Question

1. Chewie Corporation manufactures a single product, R2D2, in its Duluth plant. R2D2 sells for $280. Current production is 10,000 units per year, and demand is expected to be relatively stable. Income statement for the product for the most recent year (in $000):

Sales                                                               2,800

Expenses:

            Variable production costs     1,420

            Fixed overhead: occupancy      400

            Fixed overhead: other                480

            General overhead                       560             2,860

            Net loss                                                           (60)

            Occupancy cost includes items such as utilities, taxes, insurance, and
            depreciation. General overhead is corporate level costs allocated at 20%
            of sales.

            Because R2D2 is running a loss, a vice president has developed a plan to drop this
            product, and replace it with a new product, C3PO. Existing capacity in Duluth is
            sufficient to meet expected demand for this product, which is 8,000 units/year.
            C3PO would sell for $400/unit and have variable costs of $215/unit. Overhead
            costs would remain the same, except that an additional supervisor would need to
            be hired for $50,000/year. Product C3PO would not have any effect on sales of
            other Chewie products. However, R2D2 has synergies with product S0L0,
            produced in the Oshkosh plant. If R2D2 is eliminated, sales of 300 units/year of
            S0L0 would be lost. S0L0 sells for $500/unit and has a cost of $340 unit (60%
            variable.

            The CFO has discovered that the Duluth facility could be rented to another firm
            (not a competitor). Under this lease, occupancy cost would decrease by 20%
            and overhead: other would be eliminated, except for $25,000 per year paid to
            a security firm.

           

            Required:

1. Is R2D2 really losing money? Explain briefly.
2. Should Chewie produce C3PO instead of R2D2? Explain.
3. How much rent would have to be charged on the facility to make that alternative superior to producing either of the two products?

Please also show Excel solutions. Thanks

Answer 1

solution:- Page 1 * According to data- >> R2D2 is having net loss of $ 60,000. However, if this product is discontinued, there would be contribution loss of $88,800 for product SOLD [(C500 per unit sale price - (340 per unit cos x 60% Variable cost)) x 300) =) Thus it has net profit of $28,800 due to opportunity cost B) If the company decides to produce C3PO instead of R2D2, It will have loss of $98,800 as explained below: sales - 3200,000 less: variable cost – 17,20,000 Less: Fixed overhead – 14,40,000

page-2 Less: Additional cost - 50,000 Less: Opportunity cost of product SOLD – 88800 This loss of $98,800. c) company should charge sent in excess of $ 3,73,800 so that the rent option is better as discussed below: fixed occupancy cost - 320,000 Add: security : - 25,000 Add: opportunity cost of not producing R2D2 and SOLD: 28,800 Total : 3,73,800 kindly, give me positive like.