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Case 2-59 Part 1 1. Alderon Enterprises is evaluating a special order it has received for a ceramic fixture to be used in aircraft engines. Alderon has recently been operating at less than full capacity, so the firms management will accept the order if the price offered exceeds the costs that will be incurred in producing it. You have been asked for advice on how to determine the cost of two raw materials that would be required to produce the order, a. The special order will require 900 gallons of endor, a highly perishable material that is purchased as needed. Alderon currently has 1,300 gallons of endor on hand, since the material is used in virtually all of the companys products. The last time endor was purchased, Alderon paid $5.00 per gallon. However, the average price paid for the endor in stock was only $4.75. The market price for endor is quite volatile, with the current price at $5.50. If the special order is accepted, Alderon will have to place a new order next week to replace the 900 gallons of endor used. By then the price is expected to reach $5.75 per gallon. What is the real cost of endor if the special order is produced? Real costb. The special order would also require 1,500 kilograms of tatooine, a material not normally required in any of Alderons regular products. The company does happen to have 2,000 kilograms of tatooine on hand, since it formerly manufactured a ceramic product that used the material. Alderon recently received an offer of $14,000 from Solo Industries for its entire supply of tatooine. However, Solo Industries is not interested in buying any quantity less than Alderons entire 2,000-kilogram stock Alderons management is unenthusiastic about Solos offer, since Alderon paid $18,000 for the tatooine. Moreover, if the tatooine were purchased at todays market price, it would cost $12 per kilogram. Due to the volatility of the tatooine, Alderon will need to get rid of its entire supply one way or another. If the material is not used in production or sold, Alderon will have to pay $1,000 for each 500 kilograms that is transported away and disposed of in a hazardous waste disposal site What is the real cost of tatooine to be used in the special order? Real costCase 2-59 Part 2 2. CopyFast Company, a specialist in printing, has established 500 convenience photo copying centers throughout the country. In order to upgrade its services, the company is considering three new models of laser copying machines for use in producing high quality copies. These high-quality copies would be added to the growing list of products offered in the CopyFast shops. The selling price to the customer for each laser copy would be the same, no matter which machine is installed in the shop. The three models of laser copying machines under consideration are: 1500S, a small- volume model; 1500M, a medium-volume model; and 1500L, a large-volume model The annual rental costs and the operating costs vary with the size of each machine The machine capacities and costs are as follows Photocopier Model 1500S 1500M 1500L 800,000 Annual capacity (copies) 100,000 350,000 Costs $ 7,000 $ 11,000 $19,000 0.02 0.03 Annual machine rental Direct material and direct labor cost 0.02 0.02 per copy Variable overhead costs per copy 0.12 0.07a. Calculate the volume level in copies where CopyFast Company would be indifferent to acquiring either the small-volume model laser copier, 1500S, or the medium-volume model laser copier, 1500M Volume level copies b. Present a decision rule that would enable management to select the most profitable machine. (Hint: For your calculations compare 150OS to 150OM and 1500M to 1500L.) Anticipated Annual Volume 0-80,000 80,000-200,000 200,000 and higher Optimal Model Choice

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Answer #1

Case 2-59 Part 1

a. What is the real cost of endor if the special order is produced?

The real cost of endor for the special order = 900 x $5.75

= $5175

b. What is the real cost of tatooine to be used in the special order?

Opportunity cost of not selling to Solo = $14,000

Disposal costs for remaining 500 kilograms as 1500 kilograms are to be used for special order = $1,000

Real cost of tatooine to be used in the special order = 14000+1000

= $15,000

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