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Question 1: Special orderSales volume in units90Revenue$8,100 Variable costs$1,800Contribution margin$6,300 Fixed costs$1,600Profit$4,700Special order: A client wants to buy 20 units at a discounted price of $30 per unit. This is a one-time deal (i.e., a short-term decision). You have enough spare capacity to fulfill this special order without cutting back on your regular sales. a) Use the gross approach to decide whether you should take the special order:status quo (no special order)total amounts after adding the special orderRevenue$8,100 Variable costs$1,800 Contribution margin$6,300 Fixed costs$1,600 Profit$4,700 b) Use the incremental approach to decide whether you should take the special order.how much each amount changes after adding the special orderIncremental revenue Incremental variable costs Incremental contribution margin Incremental fixed costs Incremental profit Question 2: Should you reduce the price or increase advertising?The selling price is $20/unit, variable costs are $10/unit, and fixed costs are $3,000 in total. Sales volume decreased to 200 units because of a recession. You are considering two options to stimulate sales:(1) Reduce the price to $18/unit. This will increase sales volume by 20%.(2) Buy additional advertising for $300 and keep the original price. This will increase sales volume by 20%.Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising.status quo(1) reduce the price(2) increase advertisingVolume in unitsRevenue$ $ $ Variable costs$ $ $ Contribution margin$ $ $ Fixed costs$ $ $ Profit*$ $ $ * enter losses as a negative number: e.g., a loss of $500 should be entered as -500, not as (500) or ($500). What should you do?Reduce the priceIncrease advertising Do nothingQuestion 3: Make versus buyYou make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $95 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows:cost per unitdirect materials$40direct labor$40variable overhead$10fixed overhead$20total$110If you outsource the production of compressors (the buy option) in the short term, how will this choice affect your costs and profit?First, compute variable costs under MAKE versus BUY:MAKEBUYunit VCtotal VCIf you outsource (BUY), the incremental revenue, costs, and profit are:how much each amount changes if you outsourceIncremental revenue Incremental VCIncremental CM Incremental FCIncremental profitEnter negative amounts with a minus sign, i.e., -1,000 not ($1,000). Should you outsource?YES – outsourcing reduces costs by $5,000 NO – outsourcing reduces profit by $5,000 Question 4: Choosing the product mix when capacity is in short supplyYou have three product lines: Basic, Premium, and Supreme. You have limited capacity of 300 machine hours. You face excess demand for all three products (assume unlimited demand for simplicity).BasicPremiumSupremePrice per unit$3,000$7,000$10,000Unit variable cost$1,000$2,000$3,000Machine hours per unit124Compute the CM per unit of capacity (i.e, per machine-hour) for each product: Basic = $ per hour Premium = $ per hour Supreme = $ per hourWhich product(s) should you make?Premium onlyBasic only Make all three products to take advantage of the high demandSupreme onlyHow many units of each product should you make? (enter 0 for products that you do not want to make) Basic = units Premium = units Supreme = unitsHint if you get stuck: You have 300 machine hours.
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