1) Based on the selected company, answer the following questions:
a) Identify and explain TWO (2) types of fixed costs which, in your opinion, are significant to the selected company.
b) Explain how these fixed costs would adversely affecting the company’s performance in the periods of economic recession.
2) Suppose a production division of your company is trying to decide whether it should continue to manufacture a product component or purchase it from a contractor for $68.8 each. Demand for the coming year is expected to be the same as for the current year, 400,000 units. Data for the current year follow:
Direct material 14,000,000
Direct labour 5,320,000
Factory overhead, variable 3,080,000
Factory overhead, fixed 7,000,000
Total product costs 29,400,000
If the company makes the component, the unit cost of direct material and direct labour will increase 10%. If the company buys the component, 70% of the fixed overhead will be avoided. The other 30% will continue regardless of whether the components are manufactured or purchased. Assume that variable overhead varies with output volume.
Discuss whether the company should buy or make the component. Support your discussion with relevant calculations and consider any qualitative factors.
3) A third production division of your company produces caps for schools. The selling price for such caps is $14 and its purchase price from a supplier of $8 per cap. Your company sews a name and logo to each cap at a variable cost of $1.20 per cap. The annual fixed cost of equipment used in the sewing process is $480,000. The equipment is used only for sewing caps and stands idle 70% of the usable time. The production division produces 600,000 caps per year.
a) Calculate the breakeven point (in units) and profit for the year.
b) A sport club has offered to buy 200,000 caps, for the club’s promotional items to be sold to its sport fans, for $11.60 per cap. Evaluate, with justifications, whether your company should take up the offer.