Question

Talk-2-Me Corporation produces and markets mobile phones for corporate use. The mobile phones have built in tracking devices and a network enabled shutdown system so that corporate security or the telephone holder can locate and quickly disable a corporation issued cell phone, when necessary.

The cost of producing and installing the shutdown technology is as follow:

	Assuming 10,000 units produced and sold
	per unit	Total
Direct materials	4.50	$45,000
Production wages	2.75	27,500
Production overhead:
Power and utilities	1.50	15,000
Inspection, materials handling, and setup	$0.45	4,500
Plant administration, taxes, and insurance	3.00	30,000
Specialized machine rental costs	0.30	3,000
Installation costs	1.85	18,500
		$143,500

Talk-2-Me receives a bid from an outside vendor to produce the shutdown system for the mobile telephones at a cost of $12.00 per cell phone.

Additional Information:

• Power and utilities costs are directly related to producing the shutdown systems.
• Inspection, materials handling, and setup costs are variable costs. However, those costs vary per “production run” rather than per unit. Each production run produces 10 shutdown systems.
• Specialized machine rental costs are fixed costs, however, they are directly associated with producing shutdown systems. Therefore, if the company discontinues producing the shutdown system, they will not incur the related specialized machine rental costs.
• The vendor will produce and deliver the shutdown systems for Talk-2-Me to install.

Required:

1. If Talk-2-Me accepts the vendor’s bid, they will still use the production facility for existing production related activities. At the $12.00-unit cost, should Talk-2-Me accept the vendor’s offer? (Show your work).
2. Assume that if Talk-2-Me accepts the outside vendor’s offer, they could use the new available production capacity to upgrade their cell phone product. Details associated with the upgrade are:
   • Selling price of upgraded phone will increase by $18
   • Power and utilities costs will decrease to $1.25 per unit
   • Additional other variable cost of the upgrade = $14 per unit
   • Additional fixed cost related to the upgrade = $16,000.

Assuming Talk-2-Me will still produce and sell 10,000 units, re-evaluate the vendor’s offer to produce the shutdown system given this new information

Answer 1