1) Consider the following information, prepared based on a capacity of 40,000 units:
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Category
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Cost per Unit
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Variable manufacturing costs
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$5.00
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|
Fixed manufacturing costs
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$1.50
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|
Variable marketing costs
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$1.00
|
|
Fixed marketing costs
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$0.50
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Capacity cannot be added in the short run and the firm currently sells the product for $10 per unit.
Consider each of these scenarios independent of each other.
a) The company is currently producing 30,000 units per month. A potential customer has contacted the firm and offered to purchase 10,000 units this month only. The customer is willing to pay $5.50 per unit. Since the potential customer approached the firm, there will be no variable marketing costs incurred. Should the company accept the special order? Why or why not? Be specific.
b) Assume the same facts as in part a, except that the company is producing 40,000 units per month. Should the company accept the special order? Why or why not? Be specific.
c) List and describe other factors should be taken into consideration when deciding whether to accept a special order? Be specific in your responses.
2) A firm expects to sell 10,000 units of its product annually. It estimates that it costs $200 to place an order and that each unit costs $7 annually to carry in inventory. It takes 7 days to receive an order once it is placed, and the store is open 365 days per year.
a) How many units should the firm order at a time if it wants to minimize the sum of ordering and carrying costs?
b) How many orders will it place in a year?
c) What will its average inventory level be during the year?
d) What is its reorder point?
3) A firm believes it can generate an additional $250,000 per year in revenues for the next 5 years if it replaces existing equipment with new equipment that costs $210,000. The firm expects to be able to sell the new equipment when it is finished using it (after 5 years). The existing equipment has a book value of $20,000 and a market value of $12,000. Variable costs are expected to total 40% of revenue. The additional sales will require an initial investment in net working capital of $15,000, which is expected to be recovered at the end of the project (after 5 years). Assume the firm uses straight line depreciation. The firm's marginal tax rate is 30%.
a) What is the required initial investment (at t = 0)?
b) What is the annual operating cash flow?
c) What is the end of project cash flow?
4)
a) Describe the differences between unit-related, batch-related, and product-sustaining activities. Give one example of each type.
b) Describe the difference between transaction drivers and duration drivers. When would one type be preferred over the other?