OmniSport’s Plastics Department is currently manufacturing 5,000 pairs of skates

Question

OmniSport’s Plastics Department is currently manufacturing 5,000 pairs of skates annually, making full use of its machine capacity. The selling price and total costs per unit associated with OmniSport’s skates are:

Selling price per pair of skates $98

Costs per pair of skates

Molded plastic $8

Other direct materials 12

Variable machine operating costs ($16 per

machine hour 24

Manufacturing overhead costs 18

Marketing and administrative costs 21 83

Operating income per pair of skates $15

OmniSport believes it can sell 8,000 pairs of skates annually if it had sufficient manufacturing capacity. Colcott Inc., a supplier of quality products, has agreed to provide up to 6,000 pairs of skates per year at a price of $75 per pair delivered to OmniSport’s facility.

Jack Petrone, OmniSport’s product manager, ahs suggested that the company can make better use of its Plastics Department by manufacturing snowboard bindings. Petrone believes that OmniSport could expect to sell up to 12,000 snowboard bindings annually at a price of $60 per binding. Petrone’s estimate of the selling price and total costs per unit to manufacture 12,000 bindings are:

Selling price per snowboard binding $60

Costs per snowboard binding

Molded plastic $16

Other direct materials 4

Variable machine operating costs ($16 per

machine hour) 8

Manufacturing overhead costs 6

Marketing and administrative costs 10 44

Operating income per snowboard binding $16

Other information pertinent to OmniSport’s operations includes the following:

* In the Plastics Department, OmniSport uses machine-hours as the allocation base for manufacturing overhead costs. The fixed manufacturing overhead component of these costs for the current year is the $30,000 of fixed plantwide manufacturing over head that has been allocated to the Plastics Department. These costs will not be affected by the product-mix decision.

* Variable marketing and administrative costs per unit for the various products are as follows:

Manufactured in-line skates $9

Purchased in-line skates    4

Manufactured snowboard bindings   8

Optimal product mix required

Calculate the quantity of each product that OmniSport should manufacture and/or purchase to maximize operating income in 2003. Show details of your calculations.

Explanation / Answer

Notes to separate fixed and variable cost in manufacturing overhead

first lets calculate the machine hours variable cost 16@1.5 = $24 hence 1.5 per hour

Total avialable hours for 5000 skates   5000 * 1.5     = 7500 hours

total overhead 7500 * 12 per hours ( MOH $18/1.5 = $12 per hours ) = $90,000

Out of this fixed cost is $30,000 hence variable is $60,000

Variable overhead per machie hour = $60,000/7500   = $8 per hour so total per unit $8@1.5= $12 per skates

Fixed ove overhead 30,000/7500 = $4 per hour total 1.5 @4 = $6 per skates paie

For snow boarfs

machine hours $8 /16   = .5 per hour

Variable $8 *.5           = $4 per hours

fixed       $4 *.5          = $2 perhours

For purchase contribution is = $98 - (75+4) = $$19

since snowboards contribution is highest so produce 12000 snowboards( 12,000 * .5 = 6000 hours consumed).now left with 1500 hours which should be used to manufacture the 1000 skates( 1500/1.5 = 1000 units)

skates Boards Selling price $98 $60 Variable cost: Materials $20 $20 Variable manufactruing $24 $8 Manugactuing overhead variable $12 $4 Marketing variable $9 $8 contribution $33 $20 per machine horu 1.5 .50 contribution per machien hour $22 $40

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