Question : 9.Westwood Gear, Inc., recently received a special order to manufacture : 1416294

 

9.Westwood Gear, Inc., recently received a special order to manufacture 10,000 units for a Canadian company.  This order specified that the selling price per unit should not exceed $50.  Since the order was received without the effort of the sales department, no commission would be paid.  However, an export handling charge of $5 per unit would be incurred.  Management anticipates that acceptance of the order will have no effect on other sales.

 

The company is now operating at 80 percent of capacity, or 80,000 units, and expects to continue at this level for the coming year without the Canadian order.  Unit costs based on estimated actual capacity for the coming year include:

 

Selling price$65.00

Expenses:

Direct materials$18.00

Direct labor16.00

Variable factory overhead10.00

Fixed factory overhead3.00

Sales commissions5.00

Other marketing expenses (two-thirds variable)3.00

General expenses (60% fixed)5.00

Total$60.00

 

Prepare an analysis showing the effect on profits if the special order is accepted by the company.  Based on your analysis, should the order be filled, and why?

10.Busby Company needs 10,000 units of a certain part to use in its production cycle.  The following information is available:

 

Costs incurred by Busby to make the part:

Direct materials$15

Direct labor  12

Variable factory overhead  13

Fixed factory overhead  10

Total$50

 

Costs to buy the part from Thurco:$45

 

If Busby buys the part from Thurco instead of making it, Busby could not use the released facilities in another manufacturing activity.  However, twenty percent of the fixed overhead would be avoided because one of the supervisors could be let go.

 

(a)In deciding whether to make or buy the part, what are the relevant costs that Busby must consider.

 

(b)What decision should Busby make?