Flying High Inc. (FHI) is a division of The Master Toy Company. FHI makes remote-controlled airplanes. During 2004, FHI incurred the following costs in the process of making 5,000 planes.

Required:

a. FHI uses a cost-plus pricing strategy. FHI sets its price at product cost plus \($100.\) Determine the price that FHI should charge for its remote-controlled airplanes.

b. Assume that a potential customer that operates a chain of high-end toy stores has approached FHI. A buyer for this chain has offered to purchase 1,000 planes from FHI at a price of \($275\) each. Ignoring qualitative considerations, should FHI accept or reject the order?

c. FFII has the opportunity to purchase the planes from Arland Manufacturing Company for \($325\) each. Arland maintains adequate inventories so that it can supply its customers with planes on demand. Should FHI accept the opportunity to outsource the making of its planes?

d. Use the contribution margin format to prepare an income statement based on historical cost data. Prepare a second income statement that reflects the relevant cost data that Master Toy should con¬ sider in a segment elimination decision. Based on a comparison of these two statements, indicate whether Master Toy should eliminate the FHI division.

e. FHI is considering replacing the equipment it currently uses to manufacture its planes. It could purchase replacement equipment for \($480,000\) that has an expected useful life of four years and a salvage value of \($40,000\) . The new equipment would increase productivity substantially, reducing unit-level labor costs by 20 percent. Assume that FHI would maintain its production and sales at 5,000 planes per year. Prepare a schedule that shows the relevant costs of operating the old equipment versus the costs of operating the new equipment. Should FHI replace the equipment?

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Unit-level materials costs (5,000 units @ $80) $ 400,000 Unit-level labor costs (5,000 units @ $90) 450,000 Unit-level overhead costs (5,000 @ $70) Depreciation cost on manufacturing equipment* Other manufacturing overhead Inventory holding costs Allocated portion of The Master Toy Company's facility-level costs Total costs 350,000 50,000 140,000 240,000 600,000 $2,230,000