Elsinore Electronics is a decentralized organization that evaluates divisional m

Question

Elsinore Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment; Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 90,000 units per year. These units require 3 direct labor-hours each.

If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 78,000 of these units per year.

If Mobile does not obtain 78,000 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile’s audio system. The units can be sold to the outside market for $203 each.

Home estimates that its total costs are $1,080,000 for fixed costs, $14.40 per direct labor-hour, and $7.20 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year.

Required:

Determine the following:

a. Total contribution margin to Home if it sells 90,000 units outside. (Do not round intermediate calculations.)

b. Total contribution margin to Home if it sells 78,000 units to Mobile. (Do not round intermediate calculations.)

(c) & (d). The costs to be considered in determining the optimal company policy for sales by Home.

The annual contributions and costs for Home and Mobile under the optimal policy.

Explanation / Answer

Calculation of contribution margin (90,000 units outside) Particulars Amount ($) Sales Price Per unit 72 Less: Direct Labour Cost (3* $14.40) 43.2 Material and other variable cost 7.2 Contribution margin per unit 21.6 Total contribution margin (90000*21.6) 1944000 Calculation of contribution margin (78,000 units outside) Particulars Amount ($) Sales Price Per unit 81 Less: Direct Labour Cost (4* $14.40) 57.6 Material and other variable cost 7.2 Contribution margin per unit 16.2 Total contribution margin (78000*16.2) 1263600 Calculation of annual cpst and contribution under optimal policy Home ($) Mobile ($) Company ($) Sale by home to outside (90000*72) 6480000 0 6480000 Sale by home to mobile (26250*81) 2126250 0 2126250 Sale by mobile to outside (78000*203) 0 15834000 15834000 Total sales 8606250 15834000 24440250 Less: Cost of material etc in home (116250*7.20) 837000 0 837000 Cost of labor in home (90000*43.2+26250*57.6) 5400000 0 5400000 Cost of unit transferred to mobile (26250*81) 0 2126250 2126250 Cost of unit purchased from outside by mobile (78000-26250)*84 0 4347000 4347000 Conversion cost in mobile (78000*36) 0 2808000 2808000 Contribution 2369250 6552750 8922000 Note: Calculation of unit sold and transferred by home Sale ouside Transsfer to mobile Contribution per unit (A) 21.6 16.2 labour hour require per unit (B) 3 4 Cobtribution per labour hour (A/B) 10.8 8.1 Since contribution is more in case of sale to outside , that should be first completed. Particulars units to sold Labour hours required per unit total labour hours Sale to outside 90000 3 270000 Transfer to mobile 26250 4 105000 116250 375000

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