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Chapter 23: Q7BTN (page 1063)

Suppose Limor Fried expands her business, Adafruit Industries, to make electric scooters.

Limor must decide on the best sales mix. Assume the company has a capacity of 400 hours of processing

time available each month and it makes two types of scooters, Deluxe and Premium. Information on these

products follows.

Deluxe Premium

Selling price per unit. \(70 \)90

Variable costs per unit \(40 \)50

Processing minutes per unit 60 minutes 120 minutes

Required

1. Assume the markets for both types of scooters are unlimited. How many Deluxe scooters and how

many Premium scooters should the company make each month? Explain. How much total contribution

margin does this mix produce each month?

2. Assume the market for the Deluxe model is limited to 60 per month, with no market limit for the

Premium model. How many Deluxe scooters and how many Premium scooters should the company

make each month? Explain. How much total contribution margin does this mix produce each month?

Short Answer

Expert verified

When both types are unlimited, company produce 400 deluxe model and contribution margin is $12,000.

$8,600 is the total contribution margin mix and there are 170 units of premium scooters are sold when the maximum number of deluxe scooters are 60 units.

Step by step solution

01

Definition of the contribution margin in case of unlimited

The contribution margin is the difference between the selling price and the variable cost of the product.

02

Calculation of total contribution margin

Deluxe

Premium

Contribution Margin per Unit

$30

$40

Direct Labor Hours per Unit

1 hour

2 Hours

Deluxe

Premium

Maximum Numbers of Units Sold

Unlimited

Unlimited

Hours Required to Produce Maximum Number of Units

400

For Most Profitable Sales Mix:

Deluxe

Premium

Total

Hours Dedicated to the production of each product

400

0

400

Units Produced for the most profitable Sales Mix

400

0

Contribution Margin Per Unit

$30

$40

Total Contribution Margin

$12,000

$0

$12,000

Hence, the total contribution margin of scooters when the maximum number of deluxe scooters sold is 60 units is $12,000.

03

Calculation of total contribution margin in case of 60 deluxe model per month

Deluxe

Premium

Contribution Margin per Unit

$30

$40

Direct Labor Hours per Unit

1 hour

2 Hours

Deluxe

Premium

Maximum Numbers of Units Sold

60

Unlimited

Hours Required to Produce Maximum Number of Units

60

For Most Profitable Sales Mix:

Deluxe

Premium

Total

Hours Dedicated to the production of each product

60

340

400

Units Produced for the most profitable Sales Mix

60

170

Contribution Margin Per Unit

$30

$40

Total Contribution Margin

$1,800

$6,800

$8,600

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Most popular questions from this chapter

Restaurants often add and remove menu items. Visit a restaurant and identify a new food item. Make a list of costs that the restaurant must consider when deciding whether to add that new item. Also, make a list of nonfinancial factors that the restaurant must consider when adding that item.

Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is

Available regarding its canoe segment. Should management discontinue the manufacturing of canoes? Support your decision.

Income Statement—Canoe Segment

Sales . \(2,000,000

Variable costs

Direct materials . \)450,000

Direct labor 500,000

Variable overhead . 300,000

Variable selling and administrative 200,000

Total variable costs 1,450,000

Contribution margin 550,000

Fixed costs

Direct . 375,000

Indirect . 300,000

Total fixed costs . 675,000

Net income . $ (125,000)

Calla Company produces skateboards that sell for \(50 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,000 skateboards per year. Annual costs for 80,000 skateboards follow.

Direct materials . \) 800,000

Direct labor 640,000

Overhead . 960,000

Selling expenses 560,000

Administrative expenses . 480,000

Total costs and expenses \(3,440,000

A new retail store has offered to buy 10,000 of its skateboards for \)45 per unit. The store is in a different market from Calla’s regular customers and would not affect regular sales. A study of its costs in anticipation

of this additional business reveals the following:

Direct materials and direct labor are 100% variable.

Thirty percent of overhead is fixed at any production level from 80,000 units to 90,000 units; the remaining

70% of annual overhead costs are variable with respect to volume.

Selling expenses are 60% variable with respect to number of units sold, and the other 40% of selling expenses are fixed.

There will be an additional \(2 per unit selling expense for this order.

Administrative expenses would increase by a \)1,000 fixed amount

Required

1. Prepare a three-column comparative income statement that reports the following:

a. Annual income without the special order.

b. Annual income from the special order.

c. Combined annual income from normal business and the new business.

2. Should Calla accept this order? What nonfinancial factors should Calla consider? Explain.

Analysis Component

3. Assume that the new customer wants to buy 15,000 units instead of 10,000 units—it will only buy 15,000 units or none and will not take a partial order. Without any computations, how does this change your answer for part 2?

Excel Memory Company can sell all units of computer memory X and Y that it can produce, but it has limited production capacity. It can produce two units of X per hour orthree units of Y per hour, and it has 4,000 production hours available. Contribution margin is \(5 for Product X and \)4 for Product Y. What is the most profitable sales mix for this company?

A division of a large company reports the information shown below for a recent year. Variable costs and direct fixed costs are avoidable, and 40% of the indirect fixed costs are avoidable. Based on this information, should the division be eliminated?

Sales . \(200,000

Variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000

Fixed costs

Direct . 30,000

Indirect . 50,000

Operating loss \) (25,000)
See all solutions

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