Question

Case #3 Bliss Manufacturing produces two types of control devices: Rivet and Viewer. Information for each product line is as follows: Costs per unit Direct materials Direct labour Variable overhead Fixed overhead Selling price Units sold Rivet $90.00 $125.00 $150.00 S120.00 $600.00 $3,000.00 Viewer $115.00 $150.00 $180.00 $150.00 $750.00 $1,800.00 On average, the labour wage rate is $25 per hour. Currently, available capacity is 22,500 direct labour hours, however the company only uses 21,000 direct labour hours to produce all control devices. If desired, the company could dire additional workers which would increase capacity up to 22,500 direct labour hours. Recently, a new customer has approached Bliss Manufacturing with an offer to buy 250 units of the Viewer at a price of $600 per unit. Required (A) How many direct labour hours are required for Bliss Manufacturing to produce the 250 units of the Viewer requested by the new customer? Does the company have sufficient capacity to produce the 250 Viewer units? (B) How much will the company's income increase or decrease by accepting the order? (C) Suppose the customer was interested in buying 400 units of the Viewer at a price of $600 per unit. How much would income increase or decrease by accepting the order? Assume that the company cannot increase production beyond the 22,500 direct labour hours. (D) Suppose the customer was interested in buying 400 units of the Viewer at a price of S600 per unit and the company can increase production by paying the workers to work overtime. Direct labour costs would increase to $37.50 per hour of overtime worked. Variable overhead costs would increase by 50% for the overtime hours. How much would income increase or decrease by accepting the order under these conditions? (E) What non-financial factors should management at Bliss Manufacturing consider before accepting a special offer, such as the one proposed by the new customer?

Answer 1

A) Direct labour hours required to produce 250 units =
= 25*150/25 = 150 dlhs
Remaining capacity = 22500 - (3000*125/25 + 1800*150/25)= -3300
No, no capacity to produce 250 units.
B) Assuming that the company cannot increase production capacity
beyond 22500 DLHs, then Bliss has to lose income of
($750-595)-($600-595) = 150 per unit to accept the order.
Total = 250*150 = 37500
C) Assuming that the company cannot increase production capacity
beyond 22500 DLHs, then Bliss has to lose income of
($750-595)-($600-595) = 150 per unit to accept the order.
Total = 400*150 = 60000
D) Increase in costs:
	Original	Overtime costs
DM	115	115
DL	150	6*37.5=225
V OH	180	180*1.5=270
total Variable costs	445	610
Order's SP		600
Loss per unit		10
total loss		400*10=4000
(because fixed costs were already covered under
normal production)
F) the non-financial factors which management
could consider are:
i) Other benefits attached with the order.
ii) Gaining an additional customer.
iii) any other input supply deal with the customer.
iv) to have economy in production through more
production.