10.24 Short Run.handout.pencast
LO3 Special Order Decision
P 7. Keystone Resorts, Ltd., has approached Crystal Printers, Inc., with a special order
to produce 300,000 two-page brochures. Most of Crystal’s work consists of recurring
short-run orders. Keystone Resorts is offering a one-time order, and Crystal has the
capacity to handle the order over a two-month period.
The management of Keystone Resorts has stated that the company would be
unwilling to pay more than $48 per 1,000 brochures. Crystal Printers’ controller
assembled the following cost data for this decision analysis: Direct materials (paper)
would be $26.80 per 1,000 brochures; direct labor costs would be $6.80 per 1,000
brochures; direct materials (ink) would be $4.40 per 1,000 brochures; variable
production overhead would be $6.20 per 1,000 brochures; machine maintenance
(fixed cost) is $1.00 per direct labor dollar. Other fixed production overhead amounts
to $2.40 per direct labor dollar. Variable packing costs would be $4.30 per 1,000
brochures. Also, the share of general and administrative expenses (fixed costs) to be
allocated would be $5.25 per direct labor dollar.
Required
1. Prepare an analysis for Crystal Printers’ management to use in deciding whether to
accept or reject Keystone Resorts’ offer. What decision should be made?
2. What is the lowest possible price Crystal Printers can charge per thousand and still
make a $6,000 profit on the order?
LO5 Sales Mix Decision
P 9. Dr. Massy, who specializes in internal medicine, wants to analyze his sales mix
to find out how the time of his physician assistant, Consuela Ortiz, can be used to
generate the highest operating income.
Ortiz sees patients in Dr. Massy’s office, consults with patients over the telephone,
and conducts one daily weight-loss support group attended by up to 50 patients.
Statistics for the three services are as follows:
Office
Visits
Phone Calls
Weight-Loss
Support Group
Maximum number of
patient billings per day
20
40
50
Hours per billing
0.25
0.10
1.0
Billing rate
$50
$25
$10
Variable costs
$25
$12
$5
Ortiz works seven hours a day.
Required
1. Determine the best sales mix. Rank the services offered in order of their
profitability.
2. Based on the ranking in requirement 1, how much time should Ortiz spend on each
service in a day? (Hint: Remember to consider the maximum number of patient
billings per day.) What would be the daily total contribution margin generated by
Ortiz?
3. Dr. Massy believes the ranking is incorrect. He knows that the daily 60-minute
meeting of the weight-loss support group has 50 patients and should continue to be
offered. If the new ranking for the services is (1) weight-loss support group, (2)
phone calls, and (3) office visits, how much time should Ortiz spend on each
service in a day? What would be the total contribution margin generated by Ortiz,
assuming the weight-loss support group has the maximum number of patient
billings?
4. Manager insight ►Which ranking would you recommend? What additional
amount of total contribution margin would be generated if your recommendation
were to be accepted?
LO6 Sell or Process-Further Decision
P 10. Marketeers, Inc., developed a promotional program for a large shopping center
in Sunset Living, Arizona, a few years ago. Having invested $360,000 in developing
the original promotion campaign, the firm is ready to present its client with an add-on
contract offer that includes the original promotion areas of (1) a TV advertising
campaign, (2) a series of brochures for mass mailing, and (3) a special rotating BIG
SALE schedule for 10 of the 28 tenants in the shopping center. Presented below are
the revenue terms from the original contract with the shopping center and the offer for
the add-on contract, which extends the original contract terms.
Original Contract
Terms
Extended Contract
Including Add-On Terms
TV advertising
campaign
$520,000
$ 580,000
Brochure series
210,000
230,000
Rotating BIG SALE
schedule
170,000
190,000
Totals
$900,000
$1,000,000
Marketeers, Inc., estimates that the following additional costs will be incurred by
extending the contract:
TV Campaign
Brochures
BIG SALE Schedule
Direct labor
$30,000
$ 9,000
$7,000
Variable overhead
costs
22,000
14,000
6,000
Fixed overhead
costs*
12,000
4,000
2,000
*80 percent are direct fixed costs applied to this contract.
Required
1. Compute the costs that will be incurred for each part of the add-on portion of the
contract.
2. Should Marketeers, Inc., offer the add-on contract, or should it ask for a final
settlement check based on the original contract only? Defend your answer.
3. If management of the shopping center indicates that the terms of the add-on
contract are negotiable, how should Marketeers, Inc., respond?