Problem #1

Make or Buy

Young Inc. has been manufacturing its own lamp shades for its table lamps. The company is currently operating at 100% capacity. The direct materials cost is $4 per unit, the direct labour cost is $6 per unit and variable manufacturing costs are 50% of direct labour. Total fixed manufacturing costs are $300,000 per year. Normal production is 50,000 lampshades per year.

A supplier offers to make the lampshades at a price of $18.50 per unit. If Young Inc. accepts the offer all variable manufacturing cost would be avoidable and $50,000 of the total fixed manufacturing costs would not and would have to be absorbed by other products.

1. Prepare an incremental analysis for the decision to make or buy the lampshades.

2. Should Young make or buy the lampshades?

3. Assume that if Young decides to buy the lampshades part of the factory space could be rented out for $40,000 per year. Should Young make or buy the lampshades? Show your calculations.

Problem # 2

Special Order

Hi-Tech is the creator of Y-Go, a technology that weaves silver into the fabric to kill bacteria and odour on clothing while managing heat. Y-GO has become very popular in undergarments for sports activities. Operating at capacity, Hi-Tech can produce one million undergarments each year .The normal selling price is $10 per unit. The per unit cost for each unit is as follows:

	Per unit	Total
Direct materials	$2.00	$2,000,000
Direct labour	0.50	500,000
Variable manufacturing overhead	1.00	1,000,000
Fixed manufacturing overhead	1.25	1,250,000
Variable selling expenses	0.25	250,000

The Canadian armed forces (CAF) has approached Hi Tech and expressed an interest in purchasing 200,000 Y-GO undergarments for soldiers stationed in hot climates.

1. If Hi-Tech is operating at 100% capacity what is the minimum price to charge?

2. If Hi- Tech is operating at 90% capacity what is the minimum price to charge?

3. If Hi-Tech is operating at 70% capacity what is the minimum price to charge?

4. Assume High Tech is operating at 90% capacity and Hi-tech receives a special order from the CAF for 200,000 Y-Gos at a selling price of $8.00 per unit. Compute the increase in profit ( or loss) if High Tech accepts the order.

Problem # 3

Metropole Inc. can produce three different products interchangeably on two machines which have a total availability of 100 per period. The accounting department provides the following information on these products.

	A	B	C
Selling price per unit	$25	$35	$45
Variable costs per unit	$15	$27	$37
Time required to produce 1 unit	6 minutes	12 minutes	15 minutes
Minimum units that must be produced	100	none	140
Maximum demand	200	none	200

Required:

Determine how many units of each product should be produced for the period and the total contribution margin.