Question

PLEASE EXPLAIN THE STEPS TAKEN - THANK YOU

Bain Corporation makes and sells state-of-the art electronics products. One of its segments produces The Math Machine, an inexpensive 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 x $10.80)	$432,000
Unit-level variable costs:
Materials cost (40,000 x $2.70)	(108,000)
Labor cost (40,000 x $1.20)	(48,000)
Manufacturing overhead (40,000 x $1.20)	(48,000)
Shipping and handling (40,000 x $0.30)	(12,000)
Sales commissions (40,000 x $1.20)	(48,000)
Contribution margin	168,000
Fixed expenses:
Advertising costs	(24,000)
Salary of production supervisor	(72,000)
Allocated companywide facility-level expenses	(96,000)
Net loss	$(24,000)

Consider each of the following requirements independently:

1. A large discount store has approached the owner of Bain about buying 5,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Bain’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 $6.60 per calculator. Based on quantitative factors alone, should Bain accept the special order? Support your answer with appropriate computations. Specifically, by what amount would the special order increase or decrease profitability?
2. Bain has the opportunity to buy 40,000 calculators it currently makes from a reliable competing manufacturer for $6.72 each. The product meets Bain’s quality standards. Bain would continue to use its own logo, advertising program, and sales program to distribute the products. Should Bain 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 you answer change if the volume of sales were increased to 60,000 units?
3. 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?

Answer 1

Evaluation of special order offered by The Discount store:

Sales Revenue	5000×$6.6	33000
LESS: VARIABLE COSTS
1.Material cost	(5000×2.7)	(13500)
2.Labour cost	(5000×1.2)	(6000)
3. Manufacturing costs	(5000×1.2)	(6000)
4.Shipping and Handling	(5000×0.3)	(1500)
Contribution (Sales-Variable costs)		6000

Yes, the Bain corporation should accept the order as it able to earn us a contribution of $6000

B) Calculation of Total cost if Co. Buys 40000 units:-

Total cost incurred = No.of units× Sale price

=$2,68,800

Calculation of total cost if we make 40000 units:-

Variable costs:-
1.Material cost (40000×2.7)	108000
2.Labour(40000×1.2)	48000
3. Manufacturing overheads( 40000×1.2)	48000
FIXED Expenses
Salary of supervisor	72000
TOTAL	276000

As the cost incurred in Buying is less than making, it is advisable to buy

Net savings from buy = Total cost in Make option- total cost for buy option

=276000-268800

=7200$

NOTE- It is important that the Fixed related to only the product is considered

If the company intends to make 60000 units

  

Variable costs:-
Material cost	60000×2.7	162000
Labour cost	60000×1.2	72000
Manufacturing overheads	60000×1.2	72000
Fixed expenses:
Salary of production supervisor		72000
TOTAL		378000

Total unit cost for:--

40000 units(if buy)=268800÷40000=$6.72 per unit

60000units(make)= 378000÷60000=$6.3per unit

As the per unit cost of making 60000 units is lesser than 40000, it is advisible to produce @ 60000 units instead of buying @6.72.

C)Computation of profit/loss specific for product:

Sales Revenue	432000
Less:- Variable costs
Material costs	(108000)
Labour cost	(48000)
Manufacturing expenses	(48000)
Shipping and handling	(48000)
Sales commission	(12000)
Contribution	168,000
Less: Fixed expenses
Production supervisor salary	(72000)
Profit	96000

The profit is $96000 attributable to production. It makes it appear that Loss is incurred due to Heavy advertising costs and company wide allocation expenses which.is not due to production.

It is advisable NOT to shut down production . If that happens , the company's profitability will decrease by $96000.