Figuring Out

Fixed manufacturing overhead………. $7,100

Total manufacturing costs……… $29,785

Cost per pair ($29,785 ÷ 1,850)…………….. $16.10

Suppose an outside supplier will sell bindings to Mountain Sports for $14 each. Mountain Sports will pay $1.00 per unit to transport the bindings to its manufacturing plant, where it will add its own logo at a cost of $0.70 per binding.

Requirements

1. Mountain Sports’ accountants predict that purchasing the bindings from the outside supplier will enable the company to avoid $2,000 of fixed overhead. Prepare an analysis to show whether the company should make or buy the bindings.

2. The facilities freed by purchasing bindings from the outside supplier can be used to manufacture another product that will contribute $2,800 to profit. Total fixed costs will be the same as if Mountain Sports had produced the bindings. Show which alternative makes the best use of Mountain Sports facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

Exercise 2

P8-63B Product mix decision under constraint

Brann Products, located in Ann Arbor, Michigan, produces two lines of electric toothbrushes: Deluxe and Standard. Because Brann 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 Regular Toothbrush

Sales price…………………………………………………. $90 $52

Variable expenses…………………………………….. 17 18

Contribution margin………………………………….. $73 $34

Contribution margin ratio……………………….. 81.1% 65.4%

After expansion, the factory will have a production capacity of 4,000 machine hours per month. The plant can manufacture either 65 Standard electric toothbrushes or 25 Deluxe electric toothbrushes per machine hour.

Requirements

1. Identify the constraining factor for Brann Products.

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

Exercise 3

S8-8 Replace a department

Assume once again that all fixed costs are unavoidable. If the company discontinues one of the current departments, it plans to replace the discontinued department with a Shoe Department. The company expects the Shoe Department to produce $84,000 in sales and have $47,000 of variable costs. Because the shoe business would be new to Devine Fashion, the company would have to incur an additional $7,100 of fixed costs (advertising, new shoe display racks, and other fixed costs) per quarter related to the department. What should the company do now?

Exercise 4

E8-51B Sell as is or process further

Organic Plus processes organic milk into plain yogurt. Organic Plus sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of $830, yields 750 gallons of plain yogurt. Organic Plus sells the one-gallon tubs for $6.00 each and spends $0.10 for each plastic tub. Management has recently begun to reconsider its strategy. Organic Plus wonders if it would be more profitable to sell individual-sized portions of fruited organic yogurt at local food stores. Organic Plus could further process each batch of plain yogurt into 16,000 individual portions (3/4 cup each) of fruited yogurt. A recent market analysis indicates that demand for the product exists. Organic Plus would sell each individual portion for $0.40. Packaging would cost $0.07 per portion, and fruit would cost $0.12 per portion. Fixed costs would not change. Should Organic Plus continue to sell only the gallon-sized plain yogurt (sell as is) or convert the plain yogurt into individual-sized portions of fruited yogurt (process further)? Why?