Question

Decision Making 1.- Sunshine Fruit Company sells oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important so the company has designed and produces shipping boxes. The annual cost to make 80,000 boxes is • Materials: $112,000 • Labor: $20,000 (Foced) • Variable Overhead: $60,000 • Fixed Overhead: $16.000 Therefore, the cost per box averages $2.60 Weyer Inc. submits a bid to supply Sunshine Fruit Company with boxes for $2.10 per box Sunshine must give Weyer the box design specifications, and the boxes will be made according to those specs. a. Should Sunshine Fruits buy the boxes from Weyer? b. Suppose that labor is variable (that is $0.25 per box). What would the differential income/loss be if they decided to buy the boxes from Weyer? c What is the number of boxes that will make it irrelevant to produce the boxes in-house or to buy thern from Weyer? 2.- Zurich American School is an international private school. In addition to regular classes, after-school care is provided at $12 per child per hour. Financial results for the after-school care for a representative month are: Revenue (600 hours at $10) $6,000 Less Teacher salaries Supplies Depreciation Sanitary engineering Other fored costs Operating loss 6,000 800 1,300 100 200 $2,400 of the total teacher salaries, $3000 represents the salaries of those teachers that are hired exclusively for the after-school program, and are paid on a per child per hour basis. The rest is an allocation of the salary of regular teachers that work full-time at the school The director of Zurich American School is considering discontinuing the after-school care services because of its $2,400 loss. a. Should the company eliminate the after school care service? b. What is the minimum price per hour that the company should charge for its services in order to break-even?

Answer 1

1. Yes, the Sunshine can buy it from Weyer because there is an absolute advantage from buying boxes from Weyer, but when the fixed costs are factored in, which will be incurred by the Sunshine irrespective of the production. The decision will depend upon the no of boxes demanded, how fixed overhead and variable costs will work in the absence of this production. If the Sunshine company doesn't replace the entire production with buying, there will be obvious underutilization of their own resources.

b. for 80000 boxes, assuming all other costs are same ie. Overhead costs and material costs

Material Cost = 112000

Variable Overhead = 60000

Fixed Overhead = 16000

Total Unchanged cost = 188000

per unit Unchanged cost = $2.35

Adding per unit labour cost = $0.25

Total per unit cost = $2.35 + $0.25 = $2.60

Differential Income per unit = $2.60 - $2.10 = $0.5

For 80000 units Diff Income = $ 40,000

c. let no of units = x

for self production, cost = 188000 + 0.25x [Unchanged Cost + Variable Labour Cost]

for buying from Weyer, cost = 2.10x

188000+0.25x = 2.10x

1.85x = 188000

x = 188000/1.85 = 101622