Question

Please show work and answer all parts.

4. 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 S000): 2,800 Sales Expenses: Variable production costs Fixed overhead: occupancy Fixed overhead: other General overhead Net loss 1,420 400 480 560 2.860 (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 S215/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 SOLO, produced in the Oshkosh plant. If R2D2 is eliminated, sales of 300 units/year of SOLO would be lost. SOLO 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: Is R2D2 really losing money? Explain briefly. b. Should Chewie produce C3PO instead of R2D2? Explain. How much rent would have to be charged on the facility to make that alternative superior to producing either of the two products?

Answer 1

Answer :

(a). R2D2 is having net loss of $60000. However, if this product is discontinued, there would be contribution loss of $88,800 for product SOLO [(( 500 per unit sale price - (340 per unit cost * 60% variable cost)) * 300 units]. 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 $98800 as explained below

Sales	3200,000
Less : Variable cost	1720,000
Less : Fixed overhead	1440,000
Less : Additional cost	50,000
Less : Opportunity cost of product SOLO	88,800
Thus loss of	$98800

(c). Company should charge rent in excess of $373,800 so that the rent option is better as discussed below

Fixed occupancy	320000
Add : Security	25000
Add : Opportunity cost of not producing R2D2 and SOLO	28800
Total	373800

Please Up -vote Thank You !!!!