Chapter 13, Problem 28P

Problem 6-30A Comprehensive problem including special order, outsourcing, and segment elimination decisions

Bain Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company’s chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment’s operating activities. The relevant range for the production and sale of the calculators is between 30,000 and 60,000 units per year.

Revenue (40,000 units × $10.80)	$432,000
Unit-level variable costs
Materials cost (40,000 × $2.70)	(108,000)
Labor cost (40,000 × $1.20)	(48,000)
Manufacturing overhead (40,000 × $1.20)	(48,000)
Shipping and handling (40,000 × $0.30)	(12,000)
Sales commissions (40,000 × $1.20)	(48,000)
Contribution margin	168,000
Fixed expenses
Advertising costs	(24,000)
Salary of production supervisor	(72,000)
Allocated companywide facility-level expenses	(96,000)
Net loss $	(24,000)

Required (Consider each of the requirements independently.)

1. a. A large discount store has approached the owner of Bain about buying 5,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Bain’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $6.60 per calculator. Based on quantitative factors alone, should Bain accept the special order? Support your answer with appropriate computations. Specifically, by what amount would the special order increase or decrease profitability?
2. b. Bain has an opportunity to buy the 40,000 calculators it currently makes from a reliable competing manufacturer for $6.72 each. The product meets Bain’s quality standards. Bain could continue to use its own logo, advertising program, and sales force to distribute the products. Should Bain buy the calculators or continue to make them? Support your answer with appropriate computations. Specifically, how much more or less would it cost to buy the calculators than to make them? Would your answer change if the volume of sales were increased to 60,000 units?
3. c. Because the calculator division is currently operating at a loss, should it be eliminated from the company’s operations? Support your answer with appropriate computations. Specifically, by what amount would the segment’s elimination increase or decrease profitability?