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Paint and
Supplies Carpeting Wallpape
r
2. This cost should be ignored. The inventory cost is sunk (i.e., a past cost that is
not relevant to the decision). Regardless of whether the department is closed,
Contemporary Trends will have a wallpaper inventory of $11,850.
Total Number of
Percen
t Accessory Handbag
of Total Dresses Capes s Total
Complete sets............................ 70% 1,050 1,050 1,050
Dress and accessory cape.......... 6% 90 90
Dress and handbag..................... 15% 225 225
Dress only.................................. 9 % 135
Total units if additional items are
introduced ................................ 100 % 1,500 1,140 1,275
Less: Unit sales if additional
items
are not introduced..................... 1,250 -- --
Incremental sales....................... 250 1,140 1,275
Incremental contribution margin
per unit (excluding material and
cutting costs) ............................ $192 .00 $12 .80 $4 .80
Total incremental contribution $68,71
margin ...................................... $48,000 $14,592 $6,120 2
Additional costs:
Additional cutting cost
(1,500 91% $14.40).......... $19,656
Additional material cost
(250 $80.00)........................ 20,000
Lost remnant sales
[(1,250 – 135) $8.00]........... 8,920
Incremental cutting for
extra dresses (250 $32.00)... 8,000 56,576
Incremental profit........................ $12,13
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2. Qualitative factors that could influence the company’s management team in its
decision to manufacture matching accessory capes and handbags include:
accuracy of forecasted increase in dress sales.
accuracy of forecasted product mix.
PROBLEM 14-45 (CONTINUED)
1.
Food
Blender Processor
Unit cost if purchased from an outside supplier ............................... $60 $114
Incremental unit cost if manufactured:
Direct material ............................................................................
$18 $ 33
Direct labor ................................................................................
12 27
Variable overhead
$48 – $30 per hour fixed ......................................................... 18
$96 – (2)($30 per hour fixed) ................................................... 36
Total .......................................................................................
$48 $ 96
Unit cost savings if manufactured ................................................... $12 $ 18
Machine hours required per unit ...................................................... 1 2
Cost savings per machine hour if manufactured
$12 ÷ 1 hour ..............................................................................$12
$18 ÷ 2 hours ............................................................................. $ 9
Therefore, each machine hour devoted to the production of blenders saves the
company more than a machine hour devoted to food processor production.
2. If the company’s management team is able to reduce the direct material cost
per food processor to $18 ($15 less than previously assumed), then the cost
savings from manufacturing a food processor are $33 per unit ($18 savings
computed in requirement (1) plus $15 reduction in material cost):
Food
Blender Processor
New unit cost savings if manufactured .................................. $12.00 $33.00
Machine hours required per unit ........................................... 1 MH 2 MH
Cost savings per machine hour if manufactured
$12 ÷ 1 hour .................................................................... $12.00
$33 ÷ 2 hours .................................................................. $16.50
Therefore, devote all 50,000 hours to the production of 25,000 food processors.
Conclusion: Manufacture: 25,000 food processors
Purchase: 3,000 food processors and 20,000 blenders
PROBLEM 14-47 (25 MINUTES)
3. Martinez, Inc. expects to sell 10,000 Standard units (40,000 units x 25%) or
8,000 Enhanced units (40,000 units x 20%). On the basis of this sales
forecast, the company would be advised to select the Standard model.
Standard Enhanced
Total contribution margin:
10,000 units x $237; 8,000 units x $2,370,00 $2,400,00
$300…. 0 0
Less: Marketing and 195,00 300,00
advertising……………… 0 0
Income………………………………………… $2,175,00 $2,100,00
…... 0 0
2. When labor is in short supply the Basic model should be manufactured, since it
has the highest contribution margin per direct-labor hour .
Yes, the order should be accepted because it generates a profit of $68,100 for the
firm. Note: The fixed administrative cost is irrelevant to the decision, because
this cost will be incurred regardless of whether Mercury accepts or rejects the
order.
Selling $31.50
price…………………………………………………
Less: Direct material ($16.40 - $4.20) $12.2
…………………... 0
Direct 4.50
labor…………………………………………..
Variable manufacturing overhead
(.5 hours x $15.00*) 7.50 24.20
……………………………..
Unit contribution $
margin…………………………………. 7.30
No, Mercury lacks adequate machine capacity to manufacture the entire order.