Chapter 23: Q2QS (page 1049)
Refer to QS 23-1 and QS 23-2. What nonfinancial factors should Helix consider before accepting this order? Explain.
There are four non-financial factors Helix should consider.
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Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The
following information is available.
Product G Product B
Selling price per unit . \(120 \)160
Variable costs per unit . 40 90
Contribution margin per unit . \( 80 \) 70
Machine hours to produce 1 unit 0.4 hours 1.0 hours
Maximum unit sales per month . 600 units 200 units
The company presently operates the machine for a single eight-hour shift for 22 working days each month.
Management is thinking about operating the machine for two shifts, which will increase its productivity
by another eight hours per day for 22 days per month. This change would require \(15,000 additional fixed
costs per month.
Required
1. Determine the contribution margin per machine hour that each product generates.
2. How many units of Product G and Product B should the company produce if it continues to operate
with only one shift? How much total contribution margin does this mix produce each month?
3. If the company adds another shift, how many units of Product G and Product B should it produce?
How much total contribution margin would this mix produce each month? Should the company add
the new shift? Explain.
4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per
month by spending \)12,000 per month in marketing efforts. Should the company pursue this strategy
and the double shift? Explain.
A company has already incurred \(5,000 of costs in producing 6,000 units of Product XY. Product XY can be sold as is for \)15 per unit. Instead, the company could incur further processing costs of \(8 per unit and sell the resulting product for \)21 per unit. Should the company sell Product XY as is or process it further?
Goshford Company produces a single product and has capacity to produce 100,000 units per month. Costs to produce its current sales of 80,000 units follow. The regular selling price of the product is \(100 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for \)75 per unit. If the order is accepted, there will be no additional fixed manufacturing overhead and no additional fixed selling and administrative expenses. The customer is not in the company’s regular sellingterritory, so there will be a \(5 per unit shipping expense in addition to the regular variable selling and administrative expenses Unit 80,000 Units
Direct materials . \)12.50 \(1,000,000
Direct labor 15.00 1,200,000
Variable manufacturing overhead . 10.00 800,000
Fixed manufacturing overhead 17.50 1,400,000
Variable selling and administrative expenses . 14.00 1,120,000
Fixed selling and administrative expenses . 13.00 1,040,000
Totals \)82.00 $6,560,000
1. Determine whether management should accept or reject the new business.
2. What nonfinancial factors should management consider when deciding whether to take this order?
Santana Rey has found that Business Solutions’s line of computer desks and chairs has become very popular, and she is finding it hard to keep up with demand. She knows that she cannot fill all of her
orders for both items, so she decides she must determine the optimal sales mix given the resources she has available. Information about the desks and chairs follows. Santana has determined that she only has 1,015 direct labor hours available for the next quarter and wants to optimize her contribution margin given the limited number of direct labor hours available.
Selling price per unit . \(1,125 \)375
Variable costs per unit 500 200
Contribution margin per unit . \( 625 \)175
Direct labor hours per unit . 5 hours 4 hours
Expected demand for next quarter 175 desks 50 chairs
Required
Determine the optimal sales mix and the contribution margin the business will earn at that sales mix.
Samsung must confront sunk costs. Why are sunk costs irrelevant in deciding whether to sell a product in its present condition or to make it into a new product through additional processing?
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