Vernon Corporation makes and sells state-of-the-art electronics products. One of
ID: 2558294 • Letter: V
Question
Vernon 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 33,000 and 71,000 units per year.
Required
a. A large discount store has approached the owner of Vernon about buying 7,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Vernon’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $4.20 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Vernon accept the special order?
b-1. Vernon has an opportunity to buy the 47,000 calculators it currently makes from a reliable competing manufacturer for $4.60 each. The product meets Vernon’s quality standards. Vernon could continue to use its own logo, advertising program, and sales force to distribute the products. Should Vernon buy the calculators or continue to make them?
b-2. Calculate the total cost for Vernon to make and buy the 47,000 calculators.
b-3. Should Vernon buy the calculators or continue to make them, if the volume of sales were increased to 71,000 units?
c. Because the calculator division is currently operating at a loss, should it be eliminated from the company’s operations? Support your answer with appropriate computations. Specifically, by what amount would the segment’s elimination increase or decrease profitability?
Revenue (47,000 units x $9) Unit-level variable costs $423,000 Materials cost (47,000 × $2) Labor cost (47,000 x $1) Manufacturing overhead (47,000 x $0.20) Shipping and handling (47,000 x $0.24) Sales commissions (47,000 x $2) (94,000) (47,000) (9,400) (11,280) 94,000 167,320 Contribution marqin Fixed expenses Advertising costs Salary of production supervisor Allocated company wide facility-level expenses (30,000) (66,000) (82,000 $ (10,680) Net lossExplanation / Answer
1)Variable cost = 2+1+.2+.24=3.44 [sales commission will not be included]
Contribution margin : units [Price offered -variable cost]
= 7000[4.2-3.44]
= 5320
yes,special offer should be accepted as it will result in profit of 5320
b-1)
b-1)The company should buy from outside supplier as total cost of purchase is lower than manufacturing
**advertising sales commission and shipping cost is irrelevant as it will be incurred whether purchased or make
b-2)Refer table above
b--3)cost of purchase : 71000*4.6 = 326600
cost to make : [71000*2]+[71000*1]+[71000*.20]+66000
= 293200
since the total cost of manufacturing is lower than purchase ,Units should be manufactured internally
3)If division is closed there will be no contribution margin .Also advertising cost and salary of supervisor will be no longer incurred .
Only cost that will continue to ne incurred is allocated cost resulting in loss of 82000
since the lossis increased from 10680 to 82000 ,division should be continued and dropped.
Make Buy Purchase cost 47000*4.6=216200 Direct material 94000 Direct labor 47000 manufacturing overhead 9400 salary of production supervisor 66000 Total cost 216400 216200Related Questions
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