(Make-or-buy) The New Visions Lighting Company manufactures various types of household

light fixtures. Most of the light fixtures require sixty-watt light bulbs to operate. Historically, the
company has produced its own light bulbs. The costs to produce a bulb (based on capacity
operation of 3,000,000 bulbs per year) are:

Direct materials $.10

Direct labour .05
Variable factory overhead .01
Fixed factory overhead .03
Total $.19

The fixed factory overhead includes $60,000 of depreciation on equipment for which there is no
alternative use and no external market value. The balance of the fixed factory overhead pertains
to the salary of the production supervisor. While the production supervisor of the light bulb
operation has a lifetime employment contract, she can be reassigned to take the full-time job of
another manager (the supervisor of electrical cord production) who draws a salary of $15,000
per year.

The Specific Electric Company has recently approached New Visions with an offer to supply
all the light bulbs New Visions requires at a price of $.18 per bulb. Anticipated sales demand
for the coming year will require 2,000,000 bulbs.

REQUIRED:
What is the total annual advantage or disadvantage (in dollars) of buying the bulbs rather than
making the bulbs?

Cost of producing bulbs

Replaced manager’s salary
Total relevant cost of making

Total relevant cost of buying

Net annual advantage to make/buy

(Sellor process further) Redbird Company currently produces three products from a joint
process. The joint process has total costs of $250,000 per month. All three products, A, B & C,
are immediately saleable as they come out of the joint process. Alternatively, any of the products
could continue on with additional processing and be sold as a more complete product. The
following information is available:

Later Unit Cost of

Immediate
Sales Further
Units Sales Price
Price Processing
A 50,000 $5 $10 $6
B 75,000 $10 $15 $4
C 100,000 $15 $20 $3

Required: Which of the products should be sold after further processing?

Incremental revenue of Incremental cost of further

Units further processing per unit processing per unit
A 50,000
B 75,000
C 100,000
(Keep or drop) Hamilton, Inc. has two divisions, Parker and Blaine. Following is the income
statement for the previous year:

Parker Blaine
Sales $1,200,000 $800,000
Variable Costs 600,000 450,000
Contribution Margin $600,000 $350,000
Fixed Costs 450,000 390,000
Profit $150,000 ($40,000)

Of the total fixed costs, $600,000 are common fixed costs that are allocated equally between the
divisions. What would Hamilton's profit be if Blaine were dropped, assuming that the common
fixed costs and Parker’s sales are not affected by the elimination of Blaine?

Contribution margin:
Fixed costs:
Profit:
(Special Order) Northern Optical normally sells the X-lens for $50 with the following cost data.
Variable production cost per unit $10
Fixed production cost per unit $18
Variable selling cost per unit $1

A customer has requested a special order for 10,000 units to be imprinted with the customer’s
logo. This special order would not involve any selling costs, but Northern Optical would have to
purchase an imprinting machine for $50,000. The imprinting machine has no further use after
this order.
(1) If there is ample idle capacity to fulfill the special order without sacrificing any regular
sales, what is the minimum price that Northern Optical would be willing to accept?
(2) If Northern Optical is already operating at full production capacity, what is the minimum
price that Northern Optical would be willing to accept?
(Prioritize products with constrained resources) Clear Water Bay Inc. makes three products
with the following manufacturing costs.
A B C
Direct materials $12.8 9.30 $4.70
Direct labor 14.10 14.90 10.00
Variable manufacturing overhead 1.20 0.90 0.50
Fixed manufacturing overhead 18.50 17.20 23.70
Unit product cost 46.60 42.30 38.90

Additional data are listed below.

A B C
Mixing minutes per unit 3.70 3.40 3.90
Selling price per unit $59.20 $60.10 $55.30
Variable selling cost per unit $2.90 $2.70 $3.70
Monthly demand in units 2,000 4,000 2,000

24,200 minutes of machine time are available per month for the mixing machines. Direct labor is
a variable cost in the company.

Required:
(1) How many minutes of mixing machine time would be required to satisfy demand for all
three products?

(2) How much of each product should be produced? Rounded to the nearest whole unit.
A B C
Selling price per unit $59.20 $60.10 $55.30

CM per unit
Mixing minutes per unit 3.70 3.40 3.90
CM per minute
Rank by profitability
Optimal production

(3) Up to how much should the company be willing pay, rounded to the nearest whole cent,
for one additional minute of mixing machine time if the company has made the best use
of the existing mixing machine capacity?
$ per minute