ACT 5060 Week 3 Assignment 2015

1. Outsourcing (Make-or-Buy) Decision
Assume a division of Hewlett-Packard currently makes 12,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $37 per board, consisting of variable costs per unit of $25 and fixed costs per unit of $12. Further assume Sanmina-SCI offers to sell Hewlett-Packard the 12,000 circuit boards for $37 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $55,000 per year. In addition, $7 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.

Calculate the net benefit (cost) to HP of outsourcing the component from Samina-SCI. Use a negative sign with your answer, if appropriate.
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2. Make or Buy
Rashad Rahavy, M.D., is a general practitioner whose offices are located in the South Falls Professional Building. In the past, Dr. Rahavy has operated his practice with a nurse, a receptionist/secretary, and a part-time bookkeeper. Dr. Rahavy, like many small-town physicians, has billed his patients and their insurance companies from his own office. The part-time bookkeeper, who works 10 hours per week, is employed exclusively for this purpose.

North Falls Physician's Service Center has offered to take over all of Dr. Rahavy's billings and collections for an annual fee of $9,000. If Dr. Rahavy accepts this offer, he will no longer need the bookkeeper. The bookkeeper's wages and fringe benefits amount to $12 per hour, and the bookkeeper works 50 weeks per year. With all the billings and collections done elsewhere, Dr. Rahavy will have two additional hours available per week to see patients. He sees an average of three patients per hour at an average fee of $20 per visit. Dr. Rahavy's practice is expanding, and new patients often have to wait several weeks for an appointment. He has resisted expanding his office hours or working more than 50 weeks per year. Finally, if Dr. Rahavy signs on with the center, he will no longer need to rent a records storage facility for $100 per month.

(a) Calculate the net benefit (cost) of outsourcing the bookkeeping.
$Answer

(b) In making a final decision, all of the following are possible disadvantages that should be considered by Dr. Rahavy, except:

It could become more expensive than the bookkeeper in the future if the outside provider increases fees.

Not having to be concerned about managing this function internally, and being able to focus entirely on serving patients.

The loss of direct control of this important function.

The quality of the outsourced service may not meet expectations.

None of the above.

3. Sell or Process Further
Port Allen Chemical Company processes raw material D into joint products E and F. Raw material D costs $5 per liter. It costs $100 to convert 100 liters of D into 60 liters of E and 40 liters of F. Product F can be sold immediately for $5 per liter or processed further into Product G at an additional cost of $2 per liter. Product G can then be sold for $10 per liter.

Determine whether Product F should be sold or processed further into Product G. Calculate the net benefit (cost) of further processing.
$Answer per liter

4. Relevant Costs for Equipment Replacement Decision
Health Scan, Inc. paid $50,000 for X-ray equipment four years ago. The equipment was expected to have a useful life of 10 years from the date of acquisition with annual operating costs of $45,000. Technological advances have made the machine purchased four years ago obsolete with a zero salvage value. An improved X-ray device incorporating the new technology is available at an initial cost of $92,000 and annual operating costs of $28,000. The new machine is expected to last only six years before it, too, is obsolete. Asked to analyze the financial aspects of replacing the obsolete but still functional machine, Health Scan's accountant prepared the following analysis. After looking over these numbers, the Center's manager rejected the proposal.

Calculate the net benefit (cost) of purchasing the new machine.
$Answer

5. Special Order
Tobitzu TV produces wall mounts for flat panel television sets. The forecasted income statement for 2009 is as follows:

Additional Information
(1) Of the production costs and selling expenses, $600,000 and $100,000, respectively, are fixed. (2) Tobitzu TV received a special order from a hospital supply company offering to buy 15,500 wall mounts for $28. If it accepts the order, there will be no additional selling expenses, and there is currently sufficient excess capacity to fill the order. The company's sales manager argues for rejecting the order because "we are not in the business of paying $32 to make a product to sell for $28."

Calculate the net benefit (cost) of accepting the special order.
$Answer