What is the optimal mix of sweatshirt?

Structuring a Make­or­Buy Problem
Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of
its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each.
Cost information on internal production includes the following:
Total Cost

Direct materials

$25,000

Direct labor

15,000

Variable manufacturing overhead

7,500

Variable marketing overhead

8,500

Fixed plant overhead

30,000

Total

$86,000

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional
costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the
nearest whole number.
Required:
2. List the relevant cost(s) of internal production and of external purchase.
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
????

3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
_______make__________

$ _________?________

4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally.
Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
_________buy________

$ _________?________

2.
Structuring a Special­Order Problem
The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of
its model F80 at a price of $4.20 each. The new customer is geographically separated from the company’s

other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of
F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12
per unit. Unit cost information for the normal level of activity is as follows:

Fixed overhead will not be affected by whether or not the special order is accepted.
Required:
1. What are the relevant costs and benefits of the two alternatives?
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
??????

Should the company accept or reject the special order?
_______reject__________
2. By how much will operating income increase or decrease if the order is accepted?
_______decrease__________ by $ _______?__________

4
Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint
Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit
contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a
stitching machine to affix the appropriate university logo. The firm leases seven machines that each
provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time,
and each Rufus sweatshirt requires 30 minutes of machine time.
Assume that a maximum of 47,650 units of each sweatshirt can be sold.
Required:

If required, round your answers to the nearest whole number.
1. What is the contribution margin per hour of machine time for each type of sweatshirt?

Contribution Margin

Swoop

$ _______50__________

Rufus

$ ________30_________

2. What is the optimal mix of sweatshirt?

Optimal Mix

Swoop

____________?_____ units

Rufus

___________?______ units

3. What is the total contribution margin earned for the optimal mix?
$ ________?_________

5.
Special Order
Smooth Move Company manufactures professional paperweights and has been approached by a new
customer with an offer to purchase 15,000 units at a per­unit price of $9.00. The new customer is
geographically separated from Smooth Move’s other customers, and existing sales will not be affected.
Smooth Move normally produces 89,000 units but plans to produce and sell only 65,000 in the coming
year. The normal sales price is $13 per unit. Unit cost information is as follows:
Direct materials

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