Scribd
Upload
105 views

Set B - Problems On Relevant Decision Making

Bradley Heating and Cooling is considering whether to make ductwork itself or purchase prefabricated ductwork for a new project. Purchasing prefabricated ductwork would cost $42,000, avoiding $1,200 per day in late fees over 5 days and allowing workers to be reassigned to another project. This suggests it would be better to purchase the prefabricated ductwork.

Uploaded by

Nitin Khare
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
105 views

Set B - Problems On Relevant Decision Making

Bradley Heating and Cooling is considering whether to make ductwork itself or purchase prefabricated ductwork for a new project. Purchasing prefabricated ductwork would cost $42,000, avoiding $1,200 per day in late fees over 5 days and allowing workers to be reassigned to another project. This suggests it would be better to purchase the prefabricated ductwork.

Uploaded by

Nitin Khare
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 3

Problem No.

1: Make or Buy

For most construction projects Bradley Heating and Cooling buys sheet metal and forms the metal
into heating/cooling ducts as needed. The company estimates the costs of making and installing
ductwork for the Kerry Park shopping mall to be as follows:

Materials $35,000
Labour to form ductwork 4,000
Labor to install ductwork 10,000
Miscellaneous variable costs 1,500
Fixed costs allocated based on labor hours 3,000
Total Cost 53,500

The fixed costs related to the company’s building, equipment, and office staff. The company plans to
bill the Kerry Park developer $68,000 for services. Bradley is currently behind schedule on other
projects and is paying a late penalty of $1,200 per day. Walt Bradley, the owner of Bradley Heating
and Cooling, is considering ordering prefabricated ductwork for the Kerry Park job. The prefabricated
ductwork will cost $42,000 (including cost of sheet metal). If Walt buys the prefabricated ductwork,
he’ll be able to reassign workers to another project and avoid five days of late fees.

Should Bradley make the ductwork or buy it prefabricated?

Problem No.2 Additional Processing Decision

Mulan Carpet produced 1,200 yards of its economy-grade carpet. In the coloring process, there was
a pigment defect, and the resulting color appeared to be faded. The carpet normally sells for $15 per
yard : $7 of variable cost per yard and $6 of fixed cost per yard have been assigned to the carpet.

The company realizes that it cannot sell the carpet for $15 per yard through its normal channels,
unless the coloring process is repeated. The incremental cost of the process is $2 per yard. However,
Practical Home Solutions is willing to buy the carpet in its current faded condition for $9 per yard.

a. Should Mulan repeat the coloring process or sell the carpet to Practical Home Solutions?
b. Suppose Practical Home Solutions is willing to buy the carpet for $14 per yard if Mulan’s
brand is associated with the carpet by means of a tag indicating the carpet was produced by
Mulan (a highly regarded producer). Would you accept Practical Home Solutions’s offer if
you were the president of Mulan?
Problem No. 3 Drop a Product

Midwestern Company produces two products, Fescue grass and Bermuda grass:

Particulars Fescue Grass Bermuda Grass


Selling price per sq. yard $3.00 $3.85
Variable cost per Sq. Yard 0.85 1.57

The company has 130,000 square yards of growing space available. In the past year, the company
dedicated 65,000 sq. yards to fescue and 65,000 sq. yards to Bermuda grass. Annual fixed costs are
$130,000, which the company allocates to products based on relative growing space.

Martha Lopez, the CFO of Midwestern company has suggested that in the coming year, all 130,000
sq. Yards should be devoted to Bermuda grass. The president vetoed her suggestion saying “I know
the right now home construction is booming in our area and we can sell the grass we can produce,
irrespective of what type. But you know a lot of developer’s really like that fescue grass and I’d hate
to disappoint them by not offering it.”

What is the opportunity cost of the president’s decision to stick with both types of grass?

Problem No. 4. Pricing Orders

Galloway University Medical Centre (GUMC) has a top rated medical facility that draws patients from
a three state area. On the day of discharge from the GUMC hospital, most patients fill their
prescriptions from the GUMC pharmacy. However, when it time comes to renew them, they turn to
local pharmacy because that is more convenient than driving back to the GUMC pharmacy. To
encourage prescriptions renewals, GUMC is considering offering either free overnight delivery or
reduced prices on renewal orders.

Currently, the GUMC pharmacy has revenue of $54,990,000 per year on 846,000 orders. The gross
margin is approximately 25 percent. Free overnight delivery is expected to cost $9 per order and
result in 125,000 renewal orders per year. To deal with the increased volume, the pharmacy will
need to hire two pharmacists at $90,000 each per year and an additional staff person to handle
shipping at $50,000 per year.

Alternatively the pharmacy can generate 125,000 renewal orders per year by offering 20 % off the
prices of renewal orders. With this option, two pharmacist must be hired, but no additional staff
person will be needed.

Estimate the impact on annual pharmacy profit of free overnight delivery and 20 percent off on
renewals. Which option should be selected?

You might also like