Question

Gibson 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 recenty prepared the following income statement showing annual revenues and expenses associated with the segment's operating activites. The relevant range for the production and sale of the calculators is between 36.000 and 70.000 units per year. $296,000 Revenue (37,000 units x $8) Unit-level variable costs Materials coat (37,000 $2) Labor cost (37,000 $1) Manufacturing overhead (37.000 x $0.20) Shipping and handling (37.000 * $0.25) Sales commissions (37.000 x $1) Contribution margin Tixed expenses Advertising costs Salary of production supervisor Allocated companywide facility-level expenses Net loss (74,000) (37,000) (7.400) 9,250) (37.000) 131,350 (28,000) (66,000) (81,000) $(43,650) Required a. A large discount store has approached the owner of Gibson about buying 8,000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Gibson'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 $4.90 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Gibson accept the special order? b-1. Gibson has an opportunity to buy the 33,000 calculators it currently makes from a reilable competing manufacturer for $5.00 each. The product meets Gibson's quality standards. Gibson could continue to use its own logo advertising program, and sales force to distribute the products. Should Gibson buy the calculators or continue to make them? b-2. Calculate the total cost for Gibson to make and buy the 33,000 calculators. b-3. Should Gibson buy the calculators or continue to make them, if the volume of sales were increased to 70.000 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? Complete this question by entering your answers in the tabs below. Required Required Required Required Required A B1 B2 B3 A large discount store has approached the owner of Gibson about buying 8,000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Gibson'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 $4.90 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Gibson accept the special order? (Negative amounts should be indicated by a minus sign.) Show less Contribution margin (loss) Should Gibson accept the special order?

Answer 1

Answer is given below

$39,200 (8,000*$4.90) Evaluation of Special order Sales order Less: Variable cost Material cost Labor cost Manufacturing cost Shipping and handling Contribution $16,000 $8,000 $1,600 (8,000*$2) (8,000*$1) (8,000*$0.2) $27,600 (8,000*$0.25) $11,600 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 - 33,000 units Buy Make $66,000 $33,000 $6,600 $66,000 (33,000*$2) (33,000*$1) (33,000*$0.20) Direct Material Direct Labor Variable manufacturing cost Fixed Manufacturing overheads Purchase Cost Total Cost Total units Unit cost $171,600 33,000 $5.20 $165,000 (33,000*$5) $165,000 33,000 $5.00 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- 70,000 units Buy Make | $140,000 $70,000 $14,000 $66,000 |(70,000*$2) (70,000*$1) (70,000*$0.20) Direct Material Direct Labor Variable manufacturing cost Fixed Manufacturing overheads Purchase Cost Total Cost Total units Unit cost $290,000 70,000 $4.14 $350,000 (70,000*$5) $350,000 70,000 $5.00 Since cost to make is lower the Calculators should be made in-house $296,000 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 $74,000 $37,000 $7,400 $9,250 $37,000 $164,650 $131,350 $28,000 $66,000 $94,000 $37,350 Since there is Positive contribution and Net profit the division should not be discontinued Profit margin would increase by $37,350