Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number.

Required:

1. What are the alternatives for Fresh Foods?

2. List the relevant cost(s) of internal production and of external purchase.

3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

Cox Electric makes electronic components and has estimated the following for a new design of one of its products:

Fixed Cost = $3,000

Material cost per unit = $0.15

Labor cost per unit = $0.10

Revenue per unit = $0.65

Production Volume = 12,000
Per-unit material and labor cost together make up the variable cost per unit. Assuming that Cox Electric sells all it produces, build a spreadsheet model that calculates the profit by subtracting the fixed cost and total variable cost from total revenue, and answer the following questions.

Cox Electric makes electronic components and has estimated the following for a new design of one of its products:

Fixed Cost = $15,000

Material cost per unit = $0.15

Labor cost per unit = $0.10

Revenue per unit = $0.65

Production Volume = 12,000

Per-unit material and labor cost together make up the variable cost per unit. Assuming that Cox Electric sells all it produces, build a spreadsheet model that calculates the profit by subtracting the fixed cost and total variable cost from total revenue, and answer the following questions.

Cost functions, a part of the definition of profit, are useful to gauge the performance of the business. Suppose an economist estimated that the cost function of a single-product firm as: C(Q) = 2 + 2Q + 2Q2 Based on this information, determine the followings and show all steps (first, you must define each of the terms in the cost function, and then plug in the numbers to have your answers; not just the answers): Hint: The use of Graphs is recommended. a. Define fixed cost and offer an example. Next, compute the fixed cost of producing 4 units of output using the cost function above. b. Define variable cost and offer an example. Next compute the variable cost of producing 4 units of output using the cost function above. c. Define total cost and then compute the total cost of producing 4 units of output using the cost function above d. Define and compute the average fixed cost of producing 10 units of output e. Define and compute the average variable cost of producing 10 units of output f. Define and compute the average total cost of producing 10 units of output g. Define marginal cost an offer an example. Next, compute the marginal cost when Q = 2, using the cost function above

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek produced and sold 60,300 units of B300 at a price of $21 per unit and 12,700 units of T500 at a price of $39 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $104,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

2. Compute the product margins for B300 and T500 under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

2.

ompute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

3.

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

ABC hotel has 200 rooms and has a policy to determine its room rates based on consumers capacity to pay. For example busniess clients pay $1,200 per night and group tours $900 per night. The incremental cost of servicing a room is worked out at $110 per room. On average, most guest stay for three (3) nights. Rooms division manager is trying to establish if four (4) week advance reservation should be taken for a group booking of 40 rooms and three (3) nights of 7th , 8th and 9th June 2018. According to the reservation record, 80 rooms for the three (3) nights of 7th , 8th , and 9th , June 2018 are already booked by various business clients, and the historical trends of the past four (4) years suggest that 90% of the remaing 120 rooms would be sold to other busniess clients. Your are required to b) In the highly competitive environment, tourism and hospitality busniess can aspire to optimise revenue for the long term survival. Discuss " one pricing strategy " and its effect on tourism and hospitality businesses as a whole focus on the pricing strategy in tourism and hospitality business and highlight their strengths and weaknesses as reported in the published literature.

In accordance with the current Conceptual Framework, define liability as one of the five elements of the statutory financial statements and outline its recognition criteria.

Further, explain whether or not you would recognise each of the following independent items as a liability, by reference to the abovementioned liability definition and recognition criteria:

1. Your company has a 30-year history of donating $5 000 each year to The Salvation Army. So far, no amount has been paid in the current year and nothing has been recorded in the accounts.
2. Your rich uncle has lent $30 000 to your small business of delivery service (a single proprietorship) to buy a van, and told you to repay him whenever you like.

3. Yesterday a court of law ordered you and all your business partners to repair significant environmental damage that your partnership firm had caused to a park next to your firm’s premises. However, you do not yet have any idea as to how much this repair work will cost for your partnership business for which negotiations are being planned for two additional loans, each worth $3 million, from City Bank and ZNA Bank respectively.

Your company, XYZ, Inc., wants to create an outdoor area adjacent to its office building for its employees to enjoy during lunch, breaks or during non-business hours.The city, Village Township, has restrictions of the use of the land (zoning) and the type of structures that may be erected on the land. The plans that your company have created is in violation of the city ordinances. Your company does not want to spend a lot of money to resolve negotiate with the city regarding the ordinance problem because the plans and cost of building the park are over budge. You are in charge of helping find a resolution for this conflict with the city. You report directly to the CEO of XYZ, Inc., and she has asked you to research whether arbitration, mediation or litigation would be in the best interest of both parties to resolve this conflict.

1. Differentiate the roles of a mediator and arbitrator so your boss clearly understand the difference.
2. Explain all three options (arbitration, mediation, and litigation) in relation to the conflict with they city.
3. Explain which option you think is best for the company to resolve this conflict.
   • Describe why it's the best option for the company based on the facts related to the company and the conflict.
   • Provide references to resources that help support for your position.

Problem 5-16 (Algo) Comparing Traditional and Activity-Based Product Margins [LO5-1, LO5-3, LO5-4, LO5-5]

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,800 units of T500 at a price of $39 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 and $100,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

2.Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

The following information describes the costs for a firm in a perfectly competitive market. Fill in the cells (4 points) then answer the questions that follow.

1. If the market price for this good is $150, what is the profit maximizing level of output for the firm? Show your work and/or explain.
2. What is the total cost for the output you found in #1 above? Show your work.
3. What is the total revenue for the output you found in #1 above? Show your work.
4. Based on your answers to 2 and 3, is the firm making a profit or loss? Explain.
5. At this price, in the short run, will the firm continue producing or shut down in the short run? Explain.
6. At this price, in the long run, will new firms enter this market or will this firm exit the market? Explain.
7. If the market price increases to $175, does this change the firm’s decisions about either shutting down or entering/leaving the market? Explain.