Chapter 11 Decision Making with a Strategic Emphasis 431 0 11-7) 1141 Product-Pr

Question

Chapter 11 Decision Making with a Strategic Emphasis 431 0 11-7) 1141 Product-Profitability Analysis; Scarce Resources Creighton Corporation produces a variety of consumer electroaic products. Unit selling prices and costs for three models of one of its product lines are as follows: No Frills Standard Options Super Selling price Direct materials Direct labor (@$20/hour) Variable overhead Fixed overhead $40 10 10 $70 14 20 S86 16 30 Variable overhead is charged to products on the basis of direct labor dollars; fixed overhead is allocated to products on the basis of machine hours. Required 1. What is fundamentally different about the fixed versus variable overhead assigned to products? (Answer the within the context of the relevance of this difference to the determination of short-term product mix.) 2. Calculate for each product both the gross profit per unit and the contribution margin per unit. Are eit these profitability measures useful for planning the optimum short-term product mix? short-term product mix be determined? affect the product-mix decision? constraints? Why or why not? 3. If the company has excess machine capacity but a limited amount of labor time, how should the 4. Assume now that machine hours, not direct labor hours, is the limiting resource. How, if at all, would t 5. How can the optimum product mix be determined when there are only two products and o 6. How can the optimum product mix be determined when there are more than two product 7. What is the primary role of the management accountant in terms of planning the o 11-42 Sustainability If not assigned previously. Problem 9.50 (CVP Analysis, Sustainability: Uncertaint more two products and one or more constraints? ptimum short- term product mix?

Explanation / Answer

As per policy, only four parts of a question is allowed to answer at a time, so answering 1-5 here:

11-41)

1. Fundamentally, the fixed overhead is assigned on the basis of budgeted fixed overhead and defined annual maximum Machine Hours of production. The variable overhead is defined on per unit of production with no fixed budgeted expense. 2' No Frills std options Super Gross Profit 40-26=14 70-46=24 86-61=25 Contribution Margin 17 30 31 The profitability measure to be used for short term product mix should be Contribution margin because gross profits are affected by long term "Fixed overhead" budgeted figure. 3' No Frills std options Super Contribution Margin 17 30 31 DL hours 0.5 1 1.5 Contri per DLH 34 30 20.67 Preference: I II III The product mix is defined on the basis of Contribution per DLH. 4' The product mix decision, on machine hours being limited figure, on the basis of contribution per machine hours used to produce one unit of each product. 5' When there are two products and input contraints are one or more, then the most limiting/prime variable factor would be the basis of defined the product mix. Like if both material and labor are limiting factors then the product mix is dependent on material which is the prime limiting factor.

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