1) Special Order Pricing. Barry's Bar-B-Que is a popular lunch-time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 600 patrons for his $5 lunch. His variable cost for each meal is about $2, and he figures his fixed costs, on a daily basis, at about $1,200. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat 700 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $3.50 per meal for each of the 50 bus tour members.
Required:
Should Barry accept the $3.50 price? Why or why not? What if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $3.00 per meal?
2) Make or Buy: Eggers Company needs 20,000 units of a part to use in producing one of its products. If Eggers buys the part from McMillan Company for $90 instead of making it, Eggers could not use the released facilities in another manufacturing activity. Forty percent of the fixed overhead will continue irrespective of CEO Donald Mickey's decision. The cost data are:
Cost to make the part:
Direct materials........................$35
Direct labor...............................16
Variable overhead....................24
Fixed overhead................... ..20
Total.......................................$95
Required:
Determine which alternative is more attractive to Eggers and by what amount. What non-financial factors might bear upon the ultimate decision?