DIFFERENTIAL ANALYSIS AND DECISION MAKING

Heavy Metals produces various electronics items for use in heavy machines. The company usually produces all the necessary parts for its products. However, an outside supplier has recently offered to sell a specialized part - Part H - to the company for $31 per unit. To evaluate this offer, the company has gathered the following information regarding its own cost of producing the Part H internally:

	Per unit	15,000 units per year
Direct materials	12	180,000
Direct Labour	12	180,000
Variable manufacturing overhead	3	45,000
Fixed manufacturing overhead (one-third belongs to supervisory salaries; two-thirds belongs to the depreciation of special equipment)	6	90,000

1. Assuming that the company has no alternative use for the facilities now being used to produce Part H, should the outside supplier's offer be accepted?Why?

Suppose that if Part H were purchased, the company could use the freed capacity to launch a new product. The segment margin of the new product would be $75,000 per year.

2. Should the company accept the offer to buy Part H for $31 per unit? Why?

Fine Juice Limited manufactures and sells organic juice for special events. Its manufacturing plant has the capacity to produce 17,000 bottles each month; its current monthly production is 15,500 bottles. The company's regular selling price is $120 per bottle. The following data are provided for the current level of production:

Variable costs:	($)
Direct materials	850,000
Directlabour	475,000
Selling and administrative	17,000
Fixed costs:
Manufacturing	705,175
Selling and administrative	265,675

The company has just received a special one-time order for 950 bottles at $86 each. This order would not affect fixed costs.

3. Should the company accept this special order?Why?

Assume that no variable selling and administrative costs would be incurred for this particular order. All other data presented above would remain the same.

4. Should the company accept this special order? Why?