Gibson Corporation makes and sells state-of-the-art electronics products. One of

Question

Gibson Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company's chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment's operating activities. The relevant range for the production and sale of the calculators is between 36,000 and 70,000 units per year Revenue (37,000 units x $8) Unit-level variable costs $296,000 Materials cost (37,000 x $2) Labor cost (37,000 x $1) Manufacturing overhead (37,000 x $0.20) Shipping and handling (37,000 x $0.25) Sales commissions (37,000 x $1) (74,000) (37,000) (7,400) (9,250) 37,000) Contribution margin Fixed expenses 131,350 Advertising costs Salary of production supervisor Allocated company wide facility-level expenses (28,000) (66,000) (81,000) $(43,650) Net loss

Explanation / Answer

Solution a:

existing unit variable cost = $2 + $1 + $0.20 + $0.25 + $1 = $4.45

selling price of special order = $4.90

Variable cost per unit of special order = $4.45 -$1 = $3.45 per unit

Contribution per unit from special order = $4.90 - $3.45 = $1.45

Contribution margin from special order = $1.45 * 8000 = $11,600

As there is contribution margin of $11,600, therefore Gibson corporation should accept the special order.

Solution b 1:

Total cost of purchasing is lower than cost of making, therefore Gibson corporation should buy the calculator.

Solution b2:

Solution b3:

Total cost of making is lesser than cost of buying therefore Gibson corporation should continue to make the calculator.

Solution c:

As elimination of calculator division will result in decrease profitiability of $37,350, therefore calculator division should not be eliminated from company operations

Computation of relevant cost to make or buy - Gibson corporation (33000 units) Particulars Making Calculator Buying Calculator Costs: Purchase Price (33000*$5) $0.00 $165,000.00 Direct material (33000*$2) $66,000.00 $0.00 Direct Labor (33000*$1) $33,000.00 $0.00 Variable manufacturing overhead (33000*$0.20) $6,600.00 $0.00 Salary of production supervisor $66,000.00 $0.00 Total Cost $171,600.00 $165,000.00

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