Question

1. O’Brien Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 bears for $14 each, of which O’Brien Enterprises has the capacity to produce. O’Brien will incur extra shipping costs of $1 per bear.
Should O’Brien Enterprises accept the special order? Please show your calculations to support your decision.
2. O’Brien Corporation currently manufactures 3,000 staplers annually for use in its main product. The costs per stapler are as follows:
Direct materials $ 3.00
Direct labor 7.00
Variable overhead 4.00
Fixed overhead 7.00
Total $21.00
Gallup Company has contacted O’Brien Corporation with an offer to sell them 3,000 staplers for $18.00 each. $5 of the fixed overhead per unit is unavoidable.
Should O’Brien Corporation continue to make the staplers or accept the offer to buy? Please show your calculations to support your decision.
3. O’Brien Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production generates 60,000 chickens which can be sold for $1 each to a slaughtering company or the chickens can be slaughtered in house and then sold for $2.75 each. It costs $65,000 more to turn the annual chicken crop into chicken meat.
If O’Brien Farms slaughters the chickens, determine how much incremental profit or loss it would report. What should O’Brien Farms do?

Answer 1

1. Should O’Brien Enterprises accept the special order?

Variable Cost = $12

Add: Variable shipping cost = $1

Total Variable Cost = $13

A wholesaler offers to buy 8,000 bears for $14 each. Hence sale price = $14.

Profit per unit = $14 - $13

= $1.

Conclusion: There is a profit of $1 from special order. Hence O’Brien Enterprises should accept the special order. It should be noted that the fixed cost of $9 has got no relevance because it will be incurred even if there will not be a special order. Hence, fixed cost should not be considered for decision making. Only variable costs should be considered.

2. Should O’Brien Corporation manufacture or purchase from Gallup Company:

It is MAKE or BUY decision. If the cost of making is cheaper than buying, then produce.

Cost of producing staplers:

Direct materials = $3

Direct labor = $7

Variable overhead = $4

Unavoidable fixed overhead = $5

Total cost of production = $19

Cost of purchase = $18

Conclusion: Cost of purchase is lower than cost of production. Hence purchase staplers.

3. O’Brien Farms, Inc: SALE or FURTHER PROCESS decision:

Profit if sold without further processing:

60,000 chickens which can be sold for $1 each to a slaughtering company. Hence sales value = $60,000

Less: Cost of crop of chickens = $66,000

Profit = -6000. It means there is a loss of $6000.

Profit if sold after further processing:

Sale value = 60,000*2.75 = 165,000

Less: Cost of crop of chickens = $66,000

Less: Cost of conversion of chicken crop into chicken meat = $65,000

Profit = $34,000.

Conclusion: It is profitable only when it is further processed. Hence do further process.