Cool Sphere produces many types of fans, both for commercial and residential use. A model that has proven to be quite popular is the Retractafan. This is a fan with retractable blades and has a LED lamp as well. Michael Fowler, the manager of Cool Sphere, is now looking closely at its production of retractable fans, which included 10,000 units in the prior year. 

Cool Sphere has the capacity to produce 15,000 Retractafan per year. The following table is based on 10,000 units that they produced last year and include $100,000 of allocated fixed manufacturing overhead. The selling and administrative cost of $20.00 per fan includes (at a sales level of 10,000 units) fixed costs of $6.00 per unit.

Michael believes that in the coming year, demand for the retractable fans will be 20,000 units. Cool Sphere has looked into the possibility of purchasing the retractable fans from another manufacturer to help it meet this demand. Blowhard, a steady supplier of quality products, would be able to supply up to 9,000 retractable fans per year at a price of $46.00 per unit, delivered to Cool Sphere’s facility.

“Look,” Michael said to you. “I need you to work out for me what these all mean. My accounts team knows how to put in the numbers, but it seems like no one knows what to do with it. Is that how much it really costs me to produce a fan? If so, then Blowhard must be doing something different to be able to charge me such a low price. Can you re-work those numbers and tell me how much each of the Retractafans cost?” 

As you nodded your head, Michael continued: “As I have told Maureen, demand is going to go up to 20,000 units next year. But I only have capacity for 15,000 units. So what should I do? I know we can buy some from Blowhard to make up the 20,000 units requirement, but how many should I buy? Blowhard has said they can supply me with up to 9,000 units. If the price they are quoting me is lower than how much it cost me to produce, then maybe I should just buy from Blowhard and then produce the remainder. Tell me how many I need to buy. Give me a plan of how many to make and how many to buy and show me what is the maximum contribution margin I can make.”

 “And one last thing,” Michael went on. “Is there anything else I should consider apart from the price of the fans from Blowhard? Maureen always talks about these socalled “qualitative factors”. Maybe consider them for me as well? Thanks.”

Calculate:

i. The relevant cost of each Retractafan; 

ii. The appropriate production/purchase plan; and, 

iii. The qualitative factors to consider

Transcribed Image Text:

$ 72.00 Selling price per unit Costs per unit: Electric motor $ 6.00 Other parts Direct labour ($15/hour) Manufacturing overhead Selling and administrative costs Profit per unit 8.00 15.00 15.00 20.00 64.00 $ 8.00 $ 72.00 Selling price per unit Costs per unit: Electric motor $ 6.00 Other parts Direct labour ($15/hour) Manufacturing overhead Selling and administrative costs Profit per unit 8.00 15.00 15.00 20.00 64.00 $ 8.00

Answer rating: 100% (QA)

i Relevant costs are cots that relates to a specific management decision The costs vary proportionally with the change in decisions These costs must n... View the full answer