Elsinore Electronics is a decentralized organization that evaluates divisional m
ID: 2591446 • Letter: E
Question
Elsinore Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment; Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 87,500 units per year. These units require 3 direct labor-hours each. If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 75,000 of these units per year. If Mobile does not obtain 75,000 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile’s audio system. The units can be sold to the outside market for $201 each. Home estimates that its total costs are $1,070,000 for fixed costs, $14 per direct labor-hour, and $6 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year. Required: Determine the following: a. Total contribution margin to Home if it sells 87,500 units outside. (Do not round intermediate calculations.) b. Total contribution margin to Home if it sells 75,000 units to Mobile. (Do not round intermediate calculations.) (c) & (d). The costs to be considered in determining the optimal company policy for sales by Home. The annual contributions and costs for Home and Mobile under the optimal policy.
Explanation / Answer
(Labor hrs were the limiting factor, so we calculated our margin per labor hr to find our preference)
HOME Per Unit Material Cost 6 Direct Labor(3hrs×14 per hr) 42 Variable Cost (VC) 48 a. 87,500 units sold outside Sales price per unit 72 VC per unit 48 Contribution per unit 24 No. of units sold 87,500 Total Contribution 2,100,000 Less: Fixed Cost 1,070,000 Profit 1,030,000 b. 75,000 units sold to Mobile Sales price per unit 81 VC per unit 62 Contribution per unit 19 No. of units sold 75,000 Total Contribution 1,425,000 Less: Fixed Cost 1,070,000 Profit 355,000 c. Optimal sales by Home to Mobile Outsider Mobile Sales price 72 81 VC 48 62 Contribution per unit 24 19 Labor hrs (key limiting factor) 3 4 Contribution per labor hr 8 4.75 Ranking I II(Labor hrs were the limiting factor, so we calculated our margin per labor hr to find our preference)
Optimal production Units reqd Labor Hrs reqd Balance Labor Hrs 375000 Outside 87500 262500 112500 Mobile 28125 (112,500/4) d. Optimal Policy Home-Outsiders Home-Mobile Total Home No. of Units sold 87500 28125 Sales per unit 72 81 Material Cost 6 6 Direct Labor(3hrs×14 per hr) 42 42 Additional Labor(1hr) 0 14 VC per unit 48 62 Contribution per unit 24 19 Total Contribution 2100000 534375 2634375 Less: Fixed Cost 1070000 Profit 1564375 Mobile(from Home) Mobile(From Outside) Total No. of Units sold 28125 46875 75000 Sales per unit 201 201 Material Cost 81 84 Additional Cost 36 36 VC per unit 117 120 Contribution per unit 84 81 Total Contribution 2362500 3796875 6159375 Less: Fixed Cost (Details not available) Note: 1. Home can even sell to Mobile for any price above its VC of 62 per unit if there is no further demand outside for it. 2. Mobile can purchase at any cost below 84 per unit from Home.Related Questions
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