Question

Case 1 (Make Vs. Buy)

After recovering from a previous disaster in 2015, Jurassic World Luxury Resort reopened in early 2017, and business is better than ever. Jurassic World’s bioengineering team, led by Dr. Henry Wu, has designed two brand new dinosaurs named the Pepsisaurus and the Tostidodon (sponsored by PepsiCo). Having learned from past mistakes, Jurassic World’s operations manager, Claire Dearing, has insisted on making two state-of-the-art enclosures to ensure that the Pepsisaurus and Tostidodon do not escape their enclosures and wreak havoc on the theme park. Claire is not sure whether Jurassic World should manufacture the enclosures, or pay Hammond Corp $16,650,000 per enclosure to manufacture them for Jurassic World.

Claire has accumulated the following cost information related to the manufacture of the enclosures:

	Per Enclosure
Direct materials	$15,000,000
Direct labor	225,000
Variable manufacturing overhead	100,000
Fixed manufacturing overhead, traceable	1,250,000
Fixed manufacturing overhead, allocated	450,000

90% of the traceable fixed manufacturing overhead would be avoided if Jurassic World did not manufacture the enclosures. If Jurassic World did not manufacture the enclosures, it could instead use resources to open a new roller coaster ride that would generate $600,000 of margin.

1. Determine the total relevant costs of Jurassic World manufacturing the two enclosures itself. (1 point for the correct answer in the shaded box)

Cost Label	Relevant Cost Per Enclosure	Total Relevant Cost (for 2 total enclosures)
Total Relevant Costs for manufacturing 2 enclosures=

2. Determine the total relevant costs of Jurassic World paying Hammond Corp to manufacture the enclosures. (1 point for the correct answer in the shaded box)

Total Relevant Cost (for 2 total enclosures) =

3. Should Jurassic World manufacture the enclosures itself (MAKE) or pay Hammond Corp to manufacture them (BUY)? Circle One. (1 point for the correct answer)

MAKE                                BUY

Case 2 (Special Order)

While Jurassic World is filled to capacity with tourists most of the year, the theme park experiences a lower number of customers during September and October. This is due to the fact that September and October are “rainy season” in Jurassic World’s location—the island of Isla Nublar, off the coast of Costa Rica.

To celebrate their sponsorship of the Pepsisaurus and the Tostidodon, PepsiCo is interested in holding a 3-day, 2-night corporate retreat for 5,000 of its employees at Jurassic world during September. PepsiCo has told Claire that they would pay Jurassic World $200 per employee. This would provide each employee with three days of park admission, three days of meal and drink vouchers, and two nights of lodging. Additionally, PepsiCo wants Jurassic World to treat its employees to behind-the-scenes tours of the park, which would cost a total of $50,000 to plan and facilitate. Due to the timing of the retreat, Jurassic World has ample capacity to host PepsiCo’s employees.

Claire knows that Jurassic World normally charges $850 per person for a 3-day, 2-night admission, lodging, and meal/drink vacation package. The per person cost for this package is 670, as shown below:

	Per Person
Food and drink	$95
Direct labor	30
Overhead	545

Most of the overhead is the fixed cost of running the theme park, and goes towards marketing, administration, dinosaur bioengineering, customer service, grounds keeping and maintenance, dinosaur food, raptor training, and disaster control. However, $35 is variable with respect to the number of customers in the theme park.

4. Determine the incremental revenue to Jurassic World if Claire accepts PepsiCo’s request. (1 point for the correct answer in the shaded box)

Total incremental revenue=

5. Determine the incremental cost to Jurassic World if Claire accepts PepsiCo’s request. (1 point for the correct answer in the shaded box)

Cost Label	Cost Per Employee	Total Cost
Total incremental cost =

6. Should Claire accept PepsiCo’s offer? Circle One. (1 point for the correct answer)

YES                                     NO

Answer 1

Working Note- Case 1:

- Margin to be earned by making new roller coster will remain constant whether 1 or 2 or more than 2 enclosures are made or bought.

- Fixed manufacturing overhead are per enclosure. It will get doubled for 2 enclosures , tripled for 3 enclosures and so on.

Decision: Company should not place more than 3 enclosures from Hammond Corp. For 3 or less than 3 enclosures, company should get it done from Hammond Corp. Below table explains it better: