EKY8-1 BUSINESS DECISION CASE. Marvin Corporation manufactures both an automatic

Question

EKY8-1 BUSINESS DECISION CASE. Marvin Corporation manufactures both an automatic and a manual household dehumidifier. Because of limited demand, for several years production has been at 80% of estimated capacity, which is thought to be limited by the number of machine hours available. At current operations levels, a profit analysis for each product line shows the following:

Per-unit Data

Automatic Manual

Sales price $350 $150

Production Costs:

Direct material $65 $32

Direct labor 35 25

Variable manufacuring overhead 68 16

Fixed manufacturing overhead 50 $218 18 $91

Variable operating expenses 52 21

Fixed operating expenses 30 13

Total cost $300 $125

Operating income $50 $25

Management wants to make use of the company's current excess capacity by increasing production. Each unit of the automatic model requires 2.5 machine hours; the manual model requires 1 machine hour per unit.

REQUIRED

a. Assume that sufficient units of either product can be sold at current prices to utilize exisiting capacity fully and that fixed costs will not be affected.

1. To which product should the excess capacity be devoted if the decision basis is maximization of contribution margin per unit of product?

2. Prepare an analysis showing which product line should be emphasized if the firm's net income is the decision basis.

3. What general decision guideline applies in this situation?

b. Suppose the excess capacity represents 10,000 machine hours, which can be used to makes 4,000 automatic units or 10,000 manual units or any proportionate combination. The only market available for these extra units is a foreign market in which the sales price must be reduced by 20% and in which no more than 6,000 units of either model can be sold. All costs will remain the same excpet that the sales commission of 10% (included in the variable operating expense) will be avoided. Prepare an analysis showing which product should be emphasized and the effect on the firm's net income.

c. Assume that the excess capacity can be used as indicated in requirement (b) and that the firm's market research department believes that the production available from using the excess capacity exclusively on either model can be sold in the domestic market at regular prices if a promotion campaign costing $225,000 is undertaken for the automatic model or $235,000 for the manual model. Prepare an analysis indicating for which product the campaign should be undertaken.

Explanation / Answer

Automatic Manual 1. Sales Price 350 150 Less: Variable Cost -Direct Material 65 32 -Direct Labor 35 25 -Variable OVH 68 16 -Variable Op Exp 52 21 Contribution Margin 130 56 52 56 Answer is Automatic 2. Contribution Margin 130 56 Less: Fixed Cost -Fixed OVH 50 18 -Fixed OP Expe 30 13 Net Income 50 25 Answer is Automatic 3. Higher the cont/net income, utilise excess capacity b. Automatich Manual Automatich Manual Sales Price 20% reduction 280 120 Less: Variable Cost -Direct Material 65 32 -Direct Labor 35 25 -Variable OVH 68 16 -Variable Op Exp (10% sale comm avoided) 17 6 52-35 and 21-15 Contribution Margin 95 41 Less: Fixed Cost -Fixed OVH 50 18 -Fixed OP Expe 30 13 Net Income 15 10 Machine Hour needed 2.5 1 Cont Margin per machine hour 38 41 Since Cont margin per machine hour for manual is high, we should first product maxmum MANUAL To be produced-Manual 6000 Machine hour used 6000*1 6000 Balance Machine hour 10000-60000 4000 Automatic need machin hour per unit 2.5 Automatci to be produced 4000/2.5 1600 per unit Total Net Income Automatich Manual Unit 1600 6000 Sales Price 280 120 448000 720000 Less: Variable Cost -Direct Material 65 32 104000 192000 -Direct Labor 35 25 56000 150000 -Variable OVH 68 16 108800 96000 -Variable Op Exp (10% sale comm avoided) 17 6 27200 36000 52-35 and 21-15 Contribution Margin 95 41 152000 246000 Less: Fixed Cost -Fixed OVH 50 18 0 0 -Fixed OP Expe 30 13 0 0 Net Income 15 10 152000 246000 Net income will increase by 152000+246000=398000

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.