Question

Rooney 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 33,000 and 73,000 units per year. $324,000 Revenue (36,000 units * $9.00) Unit-level variable costs Materials cost (36,000 * $2.00) Labor cost (36,000 * $1.00) Manufacturing overhead (36,000 $0.10) Shipping and handling (36,000 $0.29) Sales commissions (36,000 $2.00) Contribution margin Fixed expenses Advertising costs Salary of production supervisor Allocated company-wide facility-level expenses Net loss (72,000) (36,000) (3,500) (10.440) (72,000) 129.960 (28,000) (68,000) (84,000) $(50,040) Required a. A large discount store has approached the owner of Rooney about buying 8,000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Rooney'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 $5.40 per caldulator Calculate the contribution margin from the special order. Based on quantitative factors alone, should Rooney accept the special order? b-1. Rooney has an opportunity to buy the 36,000 calculators it currently makes from a reliable competing manufacturer for $4.50 each. The product meets Rooney's quality standards. Rooney could continue to use its own logo, advertising program, and sales force to distribute the products. Calculate the total cost for Rooney to make and buy the 36,000 calculators b-2. Should Rooney buy the calculators or continue to make them? b-3. Should Rooney buy the calculators or continue to make them, if the volume of sales were increased to 73.000 units? c. Because the calculator division is currently operating at a loss, should it be eliminated from the company's operations? Support your answer with appropriate computations. Specifically, by what amount would the segment's elimination increase or decrease profitability?

Answer 1

Ans:

a.

Order Units: 8,000

Price per unit: $5.40

Order Value: $43,200

Relevant cost of production:

Material per unit: $2

Labor cost per unit: $1

Manufacturing overhead: $0.10

Shipping, handling: $0.29

Total per unit cost: $3.39

Cost for 8,000 units: $27,120.

So yes, rooney should accept the special order to increase reveune by $16,080.\

b-1.

Cost to make or buy for 36,000 units:

	Make	Buy
Material @$2 per unit	72,000
Labor cost @$1 per unit	36,000
Manufacturing overhead @$0.10 per unit	3,600
Shipping and handling @0.29 per unit	10,440
Sales commission @$2 per unit (Will continue to occur even if we buy from external source)	72,000	72,000
Buying cost @4.5 per unit		$162,000
Fixed Costs	$180,000	$180,000
Total Cost	$374,040	$414,000

b-2.

Rooney should not buy and make calculator on their own to save costs.

b-3.

No even if the sales went to 73,000 units rooney should not go for buying option as relevant cost of making is $3.39 per unit in comparision to offered of $4.50 per unit. Sales commission will continue to occur in both cases so irrelevant for decision making.

c.

No rooney should not stop operations as rooney's fixed cost is $180,000 per year which will continue to occur even if no opertions are their. So if operations were stopped their will be a increase in loss of $129,960 ($180,000-$50040).