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fficient rotomold oven would operate on 15,000 therms of natural gas price quotes from a few suppliers, Diane determined that it would cost approximately energy-efficient rotomold oven. She determines that the expected useful life of the new oven it would have no salvage value at the end of its useful life. Current Designs would be able to $10,000 for an entire year. After seeking out $250,000 to purchase a new would be 10 years sell the current oven for Instructions are an incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the averag e price for natural gas over the next 10 years will be $0.65 per therm ane is concerned that natural gas prices might increase at a faster rate over the next 10 years projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm how that might change your conclusion in (a) Situation 3 One of Current Desi involvement in the design of kaya industry leader in the desig most important component of a kayak, the seat. The Revolution Seating System is one-of-a-kind, rotating axis seat gns competitive advantages is found in the ingenuity of its owners and CEO, Mike Cichanowski. His k molds and production techniques has led to Current Designs being recognized as an n and production of kayaks. This ingenuity was evident in an improved design of one of the that gives unmatched, full contact, under-leg support. It is quickly adjustable with a lever-lock system that allows for a customizable seat position that maximizes comfort for the rider Having just designed the Revolution Seating System, Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows Direct materials Variable overhead $20/unit $12/unit Direct labor Fixed overhead $15/unit $20,000 Current Designs will need to produce 3,000 seats this year, 25% of the fixed overhead will be avoided if the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will cost $50 to purchase a seat from an outside vendor. Prepare an incremental analysis showing whether Current Designs should make or buy the Revolution Seating System. Instructions (a)ould your answer in (a) change if th produce income of $20,000? e productive capacity released by not making the seats could be used to NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a ? Situation 1 (a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to produce the coolers. Reject Order Value Value Net Income Increase (Decrease) Value Value Accept Order Revenues Costs Net income Response Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at full capacity (b) ResponseSituation 2 assuming that the average price for natural gas over the next 10 years will be 50.65 per therm. to determine if Current Designs should purchase the new rotomold oven, Net Income Increase Replace Oven Value Value Retain Oven Variable mfg. costs New oven costs Proceed from scrapping old oven Total Value Value Response Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in (a). (b)Net Income Increase Retain Oven Replace Oven Variable mfg. costs New oven costs Proceed from scrapping old oven Total Value Value Value Value Response Prepare an incremental analysis showing whether Current Designs should make or buy the Revolution Seating System. Situation 3 a) Buy Value Value Value Net Income Increase Value Value Value Make Direct materials Direct labor Variable mfg. costs Fixed mfg. costs Purchase price Value Value Total annual costResponse: (b) W ould your answer in (a) change if the pro produce income of $20,000? ductive capacity released by not making the seats could be used to Total annual cost Opportunity cost Total cost Make Value Value Buy Value Value Net Income Increase Value Value Response After you have completed CD7, consider the following additional questions. 1. Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or reject the special order. 2. Assume in situation 2, the purchase price of the new oven changed to $100,000. Would this changethe decision to retain or replace the oven? Assume in situation 3, that t one seat from an outside supplier changed to $55. Should Current Designs make or buy the se he estimated number of seats to be produced changed to 3,500 and the cost to purchase ats?

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Answer #1

Answer:

Section A

Direct material

$80

per unit

Direct labor

$60

per unit

Variable Overhead

$20

per unit

Fixed Overhead

$1,000

Modification cost

$2,000

Cost for

               100

Units

Material Cost

$8,000

Labor Cost

$6,000

Variable Cost

$2,000

Fixed Overhead

$1,000

Modification Cost

$2,000

Total Cost

$19,000

Cost Per Unit

$190

Price per cooler

$250

Profit per cooler

$60

Profit Margin

24%

Section B

If Current Design is currently operating at full capacity following factors need to check:

- Profit margin of existing product should be greater than 24%

- No treansportation cost involved in cooler

-subsequent coolers can be manufractured at less cost per unit because one time modification charges already charged

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