Question

Kansas Instruments manufactures two models of pocket calculators. Per unit of the Basic model sells for $5.50, has direct material cost of $1.25 and requires 0.25 hours of labour to produce. Each calculator of the Scientist model sells for $7.50, has direct material cost of $1.63 and takes 0.375 hours to produce.

Each labour hour costs Kansas Instruments $6 and labour is currently very scarce, even though the demand for the company’s calculators is very high. The company is currently producing 8,000 Basic calculators and 4,000 Scientist calculators each month. Fixed costs per month amount to $24,000.

Kansas Instruments has received a request from an overseas potential customer to manufacture a batch of calculators made to specific requirements. The overseas customer is offering the company a contract worth $35,000 for this order. The production manager has estimated the following facts with respect to this special order:

• The labour time required for this contract would be 1,200 hours.
• The material cost would be $9,000 (excluding the cost of a special component not normally used by the company for manufacturing its regular calculators).
• The special components could either be purchased from a supplier for $2,500 or produced internally using materials that would cost $1,000 and additional labour time of 150 hours.

Required:

Advise the management of Kansas Instruments on the appropriate course of action.

Answer 1

Overseas option-1 (Buy special component) $35,000.00 $11,500.00 $7,200.00 $16,300.00 1,200 $13.58 Overseas option-2 (Make special component) $35,000.00 $10,000.00 $8,100.00 $16,900.00 1,350 $12.52 Particulars Basic model Scientist model 2 Sales/order price 3 Direct material cost 4 Direct labor cost $6/hr 5 Contribution 6 Labor hours consumed 7 Contribution/labor hour $5.50 $1.25 $1.50 $2.75 0.25 $11.00 $7.50 $1.63 $2.25 $3.62 0.375 $9.65 9The labour resource is currently very scarce, therefore, the Company should maximize the contribution per labor hour to 10 increase the overall profitability. Since, the contribution per labor hour for "Overseas" order is higher than both the "current 11 models" and hence, the Company should accept the "Overseas" order. In case of available options of "BUY or MAKE" thee 12 special component, the Company should opt "BUY" decision as it maximizes the contribution per labor hour and the profit.

Overseas option-1 (Buy special component) Overseas option-2 (Make special component) Particulars Basic model Scientist model 7.5 1.63 2 Sales/order price 3 Direct material cost 4 Direct labor cost $6/hr. 6*0.25 5 Contribution 6 Labor hours consumed 0.25 7 Contribution/labor hour 5.5 1.25 35000 35000 9000+2500 1200*6 9000+1000 60.375 1200+150)6 B2-SUM(B3:B4) C2-SUM(C3:C4)D2-SUM(D3:D4) E2-SUM(E3:E4) 0.375 1200+150 E5/E6 1200 B5/B6 D5/D6 9 The labour resource is currently very scarce, therefore, the Company should maximize the contribution per labor hour to 10 increase the overall profitability. Since, the contribution per labor hour for "Overseas" order is higher than both the "currenıt 11 models" and hence, the Company should accept the "Overseas" order. In case of available options of "BUY or MAKE" the 12 special component, the Company should opt "BUY" decision as it maximizes the contribution per labor hour and the profit.