er Decision, Services, Qualitative Aspects
10. Question Content Area
Special-Order Decision, Services, Qualitative Aspects
Jason Rogers works full-time for UPS and runs a lawn-mowing service part-time after work during the warm months of April through October. Jason has two men working with him, each of whom is paid $6.00 per lawn mowing. Jason has 25 residential customers who contract with him for once-weekly lawn mowing during the months of May through September, and twice-per-month mowings during April and October. On average, Jason charges $42 per lawn mowed. Recently, LStar Property Management Services asked Jason to mow the lawn at each of its 29 rental houses every two weeks during the months of May through September. LStar has offered to pay $29 per lawn mowing, and would forego the lawn edging that normally takes Jason’s team about half of its regular mowing time. If Jason accepts the job, he can assign a one-man team to mow the rental house yards, and will have to buy an additional power lawn mower for about $370 used. Fuel to run the additional mower will be about $0.50 per yard.
1. If Jason accepts the special order, by how much will his income increase or decrease?
by $fill in the blank 2
12. Make-or-Buy, Traditional Analysis
Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows.
| Density Gauge |
Thickness Gauge |
Total |
||||
| Sales | $ | 219,000 | $ | 116,800 | $ | 335,800 |
| Less variable expenses | 116,800 | 67,160 | 183,960 | |||
| Contribution margin | $ | 102,200 | $ | 49,640 | $ | 151,840 |
| Less direct fixed expenses* | 29,200 | 55,480 | 84,680 | |||
| Segment margin | $ | 73,000 | $ | (5,840) | $ | 67,160 |
| Less common fixed expenses | 43,800 | |||||
| Operating income | $ | 23,360 | ||||
| * Includes depreciation. |
The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,920 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill is considering making the subassembly rather than buying it. Unit-level variable
| Direct materials | $2 |
| Direct labor | 3 |
| Variable |
2 |
No significant non-unit-level costs are incurred.
Morrill is considering two alternatives to supply the productive capacity for the subassembly.
- Lease the needed space and equipment at a cost of $39,420 per quarter for the space and $14,600 per quarter for a supervisor. There are no other fixed expenses.
- Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixed expenses, including supervision, would be $55,480, $11,680 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected.
Required:
1. Should Morrill Company make or buy the subassembly?
If it makes the subassembly, which alternative should be chosen?
Enter the relevant costs of each alternative.
| Lease and Make | Buy | Drop Thickness Gauge and Make | |
| Total relevant costs | $fill in the blank 3 | $fill in the blank 4 | $fill in the blank 5 |
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