Question

Gibson Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company's chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment's operating activities. The relevant range for the production and sale of the calculators is between 36,000 and 70,000 units per year. \begin{tabular}{lr} Revenue $ (37,000 $ units $ \times \$ 8.00) $ & \\ Unit-level variable costs & \\ Materials cost $ (37,000 \times \$ 2.00) $ & $ (74,000) $ \\ Labor cost $ (37,000 \times \$ 1.00) $ & $ (37,000) $ \\ Manufacturing overhead $ (37,000 \times \$ 0.20) $ & $ (7,400) $ \\ Shipping and handling $ (37,000 \times \$ 0.25) $ & $ (9,250) $ \\ Sales commissions $ (37,000 \times \$ 1.00) $ & $ (37,000) $ \\ Contribution margin & 131,350 \\ Fixed expenses & $ (28,000) $ \\ Advertising costs & $ (66,000) $ \\ Salary of production supervisor \\ Allocated companywide facility-level expenses & $ (81,000) $ \\ Net loss & $ \$(43,650) $ \\ & \end{tabular} Required : a. A large discount store has approached the owner of Gibson about buying 8,000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Gibson's existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $ \$ 4.90 $ per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Gibson accept the special order? b-1. Gibson has an opportunity to buy the 33,000 calculators it currently makes from a reliable competing manufacturer for $ \$ 5.00 $ each. The product meets Gibson's quality standards. Gibson could continue to use its own logo, advertising program, and sales force to distribute the products. Calculate the total cost for Gibson to make and buy the 33,000 calculators. b-2. Should Gibson buy the calculators or continue to make them? b-3. Should Gibson buy the calculators or continue to make them, if the volume of sales were increased to 70,000 units? c. Because the calculator division is currently operating at a loss, should it be eliminated from the company's operations? Support your answer with appropriate computations. Specifically, by what amount would the segment's elimination increase or decrease?

          Gibson Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company's chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment's operating activities. The relevant range for the production and sale of the calculators is between 36,000 and 70,000 units per year.
\begin{tabular}{lr} 
Revenue \( (37,000 \) units \( \times \$ 8.00) \) & \\
Unit-level variable costs & \\
Materials cost \( (37,000 \times \$ 2.00) \) & \( (74,000) \) \\
Labor cost \( (37,000 \times \$ 1.00) \) & \( (37,000) \) \\
Manufacturing overhead \( (37,000 \times \$ 0.20) \) & \( (7,400) \) \\
Shipping and handling \( (37,000 \times \$ 0.25) \) & \( (9,250) \) \\
Sales commissions \( (37,000 \times \$ 1.00) \) & \( (37,000) \) \\
Contribution margin & 131,350 \\
Fixed expenses & \( (28,000) \) \\
Advertising costs & \( (66,000) \) \\
Salary of production supervisor \\
Allocated companywide facility-level expenses & \( (81,000) \) \\
Net loss & \( \$(43,650) \) \\
&
\end{tabular}

Required :
a. A large discount store has approached the owner of Gibson about buying 8,000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Gibson's existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only \( \$ 4.90 \) per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Gibson accept the special order?
b-1. Gibson has an opportunity to buy the 33,000 calculators it currently makes from a reliable competing manufacturer for \( \$ 5.00 \) each. The product meets Gibson's quality standards. Gibson could continue to use its own logo, advertising program, and sales force to distribute the products. Calculate the total cost for Gibson to make and buy the 33,000 calculators.
b-2. Should Gibson buy the calculators or continue to make them?
b-3. Should Gibson buy the calculators or continue to make them, if the volume of sales were increased to 70,000 units?
c. Because the calculator division is currently operating at a loss, should it be eliminated from the company's operations? Support your answer with appropriate computations. Specifically, by what amount would the segment's elimination increase or decrease?

Added by S L.

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