“Pure Comfort manufactures and sells mattresses with adjustable air chambers. Pure Comfort
has been producing and selling approximately 500,000 units per year. Each units sells for $600, and there are no
variable selling, general, or administrative costs. The company has been approached by a foreign
supplier who wishes to provide the air compressor component for $90 per
unit. Total annual manufacturing costs,
including air compressors, is as follows: Direct
materials $500,00,000 Direct
labor 800,00,000 Variable
factory overhead 160,00,000 Fixed
factory overhead 350,00,000 If Pure Comfort outsources the air compressor, it is
expected that direct materials will be reduced by 20%, direct labor by 30%, and
variable factory overhead by 25%. There
will be no reduction in fixed factory overhead. (a) Should

Pure Comfort outsource the air compressor? (b) If
outsourcing the air compressor will free up capacity, and enable Pure Comfort
to increase production and sales to 600,000 units per year, would it make sense
to outsource? Summit Paintball Supply manufactures paintballs used by
recreational gamers. The cost of
producing a box of 2,500 paintballs is as follows: Direct
materials $12.50 Direct
labor 6.25 Variable
factory overhead 18.75 Fixed
factory overhead 25.00 Variable
selling, general, and administrative costs
18.75 Fixed
selling, general, and administrative costs
4.00 The fixed factory overhead and fixed SG&A cost is
allocated based on an assumption that the business will produce 400,000 boxes
of paintballs per year. The company has
capacity to produce 500,000 boxes without impacting either category of fixed
cost. (a) The market
for paintballs has become very competitive. Management has requested to know
the break-even price that can be charged for a box of paintballs, assuming
production and sale of 400,000 boxes.
(b) Management
has received a special order request for 100,000 boxes of “”private
label”” paintballs. The order
specifies a per box price of $75. How
will profitability be impacted if the order is accepted? Direct
materials $500,00,000 Direct
labor 800,00,000 Variable
factory overhead 160,00,000 Fixed
factory overhead 350,00,000 If Pure Comfort outsources the air compressor, it is
expected that direct materials will be reduced by 20%, direct labor by 30%, and
variable factory overhead by 25%. There
will be no reduction in fixed factory overhead. (a) Should
Pure Comfort outsource the air compressor? (b) If
outsourcing the air compressor will free up capacity, and enable Pure Comfort
to increase production and sales to 600,000 units per year, would it make sense
to outsource? Summit Paintball Supply manufactures paintballs used by
recreational gamers. The cost of
producing a box of 2,500 paintballs is as follows: Direct
materials $12.50 Direct
labor 6.25 Variable
factory overhead 18.75 Fixed
factory overhead 25.00 Variable
selling, general, and administrative costs
18.75 Fixed
selling, general, and administrative costs
4.00 The fixed factory overhead and fixed SG&A cost is
allocated based on an assumption that the business will produce 400,000 boxes
of paintballs per year. The company has
capacity to produce 500,000 boxes without impacting either category of fixed
cost. (a) The market
for paintballs has become very competitive. Management has requested to know
the break-even price that can be charged for a box of paintballs, assuming
production and sale of 400,000 boxes.
(b) Management
has received a special order request for 100,000 boxes of “”private
label”” paintballs. The order
specifies a per box price of $75. How
will profitability be impacted if the order is accepted? “