Buck & Sons Signs is a family business that designs and manufactures signs. The Company serves...

  

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Buck & Sons Signs is a family business that designs and manufactures signs. The Company serves three types of customers: the local government, a large restaurant chain, and one-off shops. The different types of customers require varying degrees of design creativity depending on uniqueness of the type of signs. This past year, leadership of the Company transferred from Herbert Buck to his son, Josh Buck. Concerned with current profitability, Josh is in the process of evaluating the Company's product mix and seeks your help to determine whether a shift in product/customer mix is warranted. There is some flexibility in changing the product mix based on current production and maximum demand for each type of customer (where information about demand is shown in the table below). The Company's pricing system is based on direct cost-plus where "direct cost" includes only direct materials and direct labor. The Company charges 40%, 20%, and 60% above direct cost to the government, restaurant chain, and one-off shops, respectively. Due to a tight labor market for creative designers, the total number of creative design hours available to the Company is limited to 4,300 hours per year. The creative designers are on fixed salaries and their total compensation is included in total fixed overhead of $450,000. Fixed overhead is allocated to each type of customer based on direct labor dollars. Josh has compiled information from various sources and provided it below. All dollar amounts are averages per sign: Local government Restaurant chain One-off shops Current number of signs produced 200 1,000 600 300 1,400 1,100 Maximum demand Revenue, costs, and profit per sign produced Average sales revenue Direct materials (variable) S720 $1,280 S1,470 S650 S500 s100 S500 Direct labor (variable) Total direct cost (sum) Fixed overhead (fixed) S400 $300 S600 S125 S1,050 S800 S500 $375 S105 Profit -S80 -S5 Creative designer hours per sign 4.00 0.50 5.00 Required: 1.) Calculate total profit or loss under the current mix of types of signs produced and sold (200, 1,000, and 600 for government, restaurant, and one-off shops, respectively). (15 points) 2.) Josh looks at the information provided and says the following: "Our cost-plus markup and profit per sign are highest for the one-off shops, in fact it is the only profitable product line! We will maximize profit if we shift all of our effort (production and all designer time) to making signs for our one-off customers." Assume transferring resources between product lines will not affect total fixed overhead cost incurred. Calculate total profit or loss following Josh's advice. (15 points) 3.) Do you agree with Josh's logic? If not, propose an alternative product mix that does not exceed the constraints on designer time or customer demand. Assume transferring resources between product lines will not affect total fixed overhead cost incurred. Be sure to show your calculations and show total firm profit or loss that will result from your proposal. (20 points) 4.) One of the Company's part-time designers is considering leaving for a competitor. This designer currently receives compensation of S40,000 per year and provides 800 hours of designer time. She has been offered $55,000 in compensation from the competitor. Assuming that it will not be possible to hire a replacement if this part-time designer leaves, should Buck & Sons match the $55,000 offer (assume that any decision made would have no impact on the compensation of the other creative designers at Buck & Sons)? Provide calculations in support of your answer. (15 points) Buck & Sons Signs is a family business that designs and manufactures signs. The Company serves three types of customers: the local government, a large restaurant chain, and one-off shops. The different types of customers require varying degrees of design creativity depending on uniqueness of the type of signs. This past year, leadership of the Company transferred from Herbert Buck to his son, Josh Buck. Concerned with current profitability, Josh is in the process of evaluating the Company's product mix and seeks your help to determine whether a shift in product/customer mix is warranted. There is some flexibility in changing the product mix based on current production and maximum demand for each type of customer (where information about demand is shown in the table below). The Company's pricing system is based on direct cost-plus where "direct cost" includes only direct materials and direct labor. The Company charges 40%, 20%, and 60% above direct cost to the government, restaurant chain, and one-off shops, respectively. Due to a tight labor market for creative designers, the total number of creative design hours available to the Company is limited to 4,300 hours per year. The creative designers are on fixed salaries and their total compensation is included in total fixed overhead of $450,000. Fixed overhead is allocated to each type of customer based on direct labor dollars. Josh has compiled information from various sources and provided it below. All dollar amounts are averages per sign: Local government Restaurant chain One-off shops Current number of signs produced 200 1,000 600 300 1,400 1,100 Maximum demand Revenue, costs, and profit per sign produced Average sales revenue Direct materials (variable) S720 $1,280 S1,470 S650 S500 s100 S500 Direct labor (variable) Total direct cost (sum) Fixed overhead (fixed) S400 $300 S600 S125 S1,050 S800 S500 $375 S105 Profit -S80 -S5 Creative designer hours per sign 4.00 0.50 5.00 Required: 1.) Calculate total profit or loss under the current mix of types of signs produced and sold (200, 1,000, and 600 for government, restaurant, and one-off shops, respectively). (15 points) 2.) Josh looks at the information provided and says the following: "Our cost-plus markup and profit per sign are highest for the one-off shops, in fact it is the only profitable product line! We will maximize profit if we shift all of our effort (production and all designer time) to making signs for our one-off customers." Assume transferring resources between product lines will not affect total fixed overhead cost incurred. Calculate total profit or loss following Josh's advice. (15 points) 3.) Do you agree with Josh's logic? If not, propose an alternative product mix that does not exceed the constraints on designer time or customer demand. Assume transferring resources between product lines will not affect total fixed overhead cost incurred. Be sure to show your calculations and show total firm profit or loss that will result from your proposal. (20 points) 4.) One of the Company's part-time designers is considering leaving for a competitor. This designer currently receives compensation of S40,000 per year and provides 800 hours of designer time. She has been offered $55,000 in compensation from the competitor. Assuming that it will not be possible to hire a replacement if this part-time designer leaves, should Buck & Sons match the $55,000 offer (assume that any decision made would have no impact on the compensation of the other creative designers at Buck & Sons)? Provide calculations in support of your answer. (15 points)

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Answer Explanation 1 Local Government Restaurant Chain OneOff Shops Total Number of signs produced 2... View the full answer