Question

Problem 3 Bain Corporation makes and sells state-of-the art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company's chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment's operating activities. The relevant range for the production and sale of the calculators is between 30,000 and 60,000 units per year. Revenue (40.000 units x $10.80) $432,000 Unit-level variable costs: Materials cost (40,000 x $2.70 (108.000 Labor cost (40,000 x $1.20) (48,000) Manufacturing overhead (40,000 x $1.20) (48,000) Shipping and handling (40,000 x $0.30) (12.000) Sales commissions (40.000 x $1.20) (48.000 Contribution margin 168,000 Sales -varible cost Fixed expenses: Advertising costs (24,000 Salary of production supervisor (72.000) Allocated companywide facility-level (96,000) expenses Net loss $(24,000 Consider each of the following requirements independently: a. A large discount store has approached the owner of Bain about buying 5,000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Bain's existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $6.60 per calculator. Based on quantitative factors alone, should Bain accept the special order? Support your answer with appropriate computations. Specifically, by what amount would the special order increase or decrease profitability? b. Bain has the opportunity to buy 40,000 calculators it currently makes from a reliable competing manufacturer for $6.72 each. The product meets Bain's quality standards. Bain would continue to use its own logo, advertising program, and sales program to distribute the products. Should Bain D buy the calculators or continue to make them? Support your answer with appropriate computations. Specifically, how much more or less would it cost to buy the calculators than to make them? Would you answer change if the volume of sales were increased to 60.000 units Because the calculator division is currently operating at a loss, should it be eliminated from the company's operations7 Support your answer with appropriate computations. Specifically, by what amount would the segment's elimination increase or decrease profitability

Answer 1

1. The question is based on relevant costing. The company has received special order for which it has to incur costs or may be forego opportunities. Only those costs which are relevant to decision making in accepting the offer shall be included in the cost to be charged. The relevant cost would be subtracted from revenue to compute contribution margin. If it’s positive, the offer shall be accepted.

Particulars	Details	Amount ($)
Revenue	5000*6.6	33000
Less:
Unit Level Variable Cost:
Material Cost	5000*2.7	(13500)
Labor Cost	5000*1.2	(6000)
Manufacturing Cost	5000*1.2	(6000)
Shipping and Handling	5000*0.3	(1500)
Sales Commission		0
Contribution Margin		$ 6,000

Bain should accept the offer as it increases the contribution by $ 6,000

b.

Particulars	Details	Cost to Make($)	Cost to Buy($)
Material Cost	40000*2.7	108000
Labor Cost	40000*1.2	48000
Manufacturing Cost	40000*1.2	48000
Prod Supervisor Salary		72000
Purchase Cost	40000*6.72	0	268800
Total Cost		276000	268800

As the cost is less in purchasing from outside, Bain corporation should buy from outside.

If the volume is increased to 60,000 units

Particulars	Details	Cost to Make($)	Cost to Buy($)
Material Cost	60000*2.7	162000
Labor Cost	60000*1.2	72000
Manufacturing Cost	60000*1.2	72000
Prod Supervisor Salary		72000	72000
Purchase Cost	60000*6.72	0	403200
Total Cost		378000	475200

Bain corporation should make the product itself as the cost is lower in making in-house.

c.

The calculator division should not be eliminated because elimination will decrease profitability by $ 72,000 which is allocated as company facility expenses.

Before the allocation, profit was 168,000 – 24,000 – 72,000 = $ 72,000

Hence, the loss is due to the allocation of facility expense.

Kindly upvote

Answer 2

in b) you added 72000 supervisor salary to the total cost to buy for 60000 units, but not for 40000