Oakland Precision Products (OPP) manufactures and sells a variety of scales for the kitchen and office. OPP sells primarily to kitchenware stores, discount stores, and so on. Two of the scales it produces for kitchen use are the Cook and Baker. The Cook is a basic food scale. The Baker has a greater capacity and special features that facilitate adjusting baking recipes for more or fewer people. The following information is available: Costs per unit Cook Baker Direct materials $ 1.60 $ 14.40 Direct labor 0.80 3.20 Variable overhead 0.60 2.40 Fixed overhead 8.00 15.00 Total cost per unit $ 11.00 $ 35.00 Price $ 15.00 $ 45.00 Units produced and sold 230,000 120,000 The average wage rate is $32 per hour. Variable overhead varies with the quantity of direct labor-hours. The plant has a capacity of 20,000 direct labor-hours, but current production uses only 17,750 direct labor-hours. Required: a. A nationwide kitchenware chain has offered to buy 30,000 Cook models and 15,000 Baker models if the price is lowered to $10 and $35, respectively, per unit. a-1. If OPP accepts the offer, how many direct labor-hours will be required to produce the additional scales? a-2. Complete the following table to determine the differential profit increase (or decrease) if OPP accepts this proposal. Prices on regular sales will remain the same. b-1. Suppose that the kitchenware chain has offered instead to buy 50,000 Cook models at $10 per unit and 30,000 Baker models at $35. This customer will purchase the models only in an all-or-nothing deal. That is, OPP must provide all 50,000 units of the Cook model and 30,000 units of the Baker model or nothing at all. In view of its capacity constraints, OPP will reduce sales to regular customers as needed to fill the special order. Complete the table below to determine the total contribution margin with the special order added. b-2. How much will the profits change if the order is accepted? Assume that the company cannot increase its production capacity to meet the extra demand. c-1. Assume that, in the situation presented in requirement b-1, the plant can work overtime. Direct labor costs for the overtime production increase to $45 per hour. Variable overhead costs for overtime production are $6 per hour more than for normal production. Complete the table below to determine the total contribution margin. c-2. How much will the profits change in this situation compared to the capacity constraints scenario in requirement b-1?
Oakland Precision Products (OPP) manufactures and sells a variety of scales for the kitchen and office. OPP sells primarily to kitchenware stores, discount stores, and so on. Two of the scales it produces for kitchen use are the Cook and Baker. The Cook is a basic food scale. The Baker has a greater capacity and special features that facilitate adjusting baking recipes for more or fewer people. The following information is available:
| Costs per unit | Cook | Baker |
|---|---|---|
| Direct materials | $ 1.60 | $ 14.40 |
| Direct labor | 0.80 | 3.20 |
| Variable |
0.60 | 2.40 |
| Fixed overhead | 8.00 | 15.00 |
| Total cost per unit | $ 11.00 | $ 35.00 |
| Price | $ 15.00 | $ 45.00 |
| Units produced and sold | 230,000 | 120,000 |
The average wage rate is $32 per hour. Variable overhead varies with the quantity of direct labor-hours. The plant has a capacity of 20,000 direct labor-hours, but current production uses only 17,750 direct labor-hours.
Required:
a. A nationwide kitchenware chain has offered to buy 30,000 Cook models and 15,000 Baker models if the price is lowered to $10 and $35, respectively, per unit.
a-1. If OPP accepts the offer, how many direct labor-hours will be required to produce the additional scales?
a-2. Complete the following table to determine the differential profit increase (or decrease) if OPP accepts this proposal. Prices on regular sales will remain the same.
b-1. Suppose that the kitchenware chain has offered instead to buy 50,000 Cook models at $10 per unit and 30,000 Baker models at $35. This customer will purchase the models only in an all-or-nothing deal. That is, OPP must provide all 50,000 units of the Cook model and 30,000 units of the Baker model or nothing at all. In view of its capacity constraints, OPP will reduce sales to regular customers as needed to fill the special order. Complete the table below to determine the total contribution margin with the special order added.
b-2. How much will the profits change if the order is accepted? Assume that the company cannot increase its production capacity to meet the extra demand.
c-1. Assume that, in the situation presented in requirement b-1, the plant can work overtime. Direct labor costs for the overtime production increase to $45 per hour. Variable overhead costs for overtime production are $6 per hour more than for normal production. Complete the table below to determine the total contribution margin.
c-2. How much will the profits change in this situation compared to the capacity constraints scenario in requirement b-1?
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