Koonce Company manufactures private-label small electronic products, such as alarm clocks, calculators, kitchen timers, stopwatches, and automatic
Question:
Circuit board, 1 each @ $1.00 ...... $1.00
Plastic case, 1 each @ $0.50 ...... 0.50
Alarms, 4 @ $0.15 each ........ 0.60
Labor, 15 minutes @ $12/hour ...... 3.00
Overhead, $1.60 per labor hour ..... 0.40
Koonce could purchase clocks to fill the Kmart order for $9 from Silver Star, a Korean manufacturer with a very good quality record. Silver Star has offered to reduce the price to $7.50 after Koonce has been a customer for 6 months, placing an order of at least 1,000 units per month. If
Koonce becomes a “preferred customer” by purchasing 15,000 units per year, the price would be reduced still further to $4.50. Alpha Products, a local manufacturer, has also offered to make clocks for Koonce. It has offered to sell 5,000 clocks for $5 each. However, Alpha Products has been in business for only 6 months. It has experienced significant turnover in its labor force, and the local media have reported that the owner may soon face tax-evasion charges. The owner of Alpha Products is an electronic engineer, however, and the quality of the clocks is likely to be good. If Koonce decides to purchase the clocks from either Silver Star or Alpha, all the costs to manufacturer could be avoided, except a total of $5,000 in overhead costs for machine depreciation. The machinery is fairly new and has no alternate use.
Instructions
(a) What is the difference in profit under each of the alternatives if the clocks are to be sold for $13.00 each to Kmart?
(b) What are the most important nonfinancial factors that Koonce should consider when making this decision?
(c) What should Koonce do in regard to the Kmart order? What should it do in regard to continuing to manufacture the multi-alarm clocks? Be prepared to defend your answer.
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Related Book For
Accounting Tools for business decision making
ISBN: 978-0470095461
4th Edition
Authors: kimmel, weygandt, kieso
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