Frenchie Co. manufactures and sells Fishies, a useful and novel food prep utensil. Fishies are sold across the US and Canada in several different retail stores at a price of $22 per unit. In 2023, Frenchie manufactured and sold at their normal volume level. The 2023 income statement for Frenchie is provided below:

2023

Revenue $2,750,000

-Direct Materials 937,500

-Direct Labor 375,000

-Variable Manufacturing Overhead 187,500

-Variable Selling and Admin 212,500

Total Contribution Margin 1,037,500

-Fixed Manufacturing Overhead 430,000

-Fixed Selling and Admin 220,000

Operating (pretax) Income 387,500

Assume that each of the situations described in each question below is independent of the others. Also, unless stated otherwise, assume that the cost behavior patterns, selling price, and production and sales volume will continue. Assume also that decision makers are rational profit maximizers.

1. Frenchie is considering a new advertising campaign. This new campaign would increase their Fixed Selling and Admin expenses by 50% and their per unit Variable Selling and Admin costs per unit by 30%. This move is expected to increase sales volume (relative to 2023 volume) by 20%. Should Frenchie do this? How much is the impact on pretax operating income?

2.Frenchie recently received an offer from an outside manufacturing firm, BuildIt. The offer is for BuildIt to produce and ship directly to Frenchies customers each unit that Frenchie sells. If the offer is accepted, Frenchies total fixed manufacturing overhead costs would decrease by 40%. Frenchies nonmanufacturing costs would be unaffected by the proposal except for a reduction in its variable selling and admin costs of $1 per unit.

a. Assume that BuildIts proposed price to Frenchie is $18 per unit. Compare the alternatives of Frenchie making versus buying the units at Frenchies normal volume level. Should Frenchie accept the proposal from BuildIt? How much is the operating income impact of doing this in 2024, assuming volume is unaffected?

b. At what volume level is Frenchie indifferent between making or buying (from BuildIt), given BuildIts proposed price of $18 per unit?