8/30/22, 8:33 PM Chapter 14: Question & Answers

Car Components Inc ('CCI') manufactures and sells brake andsuspension components used in the car industry. Some components are
soldthrough garages and motor factors to the public but the bulk are solddirect to car manufacturers. In particular, CCI has provided
componentsfor many years to Victor Motors, its largest client, who takes 40% ofCCI's output. Pricing has always been based on full
production cost plus25%.

Intense competition within the car industry has seen CCI's marketshare decline and last year it only operated at 70% capacity.
CCI'sclients have not been immune to industry pressure either and recentlyVictor Motors was bought out by a multinational
manufacturer. The newowners have decided that the component contract would now be put out totender each year and have made it
clear that price, while not the onlyconsideration, would be a major factor in deciding on the preferredsupplier.

The management accountant of CCI has put together the following cost schedule for the CCI contract for the next year:

Note 1: There is currently $500,000 of materials inventory.If not used on Victor Motor components this would be sold to a thirdparty, but
incur a net loss (after delivery charges are taken intoaccount) of $100,000.

Note 2: Victor Motors components are highly specialised. Ifthe contract was lost, then all of the current staff making Victorcomponents
would have to be made redundant. Redundancy costsre-estimated to be $500,000 now or $600,000 in one year's time.

Note 3: Fixed overheads consist of unavoidable company-widecosts and depreciation. If the contract is lost then machinery would
besold for $600,000 now or $450,000 in one year.

Required:

(a) Calculate the incremental cost of completing the Victor Motors contract for one more year and suggest a minimum tender price.

(8 marks)

(b) Discuss the factors that must be taken into consideration when bidding for the Victor contract.

(8 marks)

(Total: 16 marks)

4 Make or buy and other short-term decisions

 ACCESS INC

Questions

Access Inc makes electrically-driven disability scooters aimed atelderly and/or disabled customers. At present wheels and tyres
arebought from external suppliers but all other parts are manufacturedin-house. The scooters have a strong reputation due mainly to
innovativedesigns, special power units that can be recharged at home and seatsthat enable easy access for a wide range of disabilities.
Access Incalso sells power units to other firms.

Current monthly costs are as follows.

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8/30/22, 8:33 PM Chapter 14: Question & Answers

Note: The power unit department currently produces 90 units amonth – 60 being used in Access' own scooters, and 30 being
soldexternally at $376 each.

A new order has been won to supply an additional 10 scooters permonth. However, the directors are considering how best to meet
theadditional demand:

Sufficient capacity exists for the company to increase its monthly production to 70 scooters, except that making an extra 10 seating
assemblies would require reallocation of labour and other resources from the power unit to the seating department. This would cut
power unit output by 20 units per month.
The alternative course would be to buy 10 seating assemblies from an outside supplier and fit the 10 power units from the present
production of 90 units. The cheapest quote for seating assemblies is $610 per assembly.

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