Question

Blackwater Boat Company is a niche manufacturer that makes two types of fiberglass boat hulls – (a) a 14’ mono-hull skiff, and (b) a 21’ fiberglass catamaran with cabin. The completed hulls are sold to other companies that dress out the boats and sell them to retailers. Each boat is formed using molds, then slow-cured in a large industrial oven. Due to cooling times and maintenance, the ovens can be fired for only 2,000 hours per year. Applicable information for each boat appears below. Usually the company operates at full capacity, selling roughly 600 mono-hulls and 200 “cats” each year. Also, assume the company has $120,000 per year in fixed costs that it chooses to allocate equally to each category of boats.

                                                            14’ Mono-hull                21’ cat with cabin

Unit Sales Price                                    $800.00                                 $1,200.00

Unit Variable Costs                                 500.00                                     700.00

Allocated Total Fixed Costs               60,000.00                                  60,000.00

Allocated Per Unit Fixed Costs               100.00                                       300.00

Oven Time Req’d                                     2 hours.                                   4 hours.

(a) Assume this has been a bad year for sales, and the company has excess capacity. It is approached by a wholesaler that offers to make one-time purchase of 14’ mono-hulls for a special anniversary boat. It offers to buy 200 boats, and pay $600 for each one. Does the information provided here suggest that the company should accept the offer? Show impact on profit, explain why, and include supporting figures.

(b) Now assume the company is operating at its normal capacity, which uses all of the available oven time. In fact, it has more offers to purchase than it can handle. It has full price offers for up to 900 mono-hulls and up to 300 “cats.” In order to maximize profits, which offers should it accept (how many of each boat)?   Explain, and show supporting calculations.

Using either a Word document, or an Excel document, submit your answer showing calculations and explanations.

Answer 1

Answer with working notes is given below

a) Evaluation of Special Order Sales $120,000 (200*$600) Less: Variable Cost Incremental Contribution $100,000 (200*$500) $20,000 Analysis: Since there is incremental contribution the special order should be accepted There is positive contribution of $20,000 due to this special order Note: Only variable cost is relevant for evaluation of special order Fixed cost is sunk cost and irrelevant for evaluation of special order unless there is incremental fixed cost b) 14' Mono-hull 21' cat with cabin $800 $1,200 $500 $700 $300 $500 Selling price Less: Variable cost Contribution Oven time per unit- hours Contribution per Oven time Ranking $150 $125 Since oven time is limited resource, Contribution is ranked in term of oven time Mono hull should be produced on priority to maximise profit 14' Mono-hull 21' cat with cabin 900 Allocation of oven time First allocation to Mono hull Oven time - hours Total hours allocated Balance hours to Cat with cabin Production units 1,800 200 900 (1,800/2 hours) (200/4 hours) Mono-hull is produced to the extent of demand available and balance is allotted to Cat with Cabin When there is resource constraint contribution per resource defines the production Hence Mono-hull is produced fully and balance Cat. This is the Optional mix and give Maximum Profit Profit at above product mix Total Units Selling price Total Sales Less: Variable cost Contribution Less: Fixed Cost Net Profit 14' Mono-hull 21' cat with cabin 900 $800 $1,200 $720,000 $60,000 $450,000 $35,000 $270,000 $25,000 $780,000 $485,000 $295,000 $120,000 $175,000