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Chapter 23: Q9E (page 1053)

Colt Company owns a machine that can produce two specialized products. Production time for Product TLX is two units per hour and for Product MTV is five units per hour. The machine’s capacity is 2,750hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 4,700 units of Product TLX and 2,500 units of Product MTV. Selling prices and variable costs per unit to produce the products follow. Determine (1) the company’s most profitable sales mix and (2) the contribution margin that results from that sales mix.

\(s per unit Product TLX Product MTV

Selling price per unit . \)15.00 $9.50

Variable costs per unit 4.80 5.50

Short Answer

Expert verified

The contribution margin results from that sales mix are $55,940.

Step by step solution

01

Definition of sales mix

The sales mix means the situation where the company produces more than one type of product

02

Calculation of maximum sales mix

Product TLX

Product MTV

Selling Price Per Unit

$15

$9.50

Less: Variable Cost Per Unit

$4.80

$5.50

Contribution Per Unit

$10.20

$4

Particulars

Product TLX

Product MTV

Maximum Product to Manufacture

4,700

2,500

Available Hours

2,750

Units Manufactured Per Hour

2

5

No. of Units Manufactured

4,700

2,000

Hours Utilised

2,350 hr

400 hr

The most profitable sales mix is to manufacture 4,700 units of TLX and 2,000 units of product MTV.

Product TLX

Product MTV

Total

Sale Price Per Unit

$15

$9.50

Variable Cost Per Unit

$4.80

$5.50

Contribution Cost Per Unit

$10.20

$4

Units Sold

4,700

2,000

Total Contribution

$47,940

$8,000

$55,940

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Most popular questions from this chapter

Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of \(22 each. This year’s model is superior to last year’s, and the 7,000 units cannot be sold at last year’s regular selling price of \)35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for \(8 each or (2) they can be reworked at a cost of \)125,000 and then sold for $25 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.

Alto Company currently produces component TH1 for its sole product. The current cost per unit to manufacture

its required 400,000 units of TH1 follows.

Direct materials and direct labor are 100% variable. Overhead is 75% fixed. An outside supplier has offered

to supply the 400,000 units of TH1 for \(4 per unit.

Direct materials . \)1.20

Direct labor . 1.50

Overhead . 6.00

Total cost per unit . . . . . . . . . . . . $8.70

Required

1. Determine whether management should make or buy the TH1.

2. What factors besides cost must management consider when deciding whether to make or buy TH1?

José Ruiz wants to start a company that makes snowboards. Competitors sell a similar snowboard for \(240 each. José believes he can produce a snowboard for a total cost of \)200 per unit, and he plans a 25% markup on his total cost. Compute José’s planned selling price. Can José compete with his planned selling price?

Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at \(6 per package. Annual costs for the production and sale of this quantity are shown in the table.

Direct materials . \) 576,000

Direct labor 144,000

Overhead . 320,000

Selling expenses 150,000

Administrative expenses . 100,000

Total costs and expenses \(1,290,000

A new wholesaler has offered to buy 50,000 packages for \)5.20 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’s sales through its normal channels. A

study of the costs of this additional business reveals the following: Direct materials costs are 100% variable. Per unit direct labor costs for the additional units would be 50% higher than normal because their production

would require overtime pay at 1½ times the usual labor rate. Twenty-five percent of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The remaining 75% of the annual overhead cost is variable with volume.

Accepting the new business would involve no additional selling expenses.

Accepting the new business would increase administrative expenses by a $5,000 fixed amount.

Required

Prepare a three-column comparative income statement that shows the following:

1. Annual operating income without the special order (column 1).

2. Annual operating income received from the new business only (column 2).

3. Combined annual operating income from normal business and the new business (column 3).

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.
See all solutions

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