Problem 6-30A Comprehensive problem including special order, outsourcing, and segment elimination decisions LO 6-2, 6-3, 6-4
Finch Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company’s chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment’s operating activities. The relevant range for the production and sale of the calculators is between 34,000 and 70,000 units per year.
|Revenue (38,000 units × $10)||$||380,000|
|Unit-level variable costs|
|Materials cost (38,000 × $3)||(114,000||)|
|Labor cost (38,000 × $2)||(76,000||)|
|Manufacturing overhead (38,000 × $0.20)||(7,600||)|
|Shipping and handling (38,000 × $0.31)||(11,780||)|
|Sales commissions (38,000 × $1)||(38,000||)|
|Salary of production supervisor||(66,000||)|
|Allocated company wide facility-level expenses||(79,000||)|
a. A large discount store has approached the owner of Finch about buying 8,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Finch’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $5.60 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Finch accept the special order?
b-1. Finch has an opportunity to buy the 38,000 calculators it currently makes from a reliable competing manufacturer for $6.30 each. The product meets Finch’s quality standards. Finch could continue to use its own logo, advertising program, and sales force to distribute the products. Should Finch buy the calculators or continue to make them?
b-2. Calculate the total cost for Finch to make and buy the 38,000 calculators.
b-3. Should Finch buy the calculators or continue to make them, if the volume of sales were increased to 70,000 units?
c. Because the calculator division is currently operating at a loss, should it be eliminated from the company’s operations? Support your answer with appropriate computations. Specifically, by what amount would the segment’s elimination increase or decrease profitability?