You just started a summer internship with the successful management consulting firm of Kirk, Spock, and McCoy. Your first day on the job was a busy one, as the following problems were presented to you.
Required: Supply the requested comments in each of the following independent situations.
1. Alderon Enterprises is evaluating a special order it has received for a ceramic fixture to be used in aircraft engines. Alderon has recently been operating at less than full capacity, so the firm's management will accept the order if the price offered exceeds the costs that will be incurred in producing it. You have been asked for advice on how to determine the cost of two raw materials that would be required to produce the order.
a. The special order will require 900 gallons of endor, a highly perishable material that is pur- chased as needed. Alderon currently has 1,300 gallons of endor on hand, since the material is used in virtually all of the company's products. The last time endor was purchased, Alderon paid $10.00 per gallon. However, the average price paid for the endor in stock was only $9.50. The market price for endor is quite volatile, with the current price at $11.00. If the special order is accepted, Alderon will have to place a new order next week to replace the 900 gallons of endor used. By then the price is expected to reach $11.50 per gallon.
Using the cost terminology introduced in Chapter 2, comment on each of the cost figures mentioned in the preceding discussion. What is the real cost of endor if the special order is produced?
b. The special order would also require 1,400 kilograms of tatooine, a material not normally required in any of Alderon's regular products. The company does happen to have 1,900 kilo- grams of tatooine on hand, since it formerly manufactured a ceramic product that used the material. Alderon recently received an offer of $28,000 from Solo Industries for its entire supply of tatooine. However, Solo Industries is not interested in buying any quantity less than Alderon's entire 1,900-kilogram stock. Alderon's management is unenthusiastic about Solo's offer, since Alderon paid $40,000 for the tatooine. Moreover, if the tatooine were purchased at today's market price, it would cost $22.00 per kilogram. Due to the volatility of the tatooine, Alderon will need to get rid of its entire supply one way or another. If the material is not used in production or sold, Alderon will have to pay $2,000 for each 500 kilograms that is trans- ported away and disposed of in a hazardous waste disposal site.
Using the cost terminology introduced in Chapter 2, comment on each of the cost figures men- tioned in the preceding discussion. What is the real cost of tatooine to be used in the special order?
2. CopyFast Company, a specialist in printing, has established 500 convenience photo copying cen- ters throughout the country. In order to upgrade its services, the company is considering three new models of laser copying machines for use in producing high-quality copies. These high-quality copies would be added to the growing list of products offered in the CopyFast shops. The selling price to the customer for each laser copy would be the same, no matter which machine is installed in the shop. The three models of laser copying machines under consideration are: 1500S, a small- volume model; 1500M, a medium-volume model; and 1500L, a large-volume model. The annual rental costs and the operating costs vary with the size of each machine. The machine capacities and costs are as follows:
Photocopier Model
|
Annual capacity (copies) ...........................................................................
|
1500S
80,000
|
1500M
300,000
|
1500L
600,000
|
|
Costs:
|
|
|
|
|
Annual machine rental .........................................................................
|
$ 4,000
|
$ 5,500
|
$ 10,000
|
|
Direct material and direct labor cost per copy ........................................
|
.010
|
.010
|
.010
|
|
Variable overhead costs per copy ..........................................................
|
.060
|
.035
|
.015
|
a. Calculate the volume level in copies where CopyFast Company would be indifferent to acquir- ing either the small-volume model laser copier, 1500S, or the medium-volume model laser copier, 1500M.
b. The management of CopyFast Company is able to estimate the number of copies to be sold at each establishment. Present a decision rule that would enable management to select the most profitable machine without having to make a separate cost calculation for each establishment. (Hint: To specify a decision rule, determine the volume at which CopyFast Company would be indifferent between the small and medium copiers. Then determine the volume at which the company would be indifferent between the medium and large copiers.)
3. A local PBS station has decided to produce a TV series on state-of-the-art manufacturing. The director of the TV series, Justin Tyme, is currently attempting to analyze some of the projected costs for the series. Tyme intends to take a TV production crew on location to shoot various
high-tech manufacturing scenes as they occur. If the four-week series is shown in the 8:00-9:00 p.m. prime-time slot, the station will have to cancel a wildlife show that is currently scheduled. Manage- ment projects a 10 percent viewing audience for the wildlife show, and each 1 percent is expected to bring in donations of $20,000. In contrast, the manufacturing show is expected to be watched by 15 percent of the viewing audience. However, each 1 percent of the viewership will likely generate only $10,000 in donations. If the wildlife show is canceled, it can be sold to network television for
$50,000.
Using the cost terminology introduced in Chapter 2, comment on each of the financial amounts mentioned in the preceding discussion. What are the relative merits of the two shows regarding the projected revenue to the station?
(CMA, adapted)