45) A florist produces table settings for weddings. Based on an annual volume of 10,000 units it incurs $100,000 in fixed manufacturing costs. Variable costs per unit are $16 for direct materials, $3 for direct manufacturing labour, and $14 for variable factory overhead.

 

Another company has offered to supply empty baskets for the settings for $8, with a minimum annual order of 5,000 units. If the florist accepts the offer, it will be able to reduce variable labour and overhead costs by 50 percent. The materials for the empty baskets will cost $4 if the florist assembles them.

 

Required:

a.Determine if they should make or assemble the empty baskets.

b.Should they make or assemble the empty baskets if they could rent the space that the basket assembly requires for $16,000 per year to another company?

 

46) Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:

 

ExistingNew Turbo Oven

Original cost$60,000$50,000

Accumulated depreciation$5,000–

Current salvage value$40,000–

Remaining life5 years5 years

Annual operating expenses$10,000$7,500

Disposal value in 5 years$0$0

 

Required:

a.What costs are sunk?

b.What costs are relevant?

c.What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?

d.What other items should Pat, as manager of the Pizzeria, consider when making this decision?

 

 

 



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