Question

- 500.000 21 Snowboarding currently proces showboards Management is interested in outsourcing production of hands reputable manufacturing company that can supply the snow cards for $250 per unit hrdinicurs the following annual action cost to u ce 6.000 nowboards internally Arne Total annual Sur Per Unit costat 6,000 units Variable production costs Dirt materials S180 $ 1.000.000 Direct labor 300.000 Manufacturing overhead 120.000 Fixed production costs Factory building and equipment lease 220.000 Factory insurance 90.000 Production supervisor salary 65.00 Total production costs $1.875.000 SO 20 Outsourcing production eliminates all variable production costs, the production supervisor's salary, and factory insurance costs. Factory building and equipment lease costs will remain the same regardless of the decision to outsource or to produce internally. (10 Points) Perform a differential analysis, assuming that making the snowboard internally is alternative 1. and buying the snowboard from an outside manufacturer is alterative 2 (2) Explain which alternative is best and why. 24. The following monthly financial data is for Tina's T-Shirt Company. The company makes 25.000 T- shirts each month. Sales revenue Variable costs Contribution margin Fixed costs Profit Per unit $10.00 5.50 $4.50 Total monthly data at 25,000 units $250,000 137.500 $ 112.500 98.000 $ 14,500 Tina is approached by a local youth camp that would like to have 2,000 T-shirts produced. The camp asked Tina to produce the shirts for $9.00 cach rather than the standard price of $10.00. Tina can produce up to 28,000 shirts a month, so the special order will not affect regular customer sales. Variable costs per unit will remain at $5.50, but production of the shirts will require a special machine that costs $2,500. This special order will have no other effect on monthly fixed costs. (12 Points) (1) Using differential analysis, determine whether Tina would be better off accepting or rejecting the special order. (2) Assume Tina can only produce 25,000 T-shirts per month, and that regular customer sales would decrease as a result of the special order. Using differential analysis, determine whether Tina would be better off accepting or rejecting the special order.

Answer 1

Q. 23
Ans
1	Particular	Making Internally	Outsourcing
		Alternative 1	Alternative 2
	variable Production cost
	Direct Material	$             10,80,000	0
	Direct Labour	$               3,00,000	0
	manufacturing O/h	$               1,20,000	0
	Fixed Production cost
	factory Building & equi Lease	$               2,20,000	$                 2,20,000
	factory insurance	$                   90,000	0
	production supervisor salary	$                   65,000	0
	Outsource cost@ $250 per unit		$               15,00,000
	($250 * 6000 units)
	Total Cost of producing 6000 snowboards	$             18,75,000	$               17,20,000
	Saving by outsourcing production		$                 1,55,000
2	As we can see outsourcing production will cost $ 1720000 vs producing them internally will cost $1875000
	and company can save $155000 by outsourcing production.
	Alternative 2 i.e outsourcing production is better.

Q. 24
Ans
1	Particular	Current Situation	With Special offer
		25000 units	27000 units
	Sales Revenue from regular customer	$               2,50,000	$                 2,50,000
		( $10 * 25000)	( $10 * 25000)
	Sales Revenue from youth camp	0	$                     18,000
			( $9 * 2000)
	Less:
	variable Cost	$               1,37,500	$                 1,48,500
		( $5.5 * 25000)	( $5.5 * 27000)
	Contribution	$               1,12,500	$                 1,19,500
	Less: Fixed Cost	$                   98,000	$                     98,000
	Less: Special Machine cost	$                            -	$                       2,500
	Total Fixed Cost	$                   98,000	$                 1,00,500
	Profit	$                   14,500	$                     19,000
	Additional overall profit if Tina accept the special offer		$                       4,500
	Hence Tina would be better off by accepting the special offer as it be give her addional profit of $ 4500
2	If Tina can only produce 25000 T shirt per month
	Particular	Current Situation	With Special offer
		25000 units	25000 units
	Sales Revenue from regular customer	$               2,50,000	$                 2,30,000
		( $10 * 25000)	( $10 * 23000)
	Sales Revenue from youth camp	0	$                     18,000
			( $9 * 2000)
	Less:
	variable Cost	$               1,37,500	$                 1,37,500
		( $5.5 * 25000)	( $5.5 * 25000)
	Contribution	$               1,12,500	$                 1,10,500
	Less: Fixed Cost	$                   98,000	$                     98,000
	Less: Special Machine cost	$                            -	$                       2,500
	Total Fixed Cost	$                   98,000	$                 1,00,500
	Profit	$                   14,500	$                     10,000
	loss in overall profit if Tina accept the special offer		$                       4,500
	Hence In this situation Tina should not accept the special offer by youth camp
	as it would result in decrease of profit from current $14500 to $10000