Case study on decision making
RI, decision making. The following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window.
Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated.
1. What is the expected residual income in 2017?
2. Clear Panes receives an external special order for 10,000 units at $120 each. If the order is accepted, Clear Panes will have to incur incremental fixed costs of $250,000 and invest an additional $450,000 in various assets. What is the effect on Clear Panes’s residual income of accepting the order?
3. The window latch Clear Panes manufactures for its windows has a variable cost of $20. An outside vendor has offered to supply the 150,000 units required at a cost of $21 per unit. If the component is purchased outside, fixed costs will decline by $100,000 and assets with a book value of $150,000 will be sold at book value. Will Clear Panes decide to make or buy the component? Explain your answer.
4. One of Clear Panes’s regular customers asks for a special window with stained glass inserts. The customer requires 2,500 of these windows. Clear Panes estimates its variable cost for these special units at $105 each. Clear Panes will also have to undertake new investment of $300,000 to produce these windows. What is the minimum selling price that will make the deal acceptable to Clear Panes?
5. Assume the same facts as in requirement 4. Also suppose that the customer has offered $130 for each stained glass window. In addition, the customer has indicated that its purchases of the existing product will drop by 1,500 units. a. What is the net change in Clear Panes’s residual income from taking the offer, relative to its planned 2017 situation? b. At what drop in unit sales of the regular window would Clear Panes be indifferent to the offer?
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