Question

	Product A		Product B
Selling Price		$25		$20.40
Direct Materials($2/lb)	4.00		6.00
Direct Labor($6/hr)	6.00		3.00
Variable Overhead	2.00		.80
Fixed Overhead	1.60		1.60
Variable selling expense	1.00		1.00
Fixed Selling/administrative Expense	2.40	17.00	2.40	14.80
Net Income		$8.00		$5.60

The company has a maximum 1,000 labor hours available for the upcoming period. This represents the only internal constraint on capacity. The company keeps no finished goods inventory and currently estimates a maximum demand of 350 units of Product A and 1,400 units of Product B for the period.

Jason wishes to determine the optimal product mix for the period. This will be:

________________units of A            and                  _________________units of B

Based on your previous answer, the total amount of contribution margin for the period would be

$________________

A new attachment is available which will reduce the amount of time required for a unit of Product A by 20% for a given period. NOW what would the optimal product mix for Jason.

________________units of A            and                  ___________________units of B

What is the maximum amount that Jason would be willing to pay for the attachment?

NOW ASSUME the original information given and that Jason is currently making optimal use of all 1,000 labor hours and are manufacturing the maximum amount of product b that they can.

A one-time order has been received from a White corp, who is seeking 100 units or Product B and has offered a price of $2,000 for the order. With respect to the white order, there will be no variable selling expenses and fixed administrative expenses will be reduced by a total of $120. In addition, special equipment will be required for the white order at a cost of $1,000. The equipment will have no value and no further use once the white units have been produced.

the TOTAL relevant outlay associated with the special order is:

$___________________

was there an opportunity cost associated with the special order? Yes or no and why

is accepting the order from white-good idea? Yes or no and by how much? Show all computations

__________ by $___________

Yes or no                     amount

Assume again for this question that the company is producing the amount that you determine in question 23 above. By how much will Jason’s income be higher or lower if they used variable costing instead of absorption costing for internal purposes.

Please show all work!!!

Answer 1

1.

	Product A	Product B
Selling Price per unit	$ 25.00	$ 20.40
Variable Cost per unit	13.00	10.80
Contribution margin per unit	$ 12.00	$ 9.60
Labor hours per unit	1	0.5
Contribution margin per labor hour	$ 12.00	$ 19.20

Product B should be prioritized as its contribution margin per unit of constrained resource ( labor hours ) is higher.

The optimal product mix :300 units of Product A, and 1,400 units of Product B.

Total contribution margin from optimal product mix = 300 x $ 12 + 1,400 x $ 9.60 = $ 17,040.

	Product A	Product B
Number of units of Product B		1,400
Number of labor hours consumed by Product B		700
Number of labor hours left for Product A	300
Number of units of Product A	300

New attachment:

Optimal product mix : 350 units of Product A, and 1,400 units of Product B

Contribution margin from the new optimal mix = 350 x $ 13.20 + 1,400 x $ 9.60 = $ 18,060

Maximum amount that Jason would be willing to pay for the attachment = $ 18,060 - $ 17,040 = $ 1,020.

Special order :

Total relevant outlay : $ 1,860

Direct Materials	$ 600
Direct Labor	300
Variable MOH	80
Fixed cost $ ( 1,000 - 120)	880
Total Relevant Outlay	$ 1,860

Yes, there is an opportunity cost of lost contribution margin of 100 units of regular orders. The amount of the opportunity cost = 100 x $ 9.60 = $ 960.

Therefore, acceptance of order from White is not a good idea.

Operating income will decrease by $ 2,000 - $ ( 1,860 + 960) = $ ( 820)