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Chapter 25: 24PGA (page 1417)

Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:

Per Unit

Deluxe Toothbrush Standard Toothbrush

Sales price \(86 \)56

Variable costs 20 18

Contribution margin \(66 \)38

Contribution margin ratio 76.7% 67.9%

After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.

Requirements

1. Identify the constraining factor for Brinn.

2. Prepare an analysis to show which product line to emphasize.

Short Answer

Expert verified

The company should emphasize onDeluxe Toothbrush.

Step by step solution

01

Meaning of Production

Production refers to a process in whichraw materials are processed with the help of machines and labor, and are converted intofinished goods. The costs incurred in the production process are termed as direct costs, includingfixed and variable expenses.

02

Identification of constraint

According to the information given, the constraining factor is the production capacity of 4,100machine hours per month.

03

Preparation of analysis

Particulars

Deluxe Toothbrush ($)

Standard Toothbrush ($)

Contribution margin per unit

66

38

Production of toothbrush per hour

35

50

Contribution margin per machine hour

$2,310

$1,900

Comment:

The contribution margin of Deluxe Toothbrush is higher than the standard toothbrush, therefore, the company should produce more Deluxe Toothbrush for profit maximization.

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Most popular questions from this chapter

Doherty Company is considering replacing the individual printers each employee in the corporate office currently uses with a network printer located in a central area. The network printer is more efficient and would, therefore, cost less to operate than the individual printers. However, most of the office staff think having to use a centralized printer would be inconvenient. They prefer to have individual printers located at each desk. Identify the following information as financial or nonfinancial and relevant or irrelevant. The first item has been completed as an example.

Financial

Nonfinancial

Relevant

Irrelevant

  1. Amount paid for current printers
  1. Resale value of current printers
  1. Cost of new printer
  1. Operating costs of current printers
  1. Operating costs of new printer
  1. Employee morale

Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of \(9,700 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue:

Cocoa powder \)14,500

Chocolate syrup 103,000

Boxed assorted chocolates 204,000

The cost of transforming the cocoa powder into chocolate syrup would be \(72,000. Likewise, the company would incur a cost of \)183,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make assorted boxed chocolates due to their high sales value and to the fact that the cocoa bean processing cost of $9,700 eats up most of the cocoa powder profits. Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response.

Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants has \(5,100,000 in assets. Its yearly fixed costs are \)650,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total \(1.90. Snappy Plants鈥檚 volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)4.25 each. Garden centers then mark them up to sell to the public for \(9 to \)12, depending on the type of plant.

Requirements

1. Snappy Plants鈥檚 owners want to earn a 11% return on investment on the company鈥檚 assets. What is Snappy Plants鈥檚 target full product cost?

2. Given Snappy Plants鈥檚 current costs, will its owners be able to achieve their target profit?

3. Assume Snappy Plants has identified ways to cut its variable costs to \(1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?

4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend \)105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

Brik, located in San Antonio, Texas, produces two lines of electric toothbrushes: deluxe and standard. Because Brik can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:

Per Unit

Deluxe Toothbrush Standard Toothbrush

Sales price \(88 \)54

Variable expense 22 18

Contribution margin \(66 \)36

Contribution margin ratio 75.0% 66.7%

After expansion, the factory will have a production capacity of 4,900 machine hours per month. The plant can manufacture 65 standard electric toothbrushes or 27 deluxe electric toothbrushes per machine hour.

Requirements

1. Identify the constraining factor for Brik.

2. Prepare an analysis to show which product line the company should emphasize.

What is differential analysis?
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