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Chapter 25: Q15E (page 1413)

Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Light could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows:

Per Unit

Deluxe Regular

Sales price \(1,030 \)610

Costs:

Direct materials 320 130

Direct labor 88 180

Variable manufacturing overhead 270 90

Fixed manufacturing overhead* 102 34

Variable operating expenses 121 63

Total costs 901 497

Operating income \(129 \)113

*allocated on the basis of machine hours

Requirements

1. What is the constraint?

2. Which model should Tread Light produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)

3. If Tread Light should produce both models, compute the mix that will maximize operating income.

Short Answer

Expert verified

The company should produce regular treadmills forprofit maximization.

Step by step solution

01

Meaning of Contribution Margin

Acontribution margin represents the profit left with acompany after recovering all the variable costs from the sales revenue generated by a business entity. It is computed by taking the difference betweennet sales revenues and associatedvariable costs.

02

Identification of constraint

In the given set of data, machine hours are the major constraint in the company because the production process is dependent on themachine hours.

03

Computation of per-unit contribution margin

Particulars

Deluxe ($)

Regular ($)

Selling price per treadmill

1,030

610

Less: Variable cost

(799)

(463)

Contribution margin per unit

231

147

Machine hours used in proportion of $102:34

3.00

1.00

Hence, units produced per hour

1.00

3.00

Contribution margin per machine hour

Proportion of units produced per equivalent hour (A)

1

3

Contribution margin per unit (B)

231

147

Contribution margin per equivalent machine hour (A*B)

$231

$441

04

Decisionon product mix

The company should produce 100% regular treadmills with zero deluxe because it will provide ahigher contribution margin per machine hour.

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Most popular questions from this chapter

Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018:

SECURITY CHECK

Income Statement

For the Year Ended May 31, 2018

Product Line

Industrial Systems

Household Systems

Total

Net Sales Revenue

\( 300,000

\) 330,000

\( 630,000

Cost of Goods Sold:

Variable

35,000

42,000

77,000

Fixed

210,000

63,000

273,000

Total Cost of Goods Sold

245,000

105,000

350,000

Gross Pro铿乼

55,000

225,000

280,000

Selling and Administrative Expenses:

Variable

66,000

77,000

143,000

Fixed

39,000

28,000

67,000

Total Selling and Administrative Expenses

105,000

105,000

210,000

Operating Income (Loss)

\) (50,000)

\( 120,000

\) 70,000

Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(81,000 and decrease fixed selling and administrative expenses by \)15,000.

Requirements

1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line.

2. Prepare contribution margin income statements to show Security Team鈥檚 total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives鈥� income numbers to your answer to Requirement 1.

3. What have you learned from this comparison in Requirement 2?

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.

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

Elm Petroleum has spent \(204,000 to refine 61,000 gallons of petroleum distillate, which can be sold for \)6.30 per gallon. Alternatively, Elm can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost \(1.80 per gallon of distillate. The cleaner fluid can be sold for \)9.10 per gallon. To sell the cleaner fluid, Elm must pay a sales commission of \(0.10 per gallon and a transportation charge of \)0.16 per gallon.

Requirements

1. Diagram Elm鈥檚 decision alternatives, using Exhibit 25-18 as a guide.

2. Identify the sunk cost. Is the sunk cost relevant to Elm鈥檚 decision?

3. Should Elm sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.

Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:

Direct materials \(5.00

Direct labor 3.00

Variable overhead 6.00

Fixed overhead 7.00

Manufacturing product cost \)21.00

Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.

Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.
See all solutions

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