1. Baxter Corporation is working at full production capacity producing 10,000 units of a unique product, JKL. Manufacturing costs per unit for JKL follow:
Direct material $ 2
Direct manufacturing labor 3
Manufacturing overhead 5
The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed costs of $30,000 (at full capacity of 10,000 units). The non-manufacturing costs, all variable, are $4 per unit, and the selling price is $20 per unit. A customer, Jacksonville Company, has asked Baxter to produce 2,000 units of a modification of JKL to be called RST. RST would require the same manufacturing processes as JKL. Jacksonville Company has offered to share equally the non-manufacturing costs with Baxter. RST will sell at $15 per unit.
a. What is the opportunity cost to Baxter of producing the 2,000 units of RST (assuming that no overtime is worked)?
b. The Graves Company has offered to produce 2,000 units of JKL for Brown, so Brown can accept the Jacksonville offer. Graves Company would charge Baxter $14 per unit for the JKL. Should Baxter accept the Graves Company offer?
c. Suppose Baxter had been working at less than full capacity producing 8,000 units of JKL at the time the RST offer was made. What is the minimum price Baxter should accept for RST under these conditions (ignoring the $15 price mentioned previously)?
2. The Carpet Division of Home Products Corporation manufactures a single grade of residential grade carpeting. The division has the capacity to produce 500,000 square yards of carpet each year. Its current costs and revenues are shown here:
Sales (400,000 square yards) $2,000,000
Variable costs per square yard:
Fixed costs per square yard (based on 500,000 yard capacity)
The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the Carpet Division) each year at a cost of $6.50 per square yard from an outside vendor.
Refer to Home Products Corporation. If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of 40,000 square yards of carpeting, what is the Carpet Division's minimum price?© BrainMass Inc. brainmass.com October 16, 2018, 11:08 pm ad1c9bdddf
1a. Opportunity Cost = 2000 units of product JKL
Each unit = $20 in revenue = $20 x 2000 = $40,000
Less: Costs = 2000 [2+3+2+4] = $22,000
Contribution Margin = $40,000 - $22,000 = $18,000
b. In ...
The financial situation of Baxter Corporation and Home Products Corporation are analyzed.
Micro-costs and Acquisition Costs
Supply Chain Scenario:
BlueJay Manufacturing was at a crossroads in its growth. It was late Friday afternoon and BlueJay's director of supply chain management, Fred Butler, was in his office contemplating the next steps for his department and company. As the business expanded, the company was faced with a good problem: too much business. BlueJay's recently introduced products are more in demand than had been expected by the senior leadership team (SLT), and as a result, the company was scrambling to find ways to meet that higher demand. Up until this stage in the company's growth, BlueJay's senior leadership team employed the strategy of keeping all aspects of manufacturing in-house. BlueJay worked hard in recent years to improve its once tarnished quality image, and the SLT felt that particular approach was the best way to maintain adequate control of both cost and quality; however, with product demand now increasing dramatically, a different tact must be considered. In strategizing to meet the unexpected level of customer demand, the SLT has asked the supply chain team to explore outsourcing portions of its in-house manufacturing. Although Butler and his supply chain team are already working long hours to support the new product launches, they only have 30 days to make those recommendations.
To address the company's outsourcing options, Butler must consider many things. First, what portions of the in-house manufacturing are outside suppliers capable of taking over, and what are the associated risks? Second, what can be outsourced? Butler knows that establishing the type of long-term partnership with suppliers that the company is looking for will require a deep understanding of the in-house costs for each of the outsourcing initiatives. Butler also knows that to make a rational decision, he and his supply chain management team must thoroughly understand the financial aspects of these potential outsourcing activities.
Beyond incorporating the risks of outsourcing into the evaluation, compare the in-house costs to the supplier proposals BlueJay needs to fully capture the total life cycle costs for completing the work in house so the outsourcing decision is not made on purchase price alone. Although BlueJay does want to keep the work inside, the project requires the company to make a significant capital investment. Because of the size of the capital investment for BlueJay, Butler not only needs to understand the strategic side of the outsourcing initiatives, he also needs to understand the payback on the investments that BlueJay would be required to make. Unless Butler can rationally compare and demonstrate the total ownership costs of keeping the work in house as compared to the supplier pricing to the SLT, he suspects that getting authorization to move forward will be difficult.
Butler knows he cannot make these critical decisions for the company alone, especially in regard to understanding the overall financial ramifications of the various possible scenarios. Butler has decided that he needs a cross-functional team with representation from the other departments in the company. Butler feels he especially needs the finance group and all those skilled in financial analysis for evaluating the make versus buy decision for the proposal to be given to the SLT. Your assignment is to assist Butler and the supply chain management team with the tasks that follow.