Question

Playtime Electronics produces two kinds of electronic toys, Wizards and Gizmos. During the current period, 8,000 Wizards and 16,000 Gizmos were produced and sold, generating revenues of $500,000 and $2,000,000, respectively. Unit production costs for the two toys are $50 for Wizards and $70 for Gizmos. In calculating the cost of goods sold, Playtime uses activity-based costing to allocate its overhead costs. However, upstream costs of $240,000 are allocated equally to the two products.

Required:

1) Compute the total net profit for each product and for the firm as a whole.

2) Would you advise eliminating either toy? Why or why not?

Answer 1

Answer :

(1) Calculation of Net Profit :

Below is the table showing Net Profit of Wizards and Gizmos :

	Wizards	Gizmos	Firm
Sales	500,000	2,000,000	2,500,000[500,000 + 2,000,000]
Less : Production cost	400,000 (8000 * 50)	1,120,000 (16000 * 70)	1,520,000[500,000 + 2,000,000]
Gross Profit	100,000	880,000	980,000
Less : Upstream Cost	120,000 [240000 / 2]	120,000 [240,000 / 2]	240,000
Net Profit/ (Loss)	(20000)	760,000	740,000

2) Both the products should be produced even though Wizards are producing Loss because It is producing gross profit but due to equal allocation of upstream cost it is having Loss . If Product Wizard is discontinued which is now absorbing Upstream cost of $120,000 then the firm will loose its gross profit of 100,000.Therefore advise is not to eliminate any product.