Relevant costs, capital budgeting, strategic decision. (M. Porporato, adapted) Wilcox is a family-owned company that has been
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In the spring of 2013, Oh Mart, a chain of large supermarkets, approached Wilcox’s CEO and asked about the possibility of producing microwaves for them. The microwaves will be sold under the Oh Mart house brand, called Top Line.
They are offering a five-year con- tract that could be automatically extended on a year-to-year basis, unless one party gives the other at least three months’ notice that it does not wish to extend the contract. The deal is for 24,000 units per year with a unit price of $90 each. Oh Mart does not want title on a microwave to pass from Wilcox to Oh Mart until the microwave is shipped to a specific Oh Mart store. Additionally Oh Mart wants the Top Line microwaves to be somewhat different in appearance from Wilcox’s other microwaves. These requirements would increase Wilcox’s purchasing, inventorying, and production costs.
In order to be able to give an answer to Oh Mart, knowing that they had no room to negotiate, Wilcox managers gathered the following information:
1. First-year costs of producing Top Line microwaves:
883Capital Budgeting: Methods of Investment AnalysisMaterials (includes items specific to Oh Mart models)........................ $40
Labour (same as with regular microwaves).............. $20
Overhead at 100% of labour (50% is variable; the 100%
rate is based on a volume of 100,000 units per year) ........... $20
Total unit cost.......................... $80
2. Related added inventories (the cost of financing them is estimated to be close to 15% per year):
Materials:........... two-month supply (a total of 4,000 units)
Work in process:........ 1,000 units, half completed (but all materials for them issued)
Finished goods:......... 500 units (awaiting next carload lot shipment to an Oh Mart central warehouse in Concord, Ontario)
3. Impact on Wilcox’s regular sales. Wilcox’s sales over the next two years are expected to be about 75,000 units a year if they forgo the Oh Mart deal, based on the CEO estimates after launching a new “top of the line” microwave. If Wilcox accepts the deal, it would lose about 5,000 units of theregular sales volume a year, since their retail distribution is quite strong in Oh Mart market regions. These estimates do not include the possibility that a few of Wilcox’s current dealers might drop their line if they find out that Wilcox is making microwaves for Oh Mart with a lower selling price.
Distribution
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Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ
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