P 1-8 Golf Specialties
Golf Specialties (GS), a Belgian company, manufactures a variety of golf paraphernalia, such as headcovers for woods, embroidered golf towels, and umbrellas. GS sells all its products exclusively in Europe through independent distributors. Given the popularity of Tiger Woods, one of GS's more popular items is a head cover in the shape of a tiger. GS is currently making 500 tiger head covers a week at a per unit cost of 3.50 euros, which includes both variable costs and allocated fixed costs. GS sells the tiger head covers to distributors for 4.25 euros. A distributor in Japan, Kojo Imports, wants to purchase 100 tiger head covers per week from GS and sell them in Japan. Kojo offers to pay GS 2 euros per head cover. GS has enough capacity to produce the additional 100 tiger head covers and estimates that if it accepts Kojo's offer, the per unit cost of all 600 tiger head covers will be 3.10 euros. Assume the cost data provided (3.50 euros and 3.10 euros) are accurate estimates of GS's costs of producing the tiger head covers. Further assume that GS's variable cost per head cover does not vary with the number of head covers manufactured.
a. To maximize firm value, should GS accept Kojo's offer? Explain why or why not.
b. Given the data in the problem, what is GS's weekly fixed cost of producing the tiger head
c. Besides the data provided above, what other factors should GS consider before making a
decision to accept Kojo's offer?
P 1-10: Montana Pen Company
Montana Pen Company manufactures a full line of premium writing instruments. It has 12 different styles and within each style, it offers ball point pens, fountain pens, mechanical pencils, and a roller ball pen. Most models also come in three finishes-gold, silver, and black matte. Montana Pen's Bangkok, Thailand, plant manufactures four of the styles. The plant is currently producing the gold clip for the top of one of its pen styles, no. 872. Current production is 1,200 gold no. 872 pens each month at an average cost of 185 baht per gold clip. (One U.S. dollar currently buys 35 baht.) A Chinese manufacturer has offered to produce the same gold clip for 136 baht. This manufacturer will sell Montana Pen 400 clips per month. If it accepts the Chinese offer and cuts the production of the clips from 1,200 to 800, Montana Pen estimates that the cost of each clip it continues to produce will rise from 185 baht to 212.5 baht per gold clip.
a. Should Montana Pen outsource 400 gold clips for pen style no. 872 to the Chinese firm?
Provide a written justification of your answer.
b. Given your answer in part (a), what additional information would you seek before deciding
to outsource 400 gold clips per month to the Chinese firm?
P 2-2 Negative Opportunity Costs
Can opportunity costs be negative? Give an example.
P 2-5: J.P. Max Department Stores
J.P. Max is a department store carrying a large and varied stock of merchandise. Management is considering leasing part of its floor space for $72 per square foot per year to an outside jewelry company that would sell merchandise. Two areas currently in use are being considered: home appliances (1,000 square feet) and televisions (1,200 square feet). These departments had annual profits of $64,000 for appliances and $82,000 for televisions after allocated fixed occupancy costs of $7 per square foot were deducted. Allocated fixed occupancy cost include property taxes, mortgage interest, insurance, and exterior maintenance for the department store.
Considering all the relevant factors, which department should be leased and why?
P 2-15: Volume and Profits
Assuming the firm sells everything it produces and assuming that variable cost per unit does not change with volume; total profits are higher as volume increases because fixed costs are spread over more units.
a. True or false?
b. Explain your answer in part (a).