Question

3. Capstone, Inc. (Chapter 8)

Part 1 Capstone, Inc. mass-produces a special connector unit that it normally sells for $4.25. It sells approximately 45,000 of these units each year. The variable costs for each unit are $2.50. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 25,000 of these units at $3.00 per unit. The production of these units is near full capacity at Capstone, Inc., so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.15 per unit. However, variable selling costs would be reduced by $0.25 a unit.

An irrigation company has asked for a special order of 3,000 of the connectors. To meet this special order, Capstone, Inc. would not need an additional shift, and the irrigation company is willing to pay $3.25 per unit.

Instructions (given the information in Part 1):

1. What are the consequences of Capstone, Inc. agreeing to provide the 25,000 units to the Canadian company? Would this be a wise “special order” to accept?
2. Should Capstone, Inc. accept the special order from the irrigation company?
3. What would be the consequences of accepting both special orders?

Part 2 Capstone, Inc. has discovered that a small fitting it now manufactures at a cost of $1.50 per unit could be bought elsewhere for $0.95 per unit. Capstone, Inc. has fixed costs of $0.25 per unit that cannot be eliminated by buying this unit. Capstone, Inc. needs 375,000 of these units each year.

If Capstone, Inc. decides to buy rather than produce the small fitting, it can devote the machinery and labor to making a timing unit it now buys from another company. Capstone, Inc. uses approximately 575 of these units each year. The cost of the unit is $13.00. To aid in the production of this unit, Capstone, Inc. would need to purchase a new machine at a cost of $2,500, and the cost of producing the units would be $9.90 a unit.

Instructions (given the information in Part 2)

1. Without considering the possibility of making the timing unit, evaluate whether Capstone, Inc. should buy or continue to make the small fitting.
2. (1) What is Capstone, Inc.’s opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit?

(2) Would it be wise for Capstone, Inc. to buy the fitting and manufacture the timing unit? Explain.

Part 3 Capstone, Inc. is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 45 units per day at a cost of $6.75 per unit, whereas other similar machines are producing twice that much. The units sell for $9.50. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $65,000, have a 2-year life, and can produce 120 units per day.

Instructions (given the information in Part 3):

1. What are the consequences of Capstone, Inc. replacing the machine that is slowing down production because of breakdowns?

Answer 1

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