Question

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Item 6

Item 6 10 points

Franklin 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 35,000 and 71,000 units per year.

Revenue (39,000 units × $11.00)	$	429,000
Unit-level variable costs
Materials cost (39,000 × $3.00)		(117,000	)
Labor cost (39,000 × $2.00)		(78,000	)
Manufacturing overhead (39,000 × $0.10)		(3,900	)
Shipping and handling (39,000 × $0.32)		(12,480	)
Sales commissions (39,000 × $2.00)		(78,000	)
Contribution margin		139,620
Fixed expenses
Advertising costs		(27,000	)
Salary of production supervisor		(67,000	)
Allocated company-wide facility-level expenses		(80,000	)
Net loss	$	(34,380	)

Required

1. a. A large discount store has approached the owner of Franklin about buying 7,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Franklin’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 $5.50 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Franklin accept the special order?

2. b-1. Franklin has an opportunity to buy the 39,000 calculators it currently makes from a reliable competing manufacturer for $6.20 each. The product meets Franklin’s quality standards. Franklin could continue to use its own logo, advertising program, and sales force to distribute the products. Calculate the total cost for Franklin to make and buy the 39,000 calculators.

3. b-2. Should Franklin buy the calculators or continue to make them?

4. b-3. Should Franklin buy the calculators or continue to make them, if the volume of sales were increased to 71,000 units?

5. 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?

Answer 1

Answer is given below

а $38,500 (7,000*$5.50) Evaluation of Special order Sales order Less: Variable cost Material cost Labor cost Manufacturing cost Shipping and handling Contribution $21,000 $14,000 $700 (7,000*$3) (7,000*$2) (7,000*$0.10) $37,940 (7,000*$0.32) $560 Since there is incremental contribution the special order should be accepted Note: Fixed cost being sunk cost is not relevant for evaluation of special order Make vs. Buy - 39,000 units b-1 Buy Make $117,000 $78,000 $3,900 $67,000 (39,000*$3) (39,000*$2) (39,000*$0.10) Direct Material Direct Labor Variable manufacturing cost Fixed Manufacturing overheads Purchase Cost Total Cost Total units Unit cost $265,900 39,000 $6.82 $241,800 (39,000*$6.20) $241,800 39,000 b-2 Since cost to buy is lower the Calculators should be purchased Note: It is assumed production manager salary can be eliminated if calculators are procured from outside supplier Make vs. Buy-71,000 units b-3 Buy Make | $213,000 $142,000 $7,100 $67,000 (71,000*$3) (71,000*$2) (71,000*$0.10) Direct Material Direct Labor Variable manufacturing cost Fixed Manufacturing overheads Purchase Cost Total Cost Total units Unit cost $429,100 71,000 $6.04 $440,200 (71,000*$6.20) $440,200 71,000 $6.20 Since cost to make is lower the Calculators should be made in-house $429,000 Revenue Less: Variable cost Direct Material Direct Labor Variable manufacturing cost Shipping and handling Sales commission Contribution Margin Less: Fixed cost Advertising cost Salary of production supervisor Net profit $117,000 $78,000 $3,900 $12,480 $78,000 $289,380 $139,620 $27,000 $67,000 $94,000 $45,620 Since there is Positive contribution and Net profit the division should not be discontinued Profit margin would increase by $80,000