Chade Corp. is considering a special order brought to it by a new client. If Chade determines the variable cost to be \(\$ 9\) per unit, and the contribution margin of the next best alternative of the facility to be \(\$ 5\) per unit, then if Chade has: a. Full capacity, the company will be profitable at \(\$ 4\) per unit. b. Excess capacity, the company will be profitable at \(\$ 6\) per unit. c. Full capacity, the selling price must be greater than \(\$ 5\) per unit. d. Excess capacity, the selling price must be greater than \(\$ 9\) per unit.

"Managers should always buy inventory in quantities that result in the lowest purchase cost per unit." Do you agree? Why?

Susan Smith manages the Wexford plant of Sanchez Manufacturing. A representative of Darnell Engineering approaches Smith about replacing a large piece of manufacturing equipment that Sanchez uses in its process with a more efficient model. While the representative made some compelling arguments in favor of replacing the 3 -year-old equipment, Smith is hesitant. Smith is hoping to be promoted next year to manager of the larger Detroit plant, and she knows that the accrual-basis net operating income of the Wexford plant will be evaluated closely as part of the promotion decision. The following information is available concerning the equipment replacement decision: Sanchez uses straight-line depreciation on all equipment. Annual depreciation expense for the old machine is \(\$ 180,000\) and will be \(\$ 270,000\) on the new machine if it is acquired. For simplicity, ignore income taxes and the time value of money. 1\. Assume that Smith's priority is to receive the promotion and she makes the equipment-replacement decision based on the next one year's accrual-based net operating income. Which alternative would she choose? Show your calculations. 2\. What are the relevant factors in the decision? Which alternative is in the best interest of the company over the next 2 years? Show your calculations. 3\. At what cost would Smith be willing to purchase the new equipment? Explain.

(CMA, adapted) The Reward One Company manufactures windows. Its manufacturing plant has the capacity to produce 12,000 windows each month. Current production and sales are 10,000 windows per month. The company normally charges \(\$ 250\) per window. cost information for the current activity level is as follows: Reward One has just received a special one-time-only order for 2,000 windows at \(\$ 225\) per window. Accepting the special order would not affect the company's regular business or its fixed costs. Reward One makes windows for its existing customers in batch sizes of 100 windows $(100 \text { batches } \times 100 \text { windows per batch }=10,000$ windows). The special order requires Reward 0ne to make the windows in 25 batches of 80 windows. 1\. Should Reward One accept this special order? Show your calculations. 2\. Suppose plant capacity were only 11,000 windows instead of 12,000 windows each month. The special order must either be taken in full or be rejected completely. Should Reward One accept the special order? Show your calculations. 3\. As in requirement 1, assume that monthly capacity is 12,000 windows. Reward 0ne is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of \(\$ 20\) in the month in which the special order is being filled. They would argue that Reward One's capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Reward One accept the special order under these conditions? Show your calculations.

(CPA) Choose the best answer. 1\. The Cozy Company manufactures slippers and sells them at \(\$ 10\) a pair. Variable manufacturing cost is \(\$ 5.75\) a pair, and allocated fixed manufacturing cost is \(\$ 1.75\) a pair. It has enough idle capacity available to accept a one-time-only special order of 25,000 pairs of slippers at $\$ 7.50$ a pair. Cozy will not incur any marketing costs as a result of the special order. What would the effect on operating income be if the special order could be accepted without affecting normal sales: (a) $\$ 0,(b) \$ 43,750\( increase, \)(c) \$ 143,750\( increase, or (d) \)\$ 187,500$ increase? Show your calculations. 2\. The Manchester Company manufactures Part No. 498 for use in its production line. The manufacturing cost per unit for 10,000 units of Part No. 498 is as follows: The Remnant Company has offered to sell 10,000 units of Part No. 498 to Manchester for \(\$ 71\) per unit. Manchester will make the decision to buy the part from Remnant if there is an overall savings of at least \(\$ 45,000\) for Manchester. If Manchester accepts Remnant's offer, S11 per unit of the fixed overhead allocated would be eliminated. Furthermore, Manchester has determined that the released facilities could be used to save relevant costs in the manufacture of Part No. \(575 .\) For Manchester to achieve an overall savings of \(\$ 45,000\) the amount of relevant costs that would have to be saved by using the released facilities in the manufacture of Part No. 575 would be which of the following: (a) $\$ 30,000,(\mathrm{b}) \$ 115,000,(\mathrm{c}) \$ 125,000,\( or \)(\mathrm{d}) \$ 100,000 ?$ Show your calculations. What other factors might Manchester consider before outsourcing to Remnant?

(A. Spero, adapted) The TechGuide Company produces and sells 7,500 modular computer desks per year at a selling price of \(\$ 750\) each. Its current production equipment, purchased for \(\$ 1,800,000\) and with a five-year useful life, is only two years old. It has a terminal disposal value of \(\$ 0\) and is depreciated on a straight-line basis. The equipment has a current disposal price of \(\$ 450,000\). However, the emergence of a new molding technology has led TechGuide to consider either upgrading or replacing the production equipment. The following table presents data for the two alternatives: (A. Spero, adapted) The TechGuide Company produces and sells 7,500 modular computer desks per year at a selling price of \(\$ 750\) each. Its current production equipment, purchased for \(\$ 1,800,000\) and with a five-year useful life, is only two years old. It has a terminal disposal value of \(\$ 0\) and is depreciated on a straight-line basis. The equipment has a current disposal price of \(\$ 450,000\). However, the emergence of a new molding technology has led TechGuide to consider either upgrading or replacing the production equipment. The following table presents data for the two alternatives: All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money. 1\. Should TechGuide upgrade its production line or replace it? Show your calculations. 2\. Now suppose the one-time equipment cost to replace the production equipment is somewhat negotiable. All other data are as given previously. What is the maximum one-time equipment cost that TechGuide would be willing to pay to replace rather than upgrade the old equipment? 3\. Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original exercise, but that the production and sales quantity is not known. For what production and sales quantity would TechGuide (i) upgrade the equipment or (ii) replace the equipment? 4\. Assume that all data are as given in the original exercise. Dan Doria is TechGuide's manager, and his bonus is based on operating income. Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Doria choose? Explain.