Tommy's Company is working at full production capacity producing 10,000 units of a unique product, PTSD....

 

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Tommy's Company is working at full production capacity producing 10,000 units of a unique product, PTSD. Manufacturing costs per unit for PTSD are as follows: Direct materials Direct manufacturing labour Manufacturing overhead 2359 $2 $10 The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed costs of $30,000 (at full capacity of 10,000 units). The non- manufacturing costs, all variable, are $4 per unit, and the selling price is $20 per unit. A customer, Flounding Corporation, has asked Tommy's to produce 2,000 units of a modification of PTSD to be called PTSI. PTSI would require the same manufacturing processes as PTSD. Flounding Corporating has offered to share equally the non-manufacturing costs with Tommy's. PTSI will sell at $15 per unit. Required: (1) What is the opportunity cost to Tommy's of producing the 2,000 units of PTSI, assuming that no overtime is worked? (2) The Winter Company has offered to produce the 2,000 units of PTSI for Tommy's, so that Tommy's can accept the Flounding offer. Winter would charge Tommy's $14 per unit for the PTSI. Should Tommy's accept the Winter Company's offer? (3) Suppose Tommy's had been working at less than full capacity producing 8,000 units of PTSD at the time the PTSI offer was made. What is the minimum price Tommy's should accept for PTSI under these conditions? Tommy's Company is working at full production capacity producing 10,000 units of a unique product, PTSD. Manufacturing costs per unit for PTSD are as follows: Direct materials Direct manufacturing labour Manufacturing overhead 2359 $2 $10 The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed costs of $30,000 (at full capacity of 10,000 units). The non- manufacturing costs, all variable, are $4 per unit, and the selling price is $20 per unit. A customer, Flounding Corporation, has asked Tommy's to produce 2,000 units of a modification of PTSD to be called PTSI. PTSI would require the same manufacturing processes as PTSD. Flounding Corporating has offered to share equally the non-manufacturing costs with Tommy's. PTSI will sell at $15 per unit. Required: (1) What is the opportunity cost to Tommy's of producing the 2,000 units of PTSI, assuming that no overtime is worked? (2) The Winter Company has offered to produce the 2,000 units of PTSI for Tommy's, so that Tommy's can accept the Flounding offer. Winter would charge Tommy's $14 per unit for the PTSI. Should Tommy's accept the Winter Company's offer? (3) Suppose Tommy's had been working at less than full capacity producing 8,000 units of PTSD at the time the PTSI offer was made. What is the minimum price Tommy's should accept for PTSI under these conditions?

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Opportunity Cost and Decision Analysis for Tommys Company 1 Opportunity Cost of Producing PTSI To calculate the opportunity cost we need to determine ... View the full answer