Managerial Accounts

Chapter 14 Decision Making: Relevant Costs and Benefits

Bo Vonderueidt. thc production managcr for Sportrvay Corporation, had rcquested to have lunch with the company president. Vonderweidt r.vanted to put lbruard his suggestion to add a new product line. As the5, linished lunoh. Meg Thomas. the company president. said, "l'll give your proposal sonre serious thought. Bo. I think you're right about the increasing demand lbr skateboards. What I'm not sure about is rvhether the skateboard line will be better for us than our tackle boxes. 1'hose have been our bread and butter the past ferv years."

Vondemeidt responded rvith, "Let me get together rvith one of the controller's people. \\'e'll run a l-ew numhers on this skateboard idea that I think rvill demonstrate the line's potential."

Sportway' is a wlrolesale distrilrutor supplying a wide range of moderately'priced sports equipment to large chain stores. About 60 percent of Sportwa.v's products are purchased liom other companies wJiile the remainder olthc products are manufactured by Sportrvay. fhe con-rpany has a Plastics Depart- ment that is currently rnanulbcturing molded fishing tackle boxes. Sportrvay is able to manutbcture and sell 1t,000 tackle bores amually. making full use of its direct-labor capaoity at available rvork stations. -Ihe

selling price and cosls associated with Sportway's tackie boxes are as ftrllows:

539

I ffi Adding a Product Line

(10 4,5)

1. Contribution per hour

tackle boxes: $26.40 2. lmprovsment in

contribution rnargin:

$236,250

Selling price per box .................

Costs per box:

lVolded plaslic

'lingcs, latches. han01e .................

Direct labor {$1 5,00 per hour) .........,.,..

$86,00

$ 8,oo 9.00

18.75

12.50

1 7.00 65,25 $2qi!

$45,00

34,00

$11 00

Ilecause Sportrvay's sales manager believes fie firm could sell 12,000 tackle boxes ifit had sutll- cient manuhcturing capacity, the companl'has looked into the possibility ofpurchasing the tackle boxes lor distribution. Maple Products. a steady supplier ot quality products. lvould be able to provide up to 9,000 tackle boxes per year at a price of$68.00 per box delivered to Sportway's facilitl'.

Bcl Vondenveidt, Sportway's production manager. has come to the conclusion that the company could make better use ol its Plastics Departn'rent by manufacturing skateboards. Vondenveidt has a market study that indicates an expanding market for skateboards and a need firr additional suppliers. Vondenveidt believes that Sportway could expect to sell 17,500 skateboards annually at a price of $45.00 per skateboard.

Aller his lunch rvith the company president, Vonderweidt rvorked out the follorving estimates with the assistant controller.

Manutacturing overhead ..

Selling and administrative c0st .,...,.,,,.,.,...,....

Profit pe' box

Selling price per skateboard

Costs per skateboardl

lMolded plastic $5.50

7,00Wheels, hardware

Direct labor ($1 5.00 per h0u0 . ...... . ... 7 .5A lvanufacturing overhead .,...,......,. 5.00 Selling and administrative c0s1....,................, 9,00

Profit pe' skateboa'd,.,.,.,,., ...,.,.,.,.,.,.

In the Plastics Department, Sportrlr,ay uses direct-labor hours as the application base for manufac- turiug overhead. lncluded in the manufacturing overhead lor the currenl year is $50.000 offactoryrvide, fired manufocturing overhead that has been allocated to the Plastics Department. For each unit ofprod- uct that Sportrvay sells. regardless ol,rvhether the product has been purchased or is manufactured by Sportrvay'. there is an allocated $6.00 fixed overhead cost per unil for distribution that is inclutied in the selling and adrninistrative cost fbr all products. Total selling and administrative costs 1br the purchirsed lackle boxes r.vould be $10.00 per unit.