Question

Fanning 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 69,000 units per year. Revenue (37,000 units $10) Unit-level variable costs $370,000 Materials cost (37,000 $2) Labor cost (37,000 $2) Manufacturing overhead (37,000 $0.30) Shipping and handling (37,000x $0.30) Sales commissions (37,000x $2) Contribation margin Fixed expenses Advertising costs Salary of production supervisor Allocated company wide facility-level expenses (74,000) (74,000) (11,100) (11,100) (74,000) 125,800 (25,000) (65,000 (78,000) $(42,200) Net loss Required a. A large discount store has approached the owner of Fanning about buying 7,000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Fanning'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 $5.10 per calculator. Calculate the contribution margin from the special order Based on quantitative factors alone, should Fanning accept the special order? b-1. Fanning has an opportunity to buy the 37000 calculators it currently makes from a reliable competing manufacturer for $5.60 each The product meets Fanning's quality standards. Fanning could continue to use its own logo, advertising program, and sales force to distribute the products Should Fannirng buy the calculators or continue to make them? b 2. Calculate the total cost for Fanning to make and buy the 37000 calculators b-3. Should Fanning buy the calculators or continue to make them, if the volume of sales were increased to 69.000 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 oppropriate computations Specifically by whet amount would the segmentr's elimination increase or decrease profitability?

Answer 1

Solution: I Data from the new proporal" No. of units = 7000 calculators. SP pu = $5.10 __ Variable cost put mat cost = labour cost . Man. Oli ?. Ship. &hodling = - Vost po = 2 .0 2.0 0 0.3. 0.3 $4.60 ... Contributions Margin = (5:10 - 4.60) * 7000 = $ 3.500. Fanning should accept the order, as it is oil contributing towards the fixed cost since it is an additional order apoot from the normal pood - Auction and the contribuhari is also positive thê this should be accepted Scanned with CamScanner

(b) Oetion 1 L as per a loss of calculator Make::.. . ; the data provided, fanning $42,200 when it is has incurred producing the . Option 2 » Buy:.: If fanning is going to buy the calculator it will not incluor the following exponses: cost = $ 2 ibu Material cost = $2 pu labour man. alt cost = $0.3 pu Salory of prod? supervinas = $65,000 Computation of Net income on trading : Sales (550X37000) R $ 370,000 less: Variable last Pur. cost (6 x 37000) (207,200) Ship & helping (0.30 * 37000) Lito ....(11,100) Sales Comm. (2.00837000) (74000) (cat margin i 72,700 freed Exp Advertising cost : harts (25000) facility expe (78000) Net loss $(25,300) s bo Since Moun the loss in buying vanning should go is for lass buying a mening TCS CamScanner

fanning calculator following expenses will be common for whether it goes for buying or making Shipping & handling : 80.30 pu. Sales Commission = $2.50 pu n advertising cost = $ 25,000 facilities º exponses = $ 78,000.), will be as follows: of Therefore, Relevant cost Buy Purchase cost = 5.60% 37000 = $ 207,200 Make i Variable (oik: PAP mat.cast (2 x 37000 ) = 74,000 lab lost = (2x 37000) = 74,000 m. ort Case - (0.3% 37000) = 11100 Superviper salary 165,000 - To Relevant cost 224,100 Scanned with CamScanner

e id am : h24 Make 690.000 At production of 69,000 units n -Buy | Sales @ $10pu 690.000 less: voriable (out!! Purchase @ 5.60 pu (386,400) : Mats lost @ 2.60pu lab. lost @ 2.00 pú M.01H cost @0.30 pu Shipping & hadly @ 0.30pu ( 20,760) V Sales Commission @ 2:00 px (138,000) - Contribution margin | | D fired Expenses : Advertising ( 25000) Salary of prod.. supervisor facility exp. (78000) Net Income / 41,900 (138.000 (134,000) (20,700) ( 20,700) (138000) 23,600 (28000 (65000) (78000) 13600 I Therefore, fanning should go for buying the ca sllanincalon atar. dimScanner