Question

(20) San-Dab Products, a supplier to the automotive industry, has seen its operating margins shrink below 20% as its customers put continued pressure on pricing. San-Dab produces four products in its plant. Details on the four products are: А B C D Total Production volume (units) 10,000 8,000 6,000 4,000 Selling price per unit $15.00 $18.00 $20.00 $22.00 Materials cost per unit $4.00 $5.00 $6.00 $7.00 Direct labor hours per unit 0.24 0.18 0.12 Total direct labor hours 2,400 1,440 320 4.880 0.08 720 Total Plant overhead Direct labor rate/hour $122,000 $30 San-Dab has a traditional cost system. It calculates a plant-wide overhead rate by dividing total overhead costs by total direct labor hours (DLH). Assume, for the calculations below, that plant overhead is a fixed cost but that direct labor is a variable cost. A. Calculate the reported unit cost for each product. B. Calculate the reported per-unit profitability of each product. C. Assume San-Dab's policy is to eliminate any products that report negative profitability, which product(s) will it eliminate? (Hint: One product should be eliminated at this step.] D. Assume San-Dab eliminates this product and adjusts its cost system accordingly. Calculate the new reported unit cost and per-unit profitability of the remaining products, E. Repeat (C) and (D) if your results lead to the elimination of another product or products, F. Repeat (E) until you cannot repeat the process again. G. What is the (unspoken) assumption that San-Dab's management is making about cost behavior when choosing the decision rule from Part C?

Answer 1

Books of San-Dab

Cost Sheet

Particulars	A	B	C	D
Production Volume (Units)	10,000	8,000	6,000	4,000
Selling Price Per Units	$ 15.00	$ 18.00	$ 20.00	$ 22.00
Material Cost Per Units	$ 4.00	$ 5.00	$ 6.00	$ 7.00
Direct Labor Hrs Per Unit	0.24	0.18	0.12	0.08
Total Direct Labor Hours	2,400	1,440	720	320
Total Sale (Units x Selling Price)	$ 150,000	$ 144,000	$ 120,000	$ 88,000
Total Material Cost	$ 40,000	$ 40,000	$ 36,000	$ 28,000
Total Direct Labor Cost ($30/Hr)	$ 72,000	$ 43,200	$ 21,600	$ 9,600
Total Variable Cost (Material + Labor)	$ 112,000	$ 83,200	$ 57,600	$ 37,600

A) Unit Cost for each product

Particulars	A	B	C	D
Total Variable Cost (Material + Labor)	$ 112,000	$ 83,200	$ 57,600	$ 37,600
Production Volume (Units)	10,000	8,000	6,000	4,000
Per Unit Cost (Total cost/Total Units)	$ 11.20	$ 10.40	$ 9.60	$ 9.40

B) Per unit profitability of each product

Particulars	A	B	C	D
Total Sale (Units x Selling Price)	$ 150,000	$ 144,000	$ 120,000	$ 88,000
Total Variable Cost (Material + Labor)	$ 112,000	$ 83,200	$ 57,600	$ 37,600
Profit Contribution	$ 38,000	$ 60,800	$ 62,400	$ 50,400
Production Volume (Units)	10,000	8,000	6,000	4,000
Per unit profit contribution	$ 3.80	$ 7.60	$ 10.40	$ 12.60
Selling Price Per Units	$ 15.00	$ 18.00	$ 20.00	$ 22.00
Profitability (%)	25.33%	42.22%	52%	57.27%