Rightway Printers: Case Analysis

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Assignment#2 Comm 3116/Busi 6106 Winter 2014 DUE DATE:......Feb 05, 2014 Questions from the Course Textbook-2nd Ed: 1. 4-41( pg 188) 2. 4-42 (pg 188-89) 3. 4-47 (pg 192) 4. 4-52 (pg 194-5) 5. 6-36 (283) 6. 6-44 (pg.285) SUGGESTED SOLUTION ------------------------------------------------- 4.41 Special Order Capacity Constraint, Relevant Information, Qualitative Factors - Rightway Printers A. This is a special order problem with a capacity constraint. The manager chooses whether to take the special order or not, but capacity limits will be exceeded if the order is taken. B. Relevant information for the decision includes the variable cost, the contribution margin, and the selling…show more content…
Capacity makes a difference in the minimum price that can be set. If Rightway is close to capacity limits, it would replace regular business with the special order and need to price the order the same as regular business that it would forego to take the order. In this problem, 5% of capacity would be used for regular business, and 5% would be excess capacity. So, the special order would need to be priced high enough to replace the lost contribution margin of the 5% of regular business. E. Usually when operations get close to capacity limits, costs go up. Bottlenecks are more common, there may be congestion in the plant, and production could slow down. These costs need to be considered when setting a price for a special order that will move an organization out of its normal operating range (relevant range). In addition, managers need to think about whether the business will lose some customers because demand cannot be filled. ------------------------------------------------- 4.42 Make or Buy, Qualitative Factors - The Vernom Corporation A. The firm should make the tubes because the estimated cost to manufacture the tubes is less than the cost to purchase them: Cost to purchase tubes ($1.80 * 100,000) $180,000 Avoidable costs to manufacture tubes: Direct labour (10% * $4 * 100,000) $ 40,000 Direct material (20% * $6 * 100,000) 120,000 Variable overheada (10% * $1.00 * 100,000) 10,000 Total avoidable cost…show more content…
* Product lines that were not covering their avoidable costs could be dropped. * New product development is likely to receive more focus as the review program identifies areas of increasing demand. * Gourmet is likely to benefit from better monitoring of competitors’ product development, prices, and market share trends. F. This is an open-ended question; the specific steps are likely to vary based on the circumstances and the information found. Analysis for a given product might include the following general steps: * Identify the product to be analyzed by using a quantitative monitoring technique (e.g., size decline in contribution margin or sales) or some other method * Obtain and analyze detailed revenue and cost data prior periods; look for negative trends * Obtain and analyze the correlation of sales for this product with other products; look for potential relationships with other products that might influence a decision to drop the product * Obtain and analyze industry information about the product; look for information about trends in customer tastes, competition,
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