Case 1 Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials cost and the direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year.A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.Tasks:
Case 2 You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities.Two options have emerged. Option 1 is for the company to keep its existing computer system and upgrade its word processing program. The memory of each individual workstation would be enhanced; and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well.Option 2 would be for the company to invest in an entirely different computer system. The software for this system is extremely impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value (NPV) information for these options is as follows:
Option 1
Option 2
Initial investment
$95,000
$270,000
Cost savings of labor over four years
Tasks: Prepare a detailed report for management in which you make a recommendation for one system or the other using the information given.
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