CD7 EXCEL Tutorial

CURRENT DESIGNS

Current Designs faces a number of important decisions that require incremental analysis. Consider each

of the following situations independently.

Situation 1

Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president

of a brewing company. He was calling to inquire about the possibility of Current Designs producing "floating

coolers" for a promotion his company was planning. These coolers resemble a kayak but are about one-third

the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip.

The company would be interest in purchasing 100 coolers for the upcoming summer. It is willing to pay $250

per cooler. The brewing company would pick up the coolers upon completion of the order.

Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce

the coolers. After careful analysis, the following costs were identified.

Direct materials

$80/unit

Variable overhead

$20/unit

Direct labor

$60/unit

Fixed overhead

$1,000

Current Designs would be able to modify an existing mold to produce the coolers. The cost of these

modifications would be approximately $2,000.

Instructions

(a)

Prepare an incremental analysis to determine whether Current Designs should accept this special order to

produce the coolers.

(b)

Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at

full capacity.

Situation 2

Current Designs is always working to identify ways to increase efficiency while becoming more environmentally

conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the

company should consider replacing the current rotomold oven as a way to realize savings from reduced energy

consumption. The oven operates on natural gas, using 17,000 therms of natural gas for an entire year. A new,

energy-efficient rotomold oven would operate on 15,000 therms of natural gas for an entire year. After seeking out

price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new,

energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and

it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for

$10,000

Instructions

(a)

Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven,

assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.

(b)

Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company

projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss

how that might change your conclusion in (a).

Situation 3

One of Current Designs' competitive advantages is found in the ingenuity of its owners and CEO, Mike Cichanowski. His

involvement in the design of kayak molds and production techniques has led to Current Designs being recognized as an

industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the

most important component of a kayak, the seat. The "Revolution Seating System" is one-of-a-kind, rotating axis seat

that gives unmatched, full contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a

customizable seat position that maximizes comfort for the rider.

Having just designed the "Revolution Seating System", Current Designs must now decide whether to produce the seats

internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows.

Direct materials

$20/unit

Direct labor

$15/unit

Variable overhead

$12/unit

Fixed overhead

$20,000

Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are

purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will

cost $50 to purchase a seat from an outside vendor.

Instructions

(a)

Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating

System."

(b)

Would your answer in (a) change if the productive capacity released by not making the seats could be used to

produce income of $20,000?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Situation 1

(a)

Prepare an incremental analysis to determine whether Current Designs should accept this special order to

produce the coolers.

Net Income

Reject Order

Accept Order

Increase (Decrease)

Revenues

Value

?

Value

Costs

Value

?

Value

Net income

?

?

?

(b)

Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at

full capacity.

Situation 2

(a)

Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven,

assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.

Net Income

Retain Oven

Replace Oven

Increase (Decrease)

Variable mfg. costs

?

?

?

New oven costs

Value

Value

?

Proceed from scrapping old oven

Value

Value

?

Total

?

?

?

(b)

Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company

projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss

how that might change your conclusion in (a).

Net Income

Retain Oven

Replace Oven

Increase (Decrease)

Variable mfg. costs

?

?

?

New oven costs

Value

Value

?

Proceed from scrapping old oven

Value

Value

?

Total

?

?

?

Situation 3

(a)

Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating

System."

Net Income

Make

Buy

Increase (Decrease)

Direct materials

?

Value

Value

Direct labor

?

Value

Value

Variable mfg. costs

?

Value

Value

Fixed mfg. costs

Value

?

?

Purchase price

Value

?

?

Total annual cost

?

?

?

(b)

Would your answer in (a) change if the productive capacity released by not making the seats could be used to

produce income of $20,000?

Net Income

Make

Buy

Increase (Decrease)

Total annual cost

Value

Value

Value

Opportunity cost

Value

Value

Value

Total cost

?

?

?

After you have completed CD7, consider the following additional questions.

1.

Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and

the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or

reject the special order.

2.

Assume in situation 2, the purchase price of the new oven changed to $100,000. Would this change

the decision to retain or replace the oven?

3.

Assume in situation 3, that the estimated number of seats to be produced changed to 3,500 and the cost to purchase

one seat from an outside supplier changed to $55. Should Current Designs make or buy the seats?