K1X2002: Tutorial 1 ~ Cost Concepts 1) A tennis racquet manufacturer is negotiating a lease on land to build a manufacturing plant. The price charged will be determined by p = $450 ~ (0.1)D per tennis racquet. The manufacturer faces variable costs of $25 per tennis racquet. Fixed costs of manufacturing are currently $25,000, in addition to the value of the lease being negotiated. a) For the situation, determine the optimal monthly sales volume for this product? b) How high can the lease be in order for the firm to make a positive profit? 2) A company is analyzing a make-versus-purchase situation for a component used in several products, and the engineering department has developed these data: Option A: Purchase 10,000 items per year at a fixed price of $8.50 per item. The cost of placing the order is negligible according to the present cost accounting procedure. Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials = $5.00 per item, and direct labor = $1.50 per item. Manufacturing overhead is allocated at 200% of direct labor (=$3.00 per item) Based on these data, should the item be purchased or manufactured?Solutions 1) {a) P= 450-0.1D; © Optimal D* (b) Profit = [450 - 0.1(2,125)] x 2,125 ~ 25,000 — Lease value ~ 25(2,125) For profits to be at least 0, Lease value can be no greater than 2) Option A (Purchase] '$25/racquet; CF = $25,000 + lease value (a — Cv)/2b = (450 - 25)/2(0.1) = 2,125 units (Eqn 2-10), T= (10,000 items)($8.50/item) = $85,000 Option B (Manufacture): Direct Materials | = $5.00/item Direct Labor = $1.50/item Overhead = $3.00/item $9.50/item_ CT = (10,000 items)($9.50/item) = $95,000 Choose Option A (Purchase Item).