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Qualitative Factors


Special-Order Decision: Qualitative FactorsLO1
Lindsey Smith, Inc., has the following cost structure for the upcoming year:
Sales (20,000 units @ $25) $500,000
Manufacturing costs:
Variable $10 per unit
Fixed $180,000
Marketing and administrative costs:
Variable $5 per unit
Fixed $20,000
• A. What is the expected level of profit?
• B. Should the company accept a special order for 1,000 units at a selling price of $20 if variable marketing expenses associated with the special order are $2 per unit? What will be the incremental profit if the order is accepted?
• C. Suppose that the company received a special order for 3,000 units at a selling price of $19 with no variable marketing expenses. What would be the impact on profit?
• D. Assume that if the special order were accepted, all the regular customers would be aware of the price paid for the special order. Would that influence your decision? Why?
Make-or-Buy Decision: Relevant Costs and Qualitative FactorsLO2
Jain Simmons Company needs 10,000 units of a certain part to be used in production. If Jain Simmons buys the part from Sullivan Company instead of making the part itself, Jain Simmons could not use its present facilities for another manufacturing activity. Sixty percent of the fixed overhead applied will continue regardless of what decision is made.
The following quantitative information is available regarding the situation presented:
Cost to make the part:
Direct materials $ 6
Direct labor 24
Variable overhead 12
Fixed overhead applied 15
Cost to buy the part: $53
• A. In deciding whether to make or buy the part, what are Jain Simmons’s total relevant costs to make the part?
• B. Which alternative (make or buy) is more desirable for Jain Simmons and by what amount?
• C. Suppose that Jain Simmons Company is in an area of the country with high unemployment and that it is unlikely that displaced employees will find other employment. How might that affect your decision?

Temporary Suspension of Operations: Qualitative FactorsLO3
Smoluk Mining Company currently is operating at less than 50 percent of capacity. The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is $3 and the variable cost per ton is $2. Fixed costs per month total $10,000.
Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals markets rebounds and prices once again rise. Over the past year, management has implemented a cost-reduction program that has been successful in reducing costs to the point that suspending operations appears to be the only viable alternative. Management estimates that suspending operations would reduce fixed costs by $6,000 per month.
• A. Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed?
• B. At what sales volume will the loss be greater or less than the shutdown cost of $4,000 per month?
• C. List any qualitative factors that you think management should consider in this decision, and discuss the potential impact of each factor on the decision.
Decision Focus: Eliminating Unprofitable SegmentsLO3
Casagrande Company is currently operating at 80 percent capacity. Worried about the company’s performance, Mike, the general manager, reviewed the company’s operating performance. Following are sales and related cost information about Casagrande, in millions of dollars:
North South East West
Sales $30 $40 $20 $10
Less variable costs 12 8 21 8
Contribution margin $18 $32 $ (1) $ 2
Less fixed costs 9 12 6 3
Operating profit (loss) $ 9 $20 $ (7) $ (1)
• A. What is the current operating profit for the company as a whole?
• B. Assume that all fixed costs are unavoidable. If Mike eliminated the unprofitable segments, what would be the new operating profit for the company as a whole?
• C. What options does management have to maximize profits?
• D. What qualitative factors do you think management should consider before making this decision? What impact could these qualitative factors have on the decision?

Decision Focus: Comprehensive Make or BuyLO2, 4
Avery, Inc., is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Avery’s products are purchased from other companies, and the remainder of the products are manufactured by Avery. The company has a plastics department that is currently manufacturing molded fishing tackle boxes. Avery is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available workstations. The following table presents the selling price and costs associated with Avery’s tackle boxes:
Selling price $86.00
Costs per box:
Molded plastic $ 8.00
Hinges, latches, handle 9.00
Direct labor ($15/hour) 18.75
Manufacturing overhead 12.50
Selling and administrative cost 17.00*
Profit per box $20.75
Includes $6 per unit of fixed distribution costs.
Because Avery believes that it could sell 12,000 tackle boxes, the company has looked into the possibility of purchasing the tackle boxes from another manufacturer. Craig Products, a supplier of quality products, could provide up to 9,000 tackle boxes per year at a per unit price of $68. Variable selling and administrative costs of $4 per unit will be incurred if the tackle boxes are purchased from Craig Products.
Bart Johnson, Avery’s product manager, has suggested that the company could make better use of its plastics department by purchasing the tackle boxes and manufacturing skateboards. To support his position, Johnson has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes that Avery could expect to sell 17,500 skateboards annually at a price of $45.00 per skateboard. Johnson’s estimate of the costs to manufacture the skateboards is as follows:
Selling price per skateboard $45.00
Costs per skateboard:
Molded plastic $5.50
Wheels, plastic 7.00
Direct labor ($15/hour) 7.50
Manufacturing overhead 5.00
Selling and administrative cost 9.00*
Profit per skateboard $11.00
Includes $6 per unit of fixed distribution costs.
In the plastics department, Avery uses direct labor hours as the base for applying manufacturing overhead. Included in the manufacturing overhead for the current year is $50,000 factorywide, fixed manufacturing overhead that has been allocated to the plastics department.
• A. Define the problem faced by Avery on the basis of the facts as presented.
• B. What options are available to Avery in solving the problem?
• C. Rank the options in order of preference on the basis of quantitative factors.
• D. What qualitative factors should Avery consider in the decision?
• E. Should Avery consider the potential liability that comes with selling skateboards? It has been shown that skateboards are responsible for 25 deaths per year and more than 500 serious accidents. Would that change your decision to make skateboards?
Although rush orders and orders requiring special handling, packaging, or different manufacturing specifications might be considered “special orders,” these types of decisions are not discussed here.
Decisions involving limited resources, or constraints, often include multiple constraints, such as storage space, machine time, labor hours, and even dollars available to invest. When we have more than one constraining factor, the decision-making process becomes more complicated and is facilitated by the use of computerized linear programming models. A discussion of linear programming is beyond the scope of this text.

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