buy Purchase Cost 1,000 Units @ $ 9 per Unit $ 9,000 Direct Materials 1,000 Units @ $ 4 per Unit $ 4,000 Direct Labor 1,000 Units @ $ 1 per Unit $ 1,000 Variable Manufacturing Overheads 1,000 Units @ $ 2 per Unit $ 2,000 Fixed Manufacturing Overheads 1,000 Units @ $ 3 per Unit $ 3,000 $3,000 * 70% $ 2,100 Total Cost $ 10,000 $ 11,100 2. Should Greenview buy the chair pads or continue to make them ? Since the cost to manufacture the Chair Pads is less than the cost of buying them, Greenview shall continue to make them. 3. How much profit must the new product line generate for Greenview to be indifferent between the buying or making the chair pads? The New Product Line must generate a profit of atleast $ 1,100 to be indifferent between making or buying the chair pads.

1. Will Greenview's Net Operating Income increase or decrease if the Blanco Model is eliminated? By how much? Particulars Calculation Sunrise Noche Total Sales Revenue 110% / 105% of Previous Fig. $ 1,21,000 $ 80,850 $ 2,01,850 Less : Variable Costs 110% / 105% of Previous Fig. $ 84,700 $ 54,600 $ 1,39,300 Contribution 36,300 $ 26,250 $ 62,550 Less : Direct Fixed Costs 3,200 $ 2,400 $ 5,600 Segment Margin 33,100 $ 23,850 $ 56,950 $ 33,600 / 201,850 * Common Fixed Costs $ 20,142 $ 13,458 $ 33,600 Respective Sales Rev. Net Operating Income 12,958 $ 10,392 $ 23,350 tot to Answer : Greenview's Net Operating Income will increase by $ 50, if the Blanco Model is eliminated.