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Non-Routine Operating Decisions

NrO

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29 views3 pages

Non-Routine Operating Decisions

NrO

Uploaded by

janfernandez274
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment

Nonroutine Operating Decisions

Problem 1:
Hershey Company manufactures part Y58 for use in its production cycle. The cost per unit for
12,000 units of part Y58 are as follows:

Cost Item Cost per Unit (P)


Direct Materials P 8.00
Materials Handling (25%) 2.00
Direct Labor 18.00
Variable Overhead 4.50
Fixed Overhead 10.50
Total Cost per Unit P 43.00

Mars Company has offered to sell Hershey 12,000 units of part Y58 for P 39 per unit. If Hershey
accepts the offer, P 3 of the fixed overhead per unit could be avoided. The materials handling
costs pertain to receiving and inspecting incoming materials and would apply to the purchase
price.

If the part is purchased, the released facilities could be used to manufacture a new product,
Galaxy, which is expected to generate an annual contribution margin of P 120,000. In addition,
the other half of the released facilities could be rented out for P 75,000 per annum.

If the part is purchased, Hershey Company will need to lease equipment at a cost of P 100,000
annually to fulfill production needs. Additionally, Hershey would save P 18,000 annually in
related costs if the parts are outsourced.

Required:
● Decision Analysis: Should Hershey make or buy part Y58? Calculate the total advantage
or disadvantage of the chosen alternative.
● Indifference Price: Compute the indifference purchase price at which both options result
in the same total cost.
● Savings Analysis: Determine the maximum purchase price for the part to achieve a
savings of P 8.00 per unit.
● Sunk Costs: Identify the sunk costs or irrelevant costs in the decision to make or buy the
part.

Problem 2:

EastWind Corporation has a manufacturing capacity of 70,000 units per year. A summary of
operating results for the year ending December 31, 2023, is as follows:
A retailer has offered to purchase 20,000 units at P 110 per unit next year. Assume that all costs
for the upcoming year will remain at the same levels and rates as in the prior year.

Required:

EastWind Corporation must decide whether to accept or reject the special sales order under the
following independent cases:

1. The corporation has no alternative use of idle capacity.


2. The corporation can rent out the idle capacity for P 400,000.
3. The corporation can use the idle capacity to produce a new product that will contribute a
P 900,000 margin.
4. If the special order is accepted, 4,000 units of regular sales will be lost.
5. The retailer increases its special order to 25,000 units, requiring the company to sacrifice
some of its regular sales.

Additional Information:

Fixed costs are the same regardless of whether the special order is accepted.
The special order will only impact variable costs of P 70 per unit.
The company has a total manufacturing capacity of 70,000 units.

Problem 3:

Luna Enterprises operates three divisions and is considering discontinuing Division C, which
has the following financial details:

Required:
Determine whether Luna Enterprises should discontinue Division C under the following
independent scenarios:

1. The division is dropped, and no alternative use for the released capacity is identified.
2. The division is dropped, and 20% of the unavoidable fixed costs are reduced due to
other organizational changes.
3. The division is dropped, and the released facilities can be used to expand the production
of Division B, which generates an additional P 400,000 contribution margin.
4. If the division is discontinued, 30% of the avoidable fixed costs would remain, and sales
from Division B are expected to decrease by 10%, reducing its contribution margin by P
120,000.
Notes for Consideration:
● The allocated fixed costs for Division C (P 400,000) are included in total company
expenses and will not change unless specified.
● The variable costs are directly tied to the operations of Division C and will be avoided if
the division is discontinued.
● Alternative uses for the released facilities, if applicable, should be considered in the
decision.

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