Comprehensive problem including special order, outsourcing, and segment elimination decisions
Shadeed Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive four-function calculator. The company’s chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment’s operating activities. The relevant range for the production and sale of the calculators is between 30,000 and 60,000 units per year.
Revenue (40,000 units × $8)
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Unit-Level Variable Costs
Materials Cost (40,000 × $2)
Labor Cost (40,000 × $1)
Manufacturing Overhead (40,000 × $0.50)
Shipping and Handling (40,000 × $0.25)
Sales Commissions (40,000 × $1)
Salary of Production Supervisor
Allocated Companywide Facility-Level Expenses
Required (Consider each of the requirements independently.)
a. A large discount store has approached the owner of Shadeed about buying 5,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Shadeed’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $4.50 per calculator. Based on quantitative factors alone, should Shadeed accept the special order? Support your answer with appropriate computations. Specifically, by what amount would the special order increase or decrease profitability?
b. Shadeed has an opportunity to buy the 40,000 calculators it currently makes from a reliable competing manufacturer for $4.90 each. The product meets Shadeed’s quality standards.
Shadeed could continue to use its own logo, advertising program, and sales force to distribute the products. Should Shadeed buy the calculators or continue to make them? Support your answer with appropriate computations. Specifically, how much more or less would it cost to buy the calculators than to make them? Would your answer change if the volume of sales were increased to 60,000 units?
c. Because the calculator division is currently operating at a loss, should it be eliminated from the company’s operations? Support your answer with appropriate computations. Specifically, by what amount would the segment’s elimination increase or decrease profitability?