On 1/1/11, Erin Rogers ESTIMATES the following fixed PRODUCT costs: Janitorial S

Question

On 1/1/11, Erin Rogers ESTIMATES the following fixed PRODUCT costs:

Janitorial Salaries for manufacturing facility                                     $40,000

Rent on Manufacturing Facility                                                      $200,000

Erin Rogers, UW-M graduate, creates the following standards for the sandwiches:

Ham

Peanut butter&Jelly

Tuna Sandwiches

Std.qty/sand

Std.pric/lb

Std.qty/sand

Std.pric/lb

Std.qty/sand

Std.pric/lb

Direct Materials

.2lbs/sand

$4/lb

.2lbs/sand

$3/lb

.2lbs/sand

$5/lb

Direct materials-bread

2slices/sand

$.10/slice

2slices/sand

$.10/slice

2slices/sand

$.10/slice

Direct Labor

.1 dlh/sand

$10/dlh

.2dlh/sand

$20/dlh

.2dlh/sand

$15/dlh

VOH – utilities

.1mh/sand

$5/mh

.4mh/sand

$5/mh4

.2mh/sand

$5/mh

FOH – janitor

.1mh/sand

$8/mh

.4mh/sand

$8/mh

.2mh/sand

$8/mh

FOH-rent

.1 dlh/sand

$10/dlh

.2dlh/sand

$10/dlh

.2dlh/sand

$10/dlh

Price/sandwich

$10/sand

$15/sand

$6/sand.

Annual Demand

4000

5000

6000

Compute the GROSS MARGIN in terms of total $’s for all 3 products.

Ham ($10/sand - $4.30/sand) = $5.70/sandwich; PB&J ($15/sand-$12/sand)=$3/sand; Tuna($6-$8.8)=($2.8/sand).

Compute the CONTRIBUTION margin in terms of total $’s for all 3products.

Ham ($10/sand - $2.50/sand) = $7.50/sandwich; PB&J ($15/sand-$6.8/sand)=$8.2/sand; Tuna($6-$5.2)=$0.8/sand.

Abbott is thinking about discontinuing the Tuna Sandwich product line. If it does so, it will reduce the janitorial salaries by $1,000. Should Abbott discontinue the Tuna sandwiches line? Why or why not and

Assume that the toaster/machine can only run a total of 1100 hours or it will break. How many of each sandwich should abbott make? Show your work.

Ham

Peanut butter&Jelly

Tuna Sandwiches

Std.qty/sand

Std.pric/lb

Std.qty/sand

Std.pric/lb

Std.qty/sand

Std.pric/lb

Direct Materials

.2lbs/sand

$4/lb

.2lbs/sand

$3/lb

.2lbs/sand

$5/lb

Direct materials-bread

2slices/sand

$.10/slice

2slices/sand

$.10/slice

2slices/sand

$.10/slice

Direct Labor

.1 dlh/sand

$10/dlh

.2dlh/sand

$20/dlh

.2dlh/sand

$15/dlh

VOH – utilities

.1mh/sand

$5/mh

.4mh/sand

$5/mh4

.2mh/sand

$5/mh

FOH – janitor

.1mh/sand

$8/mh

.4mh/sand

$8/mh

.2mh/sand

$8/mh

FOH-rent

.1 dlh/sand

$10/dlh

.2dlh/sand

$10/dlh

.2dlh/sand

$10/dlh

Price/sandwich

$10/sand

$15/sand

$6/sand.

Annual Demand

4000

5000

6000

Explanation / Answer

Ham Peanut butter & Jelly Tuna Sandwiches Annual Demand 4000 5000 6000 Selling Price/Sandwich 10 15 6 Less: Variable costs Direct Materials 0.8 0.6 1 D/M- Bread 0.2 0.2 0.2 Direct Labour 1 4 3 VOH- Utilities 0.5 2 1 Total V.C/Sw 2.5 6.8 5.2 Contribution/Sandwich 7.5 8.2 0.8 Fixed Overheads Janitor salaries 0.8 3.2 1.6 Rent 1 2 2 Total F.C/Sw 1.8 5.2 3.6 Net Income /Sw 5.7 3 -2.8 Product-wise Fixed OH Total Janitor salaries 3200 16000 9600 28800 Rent 4000 10000 12000 26000 If TUNA is discontinued Contribution loss @ 0.8*6000 Sw 4800 Janitor salaries (9600-1000) 8600 Rent 12000 Total loss 25400 If TUNA is continued Fixed costs will be covered to the extent of its contribution(0.8*6000) ie.4800 and loss will be (2.8*6000)= 16800 If TUNA is discontinued total loss amounts to 25400 (as above) Hence, Abbott should not discontinue the TUNA sandwich line-- as it contributes atleast partially towards meeting fixed costs. Ham PBJ Tuna M/C. hr. to make 1 Sw 0.2 0.8 0.4 (Var. +fixed) Total 1100 m/c hrs. Split in /unit ratio(Sw.) 157 629 314

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