Escher Skateboards has been manufacturing its own wheels for its skateboards. Normal production is 200,000 wheels per year. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $1.50 and $1.80, respectively. The production of wheels incurs scope 1 emissions of 150 grams of CO2-equivalents per wheel and scope 2 emissions of 50 grams of CO2-equivalents per wheel. Assume that the company is exposed to a carbon tax of $50 per tonne of CO2-equivalents. The company expects to continue to produce at maximum capacity next year. Further, direct materials costs are expected to increase by 30% next year, while all other costs are expected to remain the same. A supplier offers a two-year contract to make the wheels at a price of $4 each for this year and $4.50 next year. If the skateboard company accepts this two-year contract, all variable manufacturing costs will be eliminated, but the $42,000 of annual fixed manufacturing overhead currently being charged to the skateboard wheels will have to be absorbed by other products. The CO2-equivatents emissions for wheels will be scope 3 emissions of 300 grams of CO2-equivalents per wheel. Tasks: Answer the following questions: a) Classify each cost/benefit item as relevant cost/benefit, sunk cost, or opportunity cost. 3 marks b) Using the answer template in the corresponding Excel file, conduct an incremental analysis for the two years that shows whether Escher Skateboards should produce the wheels or outsource their production. 6 marks c) Based on the incremental analysis, should the company continue to produce the wheels or outsource their production. Select the right answer. 1 mark Note: Use a negative sign for costs in the incremental analysis template.
Escher Skateboards has been manufacturing its own wheels for its skateboards. Normal production is 200,000 wheels per year. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $1.50 and $1.80, respectively. The production of wheels incurs scope 1 emissions of 150 grams of CO2-equivalents per wheel and scope 2 emissions of 50 grams of CO2-equivalents per wheel. Assume that the company is exposed to a carbon tax of $50 per tonne of CO2-equivalents. The company expects to continue to produce at maximum capacity next year. Further, direct materials costs are expected to increase by 30% next year, while all other costs are expected to remain the same. A supplier offers a two-year contract to make the wheels at a price of $4 each for this year and $4.50 next year. If the skateboard company accepts this two-year contract, all variable manufacturing costs will be eliminated, but the $42,000 of annual fixed manufacturing overhead currently being charged to the skateboard wheels will have to be absorbed by other products. The CO2-equivatents emissions for wheels will be scope 3 emissions of 300 grams of CO2-equivalents per wheel. Tasks: Answer the following questions: a) Classify each cost/benefit item as relevant cost/benefit, sunk cost, or opportunity cost. 3 marks b) Using the answer template in the corresponding Excel file, conduct an incremental analysis for the two years that shows whether Escher Skateboards should produce the wheels or outsource their production. 6 marks c) Based on the incremental analysis, should the company continue to produce the wheels or outsource their production. Select the right answer. 1 mark Note: Use a negative sign for costs in the incremental analysis template.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Escher Skateboards has been manufacturing its own wheels for its skateboards. Normal
production is 200,000 wheels per year. The company is currently operating at 100% capacity, and
variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost.
The direct materials and direct labour cost per unit to make the wheels are $1.50 and $1.80,
respectively. The production of wheels incurs scope 1 emissions of 150 grams of CO2-equivalents
per wheel and scope 2 emissions of 50 grams of CO2-equivalents per wheel. Assume that the
company is exposed to a carbon tax of $50 per tonne of CO2-equivalents.
The company expects to continue to produce at maximum capacity next year. Further, direct
materials costs are expected to increase by 30% next year, while all other costs are expected to
remain the same.
A supplier offers a two-year contract to make the wheels at a price of $4 each for this year and
$4.50 next year.
If the skateboard company accepts this two-year contract, all variable manufacturing costs will be
eliminated, but the $42,000 of annual fixed manufacturing overhead currently being charged to
the skateboard wheels will have to be absorbed by other products. The CO2-equivatents emissions
for wheels will be scope 3 emissions of 300 grams of CO2-equivalents per wheel.
Tasks: Answer the following questions:
a) Classify each cost/benefit item as relevant cost/benefit, sunk cost, or opportunity cost. 3
marks
b) Using the answer template in the corresponding Excel file, conduct an incremental
analysis for the two years that shows whether Escher Skateboards should produce the
wheels or outsource their production. 6 marks
c) Based on the incremental analysis, should the company continue to produce the wheels or
outsource their production. Select the right answer. 1 mark
Note: Use a negative sign for costs in the incremental analysis template.
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