Answered: Should FAE decide to manufacture the…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter10: Short-term Decision Making

Section: Chapter Questions

Problem 16PB: At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The...

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FAE Technologies is deciding whether it should begin production of a new toy robot. It has manufactured children’s toys before but nothing as advanced as its latest robot so historical data is at a minimum. The company believes that they can secure the materials for manufacture for between $65-85 per unit and labor costs would be between $15-25 per unit. Management’s expectations are that materials will cost $70 per unit and labor $25 per unit and that 800 units will be sold monthly. Should FAE decide to manufacture the robots in-house, maintenance of the factory machine would cost $15,000 per month. However, management has found that another alternative is for the company to outsource the labor for a flat rate of $35 per unit. The company expects to sell between 750-1000 units per month initially at a price of $149. Provide recommendations for FAE technologies that will maximize profit. Also include base, worst, and best case scenario calculations and provide a scenario summary. Be sure to also consider the outsourcing alternative and make a recommendation on which alternative has the most profit potential. Lastly, include a breakeven amount of units sold for the worst-case without outsourcing.

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